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!
Promote or Save This Article
If you like this article, please consider bookmarking or helping us promote it!
Print Post | Email Post | Del.icio.us | Stumble it! | Reddit |
Related Posts
- A Dollar Saved is Two Dollars Earned but Two Dollars Earned is Twenty Dollars Saved
- Stretching Our Dollars to Make Our Budget Planning Easier
- Best Posts of June
- Best of Personal Finance with Money Ning in June 2008
- An extra dollar earned works just as well as an extra dollar saved Part 1 of 2
Subscribe! (and Get a Mini-Course with Free Registration)
Follow me on twitter! In addition, subscribe to grab free amazing content or take advantage of the newsletter to have content delivered to you. For starters, a 7-part mini course to help you spend less and be happy will be delivered to you when you subscribe!(Don't worry about spam, because we hate it as much as you do!)
{ 6 comments… read them below or add one }
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.