How an extra dollar saved can be worth twice as much as an extra dollar earned

goingDHfast on 24/05/2016 - 12:57

$1 extra saved is worth far more than $1 extra earned. This is due to all the taxes paid on money before it can be spent.

Here is the formula for those earning over $80k: 37% income tax + 2% medicare levy + 10% GST = 49% out of pocket before you can spend the $1 extra you earned. In that example you can see that saving $1 on a purchase is worth almost twice as much as earning an extra $1 income!

I find this a useful framing method when thinking about pay rises vs expenditure. It's often worth putting a bit more effort into spending less on something than you realize!

Financial

Comments

  • GameChanger on 24/05/2016 - 13:11

    You do bring up a good point.

    Though if you want to be in the top percentile of people, you eventually need to take risk and have multiple streams of income. Saving is good to an extent, but you will need to spend to make more money in the long run.

  • JetLi on 24/05/2016 - 13:18

    that's why most rich people are the biggest scrooges,

  • battler on 24/05/2016 - 13:50
    +2

    formula is flawed.
    GST is applicable only to the after tax income, so 37% + 2% = 39%, therefore 10% applicable to the 61% 'disposable income' = 5.55% (divide by 11, ie. $55.45 item + 10% = $61 )
    HOWEVER, not everything you pay for has GST, utilities, bread, milk, to name a few.
    Don't know what the average person's GST would be, but guessing perhaps it is only 7-8% ish across a basket of goods/services…. so somewhere in the vicinity of 44% is more reflective than 49%.
    Anyway, 44 or 49, your point doesn't change too much.

    • goingDHfast on 24/05/2016 - 17:04

      All valid points and thanks for your inputs! I'm sure if I really dug around I could also come up with an extra list of taxes to push the numbers back up again ;-) But as you say, the point still stands and it is worth taking the time to understand the relationship between extra $x earnt and extra $x saved for your own income level/top tax bracket.

  • ozhunter on 24/05/2016 - 14:31
    +1

    Here is the formula for those earning over $80k: 37% income tax

    That's only for the portion over $80k.

    If you earned $80k with super at 9.5%, your income would be just under $61k after medicare and income tax http://www.paycalculator.com.au/

    • goingDHfast on 24/05/2016 - 17:02

      That's only for the portion over $80k.

      That's my point. If you are already earning over $80k, every extra dollar earned will be taxed at 37%. The dollars you spend remain at a fixed rate for the purposes of this example, ie; 100% absolute savings.

  • inherentchoice on 24/05/2016 - 16:08
    +2

    Agree. This principle was highlighted in an age-old best seller from 1987 called Making Money Made Simple by Noel Whittaker.

    You don't become a millionaire unless you save money until it gets to $1 million.

    • goingDHfast on 24/05/2016 - 17:01

      until it gets to $1 million.

      What happens after $1 million - care to share the secret formula? ;-)

  • tsunamisurfer on 24/05/2016 - 18:06
    +3

    A friend of mine always told me to consider my spending in pre-tax dollars. It was hard to grasp but when it finally hit, it made sense to consider how much work you had to do to earn those post tax dollars you are about to spend.

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