Is earning more money or saving more money better? Often, when I’m faced with a need for extra cash, I automatically turn to making more money. I grew up knowing that hard work earned you money. If you need more money, then you need to work more. If that still wasn’t enough, then go talk to the bank for a loan. Now, I have a little different perspective. Working more isn’t always the best option. It comes at a cost. In fact, I think that we really might be better off just doing nothing. However, if there’s a need that must be met, doing nothing isn’t really an option. Let’s analyze the options of earning more vs saving.
Money Scripts
First, we’re going to side step just a bit. I think it’s important to think about why we react a certain way. If you are curious about why you make certain decisions around money, it might be helpful to uncover some of your money scripts. These are underlying and often subconscious beliefs about money that dictate how we respond to issues around money. To get started, go to Dr. Brad Klontz’ website and take the Klontz Money Script Inventory to find out what your natural tendencies toward money are.
Earning More Money
Earning more money comes to mind naturally for me. However, when you earn more, you pay more in taxes. For rough figures, take off 15.3% for payroll taxes (social security, disability, medicare) if you’re self-employed or contracting. Use half that, 7.65%, for W-2 income where your employer takes the taxes out for you. In that case, your employer actually pays half of your payroll taxes. If you’re a contractor and you get a 1099 at the end of the year, then you have to pay all the payroll taxes yourself.
Next, you need to add in state and federal income taxes on top of that. You can do a rough calculation off your tax return from the last year to determine what your highest marginal tax bracket is. I choose to use the highest bracket rate because we are adding money on top of what you’re already earning. In effect, any additional money you make is in that highest tax bracket.
Remember, the way marginal tax brackets work, your money is taxed at different rates above a particular threshold. For instance if the 22% tax bracket starts at $83,550, everything you earn above that amount up to the next tax bracket is taxed at 22%. This changes from time to time, so check the IRS website.
Technically, the state tax you pay is deductible from your federal adjusted gross income. However, calculating that complicates things. For me, I don’t pay state income tax currently, so I ignore it. However, I think you should adjust for your state tax. I calculated mine and it made a 3.7% increase in the total taxes paid. That’s pretty significant.
To keep it simple, here’s a diagram of what I’m talking about.
Spending Less
Spending less is easier said than done. We always mean to spend less, but end up overspending because we, like, need stuff. The cool part about spending less is that it has a 1:1 ratio of how much you save versus how much extra cash is actually in your bank account.
You don’t pay taxes on money you save. For someone that’s a natural saver, this obviously makes a lot of sense. A natural saver will defend every penny in their account with their life. They might think of phrases like, “A dollar saved is a dollar earned.” In reality, the phrase, “A bird in the hand is worth two in the bush.” might be better. That basically means that it’s better to have possession of something versus just “knowing” that you could go get more. At the end of the day, what actually makes its way into your bank account (and stays there!) is what matters most.
Analyzing the Difference
I was curious what this looks like for me, so I did what I always do and created a spreadsheet! After finding what my top tax bracket is, I created a scenario that I would need to add an extra $500 to my budget every month. Once I added the payroll taxes, my total rate of taxation came out to 37.3%.
So in order to get an extra $500 dollars into my budget each month, I would need to make $686.50! That’s a ratio of $1.37 earned for each dollar needed. In contrast, if you look at how much money I need to save to equal the equivalent in earned income, I would only need to save roughly $0.73 to equal $1 of earned income.
At the end of the day, in order to add $500 of working capital into my budget, I could find ways to save $500 or earn an extra $686.50. It’s pretty clear that finding ways to save is important too.
Striking a Balance
My tendency to fix every financial problem by making more money comes pretty naturally. I think that saying goes that if the only tool that you have is a hammer, every problem looks like a nail. However, looking at the numbers, it makes me really think about the importance of balancing extra earnings with looking for ways to save more as well.
I’ve literally been using an expired $1 off coupon as a bookmark recently. That coupon is really the equivalent of me earning an extra $1.37 cents. Makes you think about looking through the coupon section of the paper a little more closely, huh?
I think that it’s also important to still try and earn more money. There’s only so much savings that can be had in our budget. I can’t control how much gas is going to cost or cut much off our grocery bill. If you’re finding yourself focusing on saving more to fix money troubles, I’d encourage you to look at ways to earn more money too.
The monetary reward for saving money is much greater than earning more. However, If you’re really struggling trying to squeeze another penny or two out of the budget, you need to look at ways to earn a little bit more.
Bottom line, when there’s a shortage in the budget, look at both spending and saving. Don’t just focus on one or the other. Neither one is the be all end all. The number one rule in budgeting is to spend less than you earn. Notice how saving and earning are both involved there? They really are two sides of the same coin.
Action Items
- Check to see what your top marginal tax bracket is for your federal and state income. If you don’t understand how the marginal tax brackets work, don’t worry, I didn’t either. Start by looking up federal income tax and then go from there.
- Take the Klontz Money Script Inventory-Revised to find out what your money scripts are. Think about what your natural tendencies are and how that might affect your decisions around money.