Benjamin Franklin famously said, “A penny saved is a penny earned.”
The witty poet Ogden Nash quipped “A penny saved is – impossible.”
The financial writer Andrew Tobias, in his great book The Only Investment Guide You’ll Ever Need, points out that Franklin’s quote needs updating. The updated version, according to Tobias, should read, “A penny saved is two pennies earned.” “Or nearly so,” he adds.
How is a Penny Saved Two Pennies Earned?
Tobias explains that Franklin’s quote was made before America had federal income taxes, state income taxes, and payroll withholding taxes. For even the middle class these taxes can add up to around 40 percent, and for those in the upper tax brackets they can add up to over 50 percent. If taxes take half of your earnings then you need to earn two pennies to have one to save. Thus, “A penny saved is two pennies earned.”
As a side note, this is one reason why it is so hard to make financial progress. As you make more money, an increasing percentage of your increased earnings go to taxes.
Tobias concludes, “So if you want to pile up a little nest egg, or a big one, the first thing you might consider – even though you’ve doubtless considered it before – is spending less rather than earning more. If you’re in the 50% tax bracket, it’s twice as effective – and often easier.”
What Will Your Penny Be Worth in the Future?
Two of my favorite financial writers, Burton G. Malkiel and Charles D. Ellis, in their book The Elements of Investing, have also taken a crack at updating Franklin’s famous saying. They advise us to, “Think of every dollar you spend [inflation has turned Franklin’s penny into a dollar] as the amount it could grow into by the time you retire.”
They write, “If you save money and invest it at, say, a 7 percent average annual return, $1 saved today becomes $2 in about 10 years, $4 in 20 years, and $8 in 30 years, and so on and on, inevitably growing. So the dollar a young person spends on some nonessential today would mean that $10 or more will be given up in retirement.”
Putting it All Together
Combining the logic of the great financial minds quoted above leads to the conclusion that a penny saved is the equivalent of about 20 pennies earned in the future (2 pennies due to the effect of taxes multiplied by 10 pennies due to the time value of money).
This doesn’t mean that you should go overboard and feel guilty about all spending. It does mean that you should have a plan, spend wisely, and not waste money. It also means that you should start an automatic savings program immediately, which is the easiest way to prove Ogden Nash wrong. Don’t wait until you are making more and you think saving will be easier.
Franklin’s advice is more important today, but less practiced, than when he said it. Now is the time for you to put it into practice and start benefitting from the often overlooked power of thrift.