# Why a penny saved is worth more than a penny earned

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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## Learn more about savings accounts

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency.

Example: John deposits \$10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have \$10,512 in savings. After ten years, he will have saved \$16,470.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process.

You may be required to provide:

• Personal details, including identification (driver’s license, passport etc.)
• Tax file number
• Employment details

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How can I get a \$4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

• Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
• Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
• Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.