Why a penny saved is worth more than a penny earned

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We’ve all had people encourage us to save money by telling us that ‘a penny saved is a penny earned’. It turns out they were wrong – but in a good way.

Thanks to our income tax system, a penny saved is actually more than a penny earned.

That’s because, if you’re a typical worker, you give some of your salary to the taxman, which means that every time $1 appears in your bank account, you’ve actually earned more than $1.

Imagine, for example, that you lost 30 per cent of your salary to income tax. In that case, every time you earned $1.30, the taxman would pocket 30 cents and only $1 would make it into your bank account. So if you could find a way to reduce your monthly spending by $100, you’d save $130 of pre-tax income.

How much you really earn when you save money

To properly understand this concept, let’s have a look at the different tax brackets in Australia:

Taxable income Tax on this income
$0 to $18,200 0c
$18,201 to $37,000 19c for each $1 over $18,200
$37,001 to $87,000 $3,572 plus 32.5c for each $1 over $37,000
$87,001 to $180,000 $19,822 plus 37c for each $1 over $87,000
$180,001 and above $54,232 plus 45c for each $1 over $180,000

The table below makes use of the Australian Taxation Office’s simple tax calculator to calculate how much money you’d ‘earn’ for every dollar you saved.

First, let’s quickly explain the methodology, so you can understand the ‘saving ratio’ column.

Imagine your annual salary (or pre-tax income) was $30,000. Therefore, your take-home pay (or post-tax income) would be $27,758. That would mean that every $1 of post-tax income would require you to earn $1.08 (because $30,000 ÷ $27,758 = $1.08). So if you found a way to save $1, you’d ‘earn’ $1.08, giving you a ‘saving ratio’ of $1.08.

Here are some different saving ratios for different salary levels:

Taxable income Tax on this income Post-tax income Saving ratio
$30,000 $2,242 $27,758 $1.08
$40,000 $4,547 $35,453 $1.13
$50,000 $7,797 $42,203 $1.18
$60,000 $11,047 $48,953 $1.23
$70,000 $14,297 $55,703 $1.26
$80,000 $17,547 $62,453 $1.28
$90,000 $20,932 $69,068 $1.30
$100,000 $24,632 $75,368 $1.33

As the table shows, if you had a salary of $50,000 and found a way to save $100 per month, you’d ‘earn’ $118. If your salary was $100,000, you’d ‘earn’ $133.

So the next time somebody tells you that a penny saved is a penny earned, tell them they’re wrong – because it’s actually more.


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