A penny saved is MORE than a penny earned (or why impulse spending is more expensive than you thought)

Source: Anne Arnould via Flickr under a Creative Commons license

Source: Anne Arnould via Flickr under a Creative Commons license

I was ogling a shiny new thing over the weekend — in this case, a laptop — as temptation crept up slowly.

“Go on,” she whispered. “You work hard.”

She was right; I do work hard, after all.

“A penny saved may be a penny earned, but look, it’s just 10 times your hourly wage,” she said while nudging me closer to the glass. “Aren’t 10 hours worth that?”

Clever girl.

A penny saved is a penny earned

Equating a penny saved to a penny earned means that every penny frugally squirreled away is a penny you don’t have to re-earn at work, but she had flipped the Benjamin Franklin (maybe?) quote on its head: She had asked me to mentally turn my money back into  labor to justify a splurge.

Have any of you ever done the same thing?

To put this into numbers, let’s assume you make $20 an hour and you’re looking at this $200 laptop at Amazon.

$200 divided by $20 an hour is equal to 10 hours. So you should just compare how much you want that laptop with how painful it is to do 10 hours of whatever you do for a living, right?

Read on.

Marginal taxes

For starters, a penny saved is more than a penny earned because of marginal taxes.

At $20 an hour, you’d be in the 25% marginal tax bracket, meaning that an additional 10 hours of work at $20 per hour would only net you $150, after taxes.

Rather, to buy the laptop using after-tax money, you would need to earn $200 ÷ (100% – 25%), or $266.67 and you’d need to work 13 hours and 20 minutes to get that. That’s a bit longer! And it doesn’t even include payroll, state, sales, and local taxes. Maybe you’d have to work two whole days!

Disposable income

A penny saved is more than a penny earned because of mandatory obligations.

Suppose your monthly budget looked like this:

  • $3,500 a month is close to what you’d be making at $20 an hour. Not bad! But those of you who earn a paycheck know this isn’t close to what you’ll be taking home.
  • ($1,200) for taxes, insurance, and an automated deduction for retirement savings
  • ($200) for savings
  • ($750) for rent or mortgage payments plus city utilities
  • ($200) household utilities, including mobile phone and cable
  • ($500) for car payments (or saving to pay cash for the next car car), insurance, gas, maintenance and repairs.
  • ($400) for food.
  • ($150) for entertainment, clothes, and fitness

Do the math and you’ve got $100 in disposable income every month after all that spending. In other words, you won’t make enough to pay off that laptop in ten hours; it’ll take you two months to pay it off!

Developing habits

Have you ever seen a friend buy the latest, biggest model of TV, only to justify it by telling you that it’s the last TV she’ll ever buy? Or have you ever seen a friend buy a third new car in six years, but he tells you that he’s going to drive it into the ground?

In either of these cases, do you believe that they’re not making a habit out of getting the latest, greatest shiny new thing?

When it comes to busting your budget with an impulse buy, a penny saved is the furthest from a penny earned when you make it part of your routine.

Imagine if buying this laptop didn’t just make you a guy with a laptop; imagine if it made you the guy who buys the newest, latest laptop every six months.

Then, you’re not just using up 16 hours of labor or two months of disposable income to buy it; you’re using up a lifetime’s worth of labor and disposable income.

An ending

Anyhow, that’s how I think of it and how I’m starting to try to live. I’m trying to find things I don’t truly need and cut them out or downsize them, all so that I can focus on financial independence and the things I prioritize in life that are truly important to me.

Any thoughts on this sort of thinking?


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