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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.

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msf3
msf3
2 years ago

“U.S. inflation-adjusted per-capita disposable income rose 131%. In other words, we now have more than twice as much money to spend”. Who is this “we” of whom you speak?

In real terms, the average real household income of the 2nd quintile has risen maybe 1/3 since the early 70s. It is true that tax rates have dropped since then as well (resulting in a larger increase in disposable income), but that has boosted the top decile’s rise substantially more than that of the lower 90%.

So perhaps the reason that only 30% or so of Americans describe themselves as very happy now is because the rest haven’t seen their lot improve much in the intervening 46 years.

In short, whether it is true or not that money can’t buy happiness, one wouldn’t know it one way or the other from the statistics cited.

Tom Murin
Tom Murin
2 years ago

I agree that saving is more efficient than earning more income. That said, passing on the $100 dinner out doesn’t really make you $100 better off. You’re going to eat something – so it’s the net difference between the cost of the restaurant meal v the cost of the meal prepared at home. So perhaps you’re only $80 – $85 better off if you stayed home Of course, it’s nice to have someone serve you and to not have to do the dishes! What is that worth?

Dennis Ho
Dennis Ho
2 years ago

I’m torn on this one. Great savings habits are key, but the optimal strategy is really to do both – having good savings habits AND working hard to maximize your income. e.g. people in the early / prime stages of their careers should have great savings habits, but should also make the effort to constantly learn new things and meet new people. They’ll benefit not just from any extra dollars earned, but from more job options, greater job security and a stronger personal network. For a new retiree, I agree there is less value in taking on an extra “side hustle”, but even in this case, I would expect being open to (or even on the lookout for) opportunities to do something interesting while earning a little extra income couldn’t hurt.

Peter Blanchette
Peter Blanchette
2 years ago

There are reasons that Americans are not much happier in 1972 vs 2018. Most people are not able to provide for themselves as they would like to. The people who need more income the most are not in a high tax bracket so taxes is often not as much of an issue for them, unfortunately for their sake because their income is so low. People work long hours and multiple jobs often for a reason, a very good reason, feeding their family, providing an education for their kids and, yes, take a vacation once in a while. Of course that doesn’t apply to everyone. It does to a lot of people. See below from Center for Budget and Policy Priorities….

“The data reveal starkly uneven income growth over recent decades. Between 1979 and 2006, real after-tax incomes rose by 256 percent — or $863,000 — for the top 1 percent of households, compared to 21 percent — or $9,200 — for households in the middle fifth of households and 11 percent — or $1,600 — for households in the bottom fifth. (See Figure 1, next page.) In 2006, the average household in the top 1 percent had an income of $1.2 million, up $63,000 just from the prior year; this $63,000 gain is nearly two times the total income of the average middle-income household.”

Tom Murin
Tom Murin
2 years ago

Last month 4.9 % of Americans had multiple jobs. While there is no doubt that many people are struggling (which has always been the case) the narrative about how many are working multiple jobs has been debunked.

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