A Dollar Saved Is a Dollar Earned – Why It’s Wrong and What Time Has to Do With It

Growing up in a family that clawed its way out of poverty and into the middle class, I was always aware of the value of money.

By the time I was born, my parents were able to (barely) buy a small house in a newly developed suburb far enough outside the city to make it affordable. When they signed the dotted line a few years before my birth, the mortgage payment took half of dad’s paycheck.

By the time I was a pre-teen, dad’s salary, supported by mom’s small paycheck, was enough for us to go out to a casual restaurant. Once a month. And while getting one soda was included, if I was still thirsty I could drink tap water (no free refills back then).

Fast forward several decades, and I can afford more than that. Much more.

But I still appreciate the value of the freedom money brings.

A Famous (Misattributed) Quote About the Value of Money

“A penny saved is a penny earned” is often (erroneously) attributed to Benjamin Franklin.

Given inflation, “A dollar saved is a dollar earned” would be more up to date.

But whether a penny or a dollar, the saying is still wrong! Perhaps Old Ben never said it because he knew better.

Why a Dollar Earned Is Worth Less Than a Dollar

As many have pointed out over the years, ever since the short-lived Revenue Act of 1861, and more permanently since the 1913 ratification of the 16^th amendment, a penny (or dollar) saved is worth more than a penny (or dollar) earned, because part of the latter dollar is owed to Uncle Sam.

Adding state and local taxes to the mix, and depending on the highest income tax bracket when you look, a dollar earned could be worth as little as a handful of pennies.

These days in the US, it might be worth anywhere from $0.92 (if you owe no income tax at any level, only payroll taxes), to $0.42 for someone in the highest federal tax bracket, who earns less than the maximum federal payroll tax limit, and who lives in California.

How a Dollar Saved and Invested Is Worth Far More Than a Dollar

Not only is a dollar earned worth (potentially far) less than a dollar, but a dollar saved (and invested), is worth far more than a dollar!

If you take into account the long-term average return on stocks, about 10% a year, and compound it over a 45-year career (from age 22 when a college gradate enters the workforce, to age 67 when that worker reaches Social Security’s full retirement age of 67), that dollar saved and invested would turn into nearly $73!

That means that the saved and invested dollar could be worth as much as 174× as much as a dollar earned!

Why a Dollar Earned but Not Saved Costs You Far More than a Dollar

It’s called lifestyle inflation.

If you earn another dollar, but spend it instead of setting it aside, your budget tends to rise to the new level of spending.

If you’re 22 and add another dollar to each year’s spending, you forgo not just the $73 that original dollar might have grown to, but another $66 that the next year’s dollar would have grown to, and the $60 the third year’s would have grown to, and… well, you get the idea.

All told, you’d forgo nearly $791 by spending that extra dollar each year!

Why a Dollar Earned but Not Saved Costs You Even More

To make matters even worse, the pain doesn’t end with retirement.

Oh no.

Needing another dollar each year in retirement adds to the size nest egg you need to amass. Using the so-called “4% rule,” that extra annual dollar requires you to save another $25 to have a good chance to not run out of money in retirement.

This assumes stock market returns continue as they were over the past century, and that your retirement isn’t especially early.

Christopher J. Berry, JD, CFP^®, CELA^®, founder, Castle Wealth Group says, “Increasing earnings and decreasing expenses are both effective ways to improve one’s financial situation. However, the comparative impact of each depends on the individual’s unique circumstances. Here are some points to consider:

1. “Increasing earnings, for example through getting a raise, taking on a side hustle, or starting a business, can provide a significant boost to your financial situation. It provides a direct increase in disposable income and can also help you reach your financial goals faster.
2. “Decreasing expenses, such as by cutting unnecessary spending or finding ways to save on essential expenses, can also have a significant impact on your finances. This approach may be especially useful for those with a limited income or for those looking to reduce their debt.
3. “A balanced approach that combines both increasing earnings and decreasing expenses can be the most effective way to improve your financial situation. For example, you can increase your earnings by taking on a side hustle while also reducing your expenses by cutting unnecessary spending.”

Ryan Graves, CFA, President of Bemiston Asset Management agrees that there’s a place for both increasing earnings and investing more (e.g., by reducing expenses), “Earning more income while living within your means can do more to reach your financial goals than picking investments. I work with a few clients that receive fairly lucrative bonuses that make up a substantial portion of their total income. They live on their salary, using very little bonus money to cover their day-to-day or unexpected expenses. Treating a bonus as a bonus and not an extra paycheck effectively increases income without changing their lifestyle. After accounting for their 401(k) savings, they save well above the 20% rule of thumb. There are two sizeable complementary effects at play here: One, saving and earning more allows for more saving and compounding. Two, and less evident, spending less and avoiding “lifestyle creep” provides a more modest lifestyle that your savings will have to cover in retirement. The correct financial mindset and behavior will often far outweigh some of the investment and tax considerations.”

Carleton McHenry, CFP^®, Founder, McHenry Capital notes that while both frugality and increased earnings are important, they should go hand in hand. He says, “In my experience, it’s easier for clients to control their spending and expenses than their earnings and income. However, I caution those who only focus on one over the other to an extreme – i.e. – make as much money as possible (workaholics) or reduce expenses as much as possible (FIRE adherents [referring to the Financial Independence, Retire Early movement]), in my opinion neither is healthy. There should be a balance between the two.”

“Couples should support each other, encouraging both – create a budget they can stick to, and see if either can make more money without sacrificing something important, like raising their kids, taking care of their health, etc.”

The Bottom Line

Taking all the above into account, a dollar saved and invested at age 22, and turned into an annual habit, can grow to $791 and reduce your Financial Independence number by $25, for a total impact of $816.

By way of comparison, a dollar earned but not saved or invested is worth between $0.42 and $0.93.

This means the total impact of a dollar saved and invested could be worth as much as 1942× more than a dollar earned!

However, as the years go by, the compounded returns you can get from a dollar invested shrink for each year’s contribution. By the time you’re ready to retire, a single dollar saved and invested might be worth only that $1, plus the $25 reduction of your needed nest egg size.

That could still be as much as 62× more than a dollar earned.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.