Jenny Lang is an author, wife, homeschooling mother, investor, and pennypincher extraordinaire. She writes about smart financial living at the Frugal Guru Guide. Keep an eye out for her upcoming book, the Frugal Guru’s Guide to Everything Auto. Find her on Google Plus
”You can’t scrimp and save your way to wealth.” That’s a sentiment that’s been going around a number of financial blogs recently, to be supported by some and rejected by others.
First, let me say that everyone should aim for wealth. Being wealthy isn’t the same as being rich or having a high income. Wealth is the measure of your net worth. That money you plan on retiring on some day? Yeah, that’s your wealth! You want that, no matter how modest your income.
In some ways, the sentence above is correct. You can’t make money appear by being frugal–the income has to come from somewhere. But even though you can’t save your way to wealth alone, you certainly can spend your way into the poorhouse, no matter what your income is!
For most Americans, a dollar that you save is worth more than a dollar that you earn. Even if you don’t pay income taxes, you still pay payroll taxes and sales tax that reduce the value of your dollar. For those who pay income taxes, your earned dollar is worth even less.
When you spend your discretionary income, it’s always at the margin–that means, it’s really taxed at the highest rate of all your income. So if you’re in the 20% federal tax bracket (with 10% more taxes in payroll and state taxation) and you save $1 on your clothes that you’d otherwise spend, it has the same value as $1.43 of your gross income.
Earning more money is great, and I encourage everyone to find higher-paying jobs. But the more high paying your job, the more your discretionary savings becomes worth because the higher your tax bracket! This is even truer if you are self-employed and you have to pay twice the payroll taxes as other people.
Depending on the state, a family that is in the upper 10% of income but below the top 5% can end up with a marginal tax rate above 50% if one of the spouses is self-employed. While that family has more money than the average household, that $1 of savings would require $2 of earnings to replace it.
Really, in terms of financial soundness, earning isn’t competing with saving. They’re just different sides of the same coin–one is about maximizing what’s coming in, while the other is about minimizing what’s flowing out.
Just like you don’t have to be a workaholic to be responsible about providing for your family, you also don’t have to be a miser to be responsible about your spending. There’s a work-life balance and a spend-save balance. Success is when you can meet both your financial goals and your reasonable leisure and lifestyle goals.
Everyone has unlimited wants–that’s what the theory of economics is based upon–but everyone can also choose to be happy by fulfilling just the most important of these.
I don’t recommend that anyone work 80 hours a week from graduation to retirement, and I also don’t recommend that anyone save every penny possible forever. There may be times in your life when working more or scrimping more is necessary, but for most of your life, you should arrange your finances so that you can enjoy the fruits of your labor and maintain your financial security for the future at the same time.