Grandma was wrong, but she was on the right track. She would often tell me that a penny saved was a penny earned. Born in 1922 – she spent many of her formative years in the great depression. She hated to see waste, she talked of eating raw potatoes when she was young, and we would secretly throw out expired food when we went to visit. To her, if a penny wasn’t spent then you still had it and it was saved, and that was as good as earning another penny. But my grandma never actually did the math, and when I did, I discovered that my Grandma was even wiser than she realized. I found out that a penny saved can be worth almost two pennies earned! My kids sell these Starving Student cards – they’re loaded up with buy one get one free deals. So if I buy a pizza for $15 and get a free pizza then it’s like I earned an additional $15 right? Wrong! For me to have the spending power of $15 dollars, I actually need to earn a lot more because of taxes and charitable contributions.
So let’s work backwards on this. Where I live, when I buy prepared food, there is an 8.45% sales tax which is combined from a 4.85% state tax, a 1.1% city tax, a 1% prepared food tax, and 1.5% of county and other transit taxes. https://orem.gov/city-finances/. So in fact the $15 pizza costs me $16.27. I also donate about 10% of my income to charitable causes, so really I make $18.07 to buy my $15 pizza, but then we have to factor in three other taxes. Federal taxes, State taxes, and Federal Insurance Contributions Act (or FICA) taxes which fund Social Security and Medicare. Let’s take these one at a time. At the federal level, the amount of tax you pay on an additional dollar that you earn depends on what your marginal rate is, for me I expect that is 24%. State income tax where I live is a flat 4.55%. FICA taxes are broken up into 6.2% to Social Security and 1.45% to for Employees, but Employers have to pay those same amounts too, and since I’m self employed, then I get to pay both of those – yipee! So you add up all the tax and it amounts to 43.85%. So to get $18.07 after tax, I really need to make $32.18 to buy that pizza. So when I save $15 by getting that other pizza free with my starving student card, it’s really like I earned $32.18. So grandma a penny saved is more than two pennies earned! I love you grandma – thanks for the lessons you taught me, I’ll try to remember to be couth…I still don’t know what that means.
