A Penny Saved

Jonathan Clements

CALL IT THE NEW conventional wisdom: Forget trying to spend less—and instead focus on earning more.

This change in thinking is no great surprise. We have endless opportunities to make an extra buck, thanks to all the “side hustles” available in our “gig economy.” Meanwhile, many folks bristle at the admonitions to spend less on lattes, happy hours and avocado toast. Let’s face it, will eliminating such expenses really put us on the fast track to financial freedom?

As you might gather, I have some sympathy with this new way of thinking—but I still believe it’s misguided.

It’s not that I have anything against working hard. I have done so my entire life. Early on, I did it mostly to make extra money. Today, I work long hours because I’m passionate about what I do. But I still think the idea of focusing on earning more, rather than spending less, is a mistake—for four reasons:

1. Spending less is far more tax-efficient. Ben Franklin purportedly said, “A penny saved is a penny earned.” But in today’s world, that isn’t quite true.

If I decide not to take my wife out for a $100 dinner, I’m $100 better off. But to improve my bank balance by $100 by working more, I might need to earn perhaps $170. Why? I’ll have to pay federal and state income taxes on the $170 at my marginal tax rate. On top of that, I’ll have to fork over payroll taxes as both an employee and the employer, assuming I’m working as a contractor.

2. Who says I’ll save the extra money I earn? If I consciously choose to spend less, I’m committing to save more. But if I choose to work longer hours so I can earn additional dough, there’s no guarantee the money will get saved. In fact, after all that extra work, I’ll probably feel I deserve to treat myself—and here comes that $100 dinner.

3. Time is more valuable than money. Indeed, it’s the ultimate limited resource. How many hours would you have to work to earn $170 of pretax income? If it’s work you’re passionate about, the hours involved don’t matter. But if it’s grunt work, you’ve traded precious time for fleeting dollars. That seems like a bum deal—unless you absolutely need those dollars to stay afloat financially.

4. Less spending could bring more happiness. According to the General Social Survey, 31% of Americans described themselves as very happy in 2018, barely higher than the 30% who described themselves that way in 1972, when the survey was first conducted. Over the intervening 46 years, U.S. inflation-adjusted per-capita disposable income rose 131%. In other words, we now have more than twice as much money to spend, but we’re no happier than we were in the early 1970s.

Perhaps spending more isn’t the answer. Instead, maybe the key to happiness is greater gratitude for what we already have—and perhaps even spending less.

My wife and I love to go out to eat, and we probably do it a little too often. Would we be less happy if we stayed home tonight? Maybe not. In fact, if we ate out less, that might make each restaurant meal feel more special—and perhaps we’d end up boosting our happiness.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Tax Rate DebateThat’s Enough and Third Rail. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

Do you enjoy HumbleDollar? Please support our work with a donation. Want to receive daily email alerts about new articles? Click here. How about getting our twice-weekly newsletter? Sign up now.

Browse Articles

Notify of
Oldest Most Voted
Inline Feedbacks
View all comments

Free Newsletter