Dollar Saved is More Than a Dollar Earned
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I was discussing taxes and savings with my co-worker, and one of the topics that came up was how much a dollar saved is actually worth. In the end, we agreed that saving a dollar is worth much more than earning a dollar since it is after taxes. We figured that we wouldn’t be able to figure this out off the top of our heads so we decided to both go home and figure it out this weekend. One of the ways to check how much the saving is actually worth in terms of additional salary increase is to go to your last year’s tax return and check how much $1000 of extra income will be taxed.
So I fired up my online tax preparation software and put in a $1000 W-2 with no social securities or taxes withheld. Here are the interesting results:
| Tax | Original Refund | Refund After Additional Salary | Difference |
|
Federal |
$1017 |
$767 |
$250 |
|
State |
$218 |
$125 |
$93 |
|
Total |
$1235 |
$892 |
$343 |
Based upon the above results, $657 ($1000 - $343) is left for every $1000 earned. This is not even counting social security deductions! Assuming there is none for this simple example, every $1000 I save would be worth a raise of $1522.07 ($1000/$657 * $1000). So for every dollar that I am able to save equates to getting a raise of $1.52.
On a side note, I always thought that I was in the 25% tax bracket (or so they want me to think). Instead, I am really somewhere close to being taxed 34% of my income.
I encourage you to try this exercise for yourself so you know how much your savings are actually worth!
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An IVA is increasingly popular. And debt management can be good if you get the right organisation to manage it for you. Debt Free Direct are the largest IVA provider in the UK, giving advice to thousands every year.8 Responses to “Dollar Saved is More Than a Dollar Earned”
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Carnival of Money, Growth & Happiness #9 | Credit Card Lowdown on July 2nd, 2007 at 12:13 am Says:
[...] presents Dollar Saved is More Than a Dollar Earned posted at Personal Finance Blog by Money Ning. MoneyNing says, “So for every dollar that I am [...]
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A Dollar Saved Is Better Than A Dollar Earned | Moolanomy on April 18th, 2008 at 6:49 am Says:
[...] Dollar Saved is More Than a Dollar Earned at MoneyNing [...]




Hello. I agree and I wish more people understood it. This tax cost is partly why I wrote, “Minimizing expenses is your most powerful tool” (click name link for article).
Or you could just consider only after tax dollars as “a dollar earned.” That’s what I do.
Lazy Man and Money: Yes I can do that, but that can also be changed easily with tax withheld too and it gets messy if you have to calculate the refund you get and try to put that money back into the mix.
There is just no right way, the important thing is to live below your means!
“Earned” can have multiple connotations but the important lesson is to account for all necessary taxes in a transaction.
I would suggest checking out MoneyChimp website to really see how much you pay taxes on your earned income. They have a pretty simple calculator because even though you may be in a higher bracket, you are not really paying that much. It is based on the last dollar you earn. So if you are in the 15% tax bracket and you earned 1 dollar over the 15% limit, you would pay 25% on that 1 dollar. Great article.
TheLocoMono: Great, I will check it out and see what it does.