Which is Better: To Earn Money or to Save It?

This post is from contributing author Matthew Houtsma. Matthew and I have been friends for over 30 years. We attended school together from kindergarten through college, have traveled together in Europe, and co-founded an SAT prep company. Matthew is always looking for ways to save money, particularly when it comes to travel with his wife and three boys. The tagline of this blog is “helping you have more time and money for what matters most.” But many of us overlook key factors in how we value money. In this post, Matthew talks about one such factor and how a proper understanding of it can help you have more money and time.

Would you rather get a $1,000 bonus at work or save $900 on plane tickets for an upcoming trip you have already decided to take? Or, would you be better off earning $1,000 driving for Uber or negotiating with your cable and phone company to save $720: $60 per month for the next 12 months, say?

Man holding glass jar with money in it

While you might think the first option is obviously better in both scenarios, for the vast majority of working adults, the second option is preferable. The reason why is simple but important to understand and keep in mind:

The Effect of Taxes

In both cases above, the second option is better because of the effect of taxes. Let’s look at each case:

Why Saving $900 is Better than Earning $1,000

Let’s assume you are married and your household taxable income (line 43 of your Form 1040) after deductions is $80,000. In this situation your marginal federal income tax rate is currently 22% and you probably also pay state income taxes.

Therefore, the $1,000 bonus you get at work is going to be at most $780 in your bank account after taxes ($1,000 – 22% x $1,000).

If you save $900 on plane tickets—for example by using airline miles—you would be better off by at least $120 ($900 – $780).

When Saving $720 is Even Better than Earning $1,000

The math is even more compelling for Uber driving or any other side income that would be subject to self-employment tax.

If you earned $1,000 driving for Uber, you would not only pay income tax at a 22% rate, but you would also pay self-employment tax of 15.3%. Your $1,000 in earnings only ends up netting you about $627 once taxes are taken into account ($1,000 – 37.3% x $1,000).

Let’s say, instead, that you negotiate a $60 lower cable and phone bill for the next 12 months—a one-year savings of $720. In doing so, you would be ahead by the full $720 you saved. Negotiating the lower bills is better than driving for Uber by $93 ($720 – $627).

Other Real-world Applications that Save Both Money and Time

This concept plays out in many smaller ways every day.

By searching for coupon codes and other deals before you make purchases you already plan to make, your savings are worth more than the corresponding amount of income. The $10-off restaurant coupon you find before heading to dinner is better than earning $12 by working an extra half hour. (Or you can go crazy and save $547 in 26 minutes as Brian did.)

Not only is saving money in such ways marginally better than earning money, it is also easier and faster given the power of quick internet searches on sites such as RetailMeNot and Groupon.

Recalculating Credit Card Signup Bonuses

Brian loves a good credit card signup bonus, as you probably know. And he takes pains to assign each bonus a fair value. But from the perspective of the principle of this post, the bonuses are even better than he calculates.

Take my favorite card, for instance: the Chase Sapphire Reserve. Brian values it at $818. But let’s say you use the points earned from the card’s signup bonus to pay for travel you would have taken anyway. In that case, you would have had to have earned over $1,000 to be able to pay for that travel. From that perspective, the signup bonus saves you more than $1,000 in pre-tax income.

Conclusion

Because of taxes, it is always economically better to save a dollar than earn a dollar. In fact, as the Uber example shows, it can be fiscally better to save $650 than to earn $1,000. And it’s often quicker to save money than to earn it as well.

Question: How do taxes affect the way you value saving vs. earning money? You can leave a comment by clicking here.

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