A dollar saved is two dollars earned
If you read many blogs, you will see a lot of goal meters around, displaying the percent of whatever the goal maybe in the blogs side bar.
Me being the envious type, I decided I wanted a goal meter. What would be a fun and interesting goal? How about a new car savings goal? Great goal, but I have agreed not to get a new car until after I graduate, because driving to school and work is racking up the miles. But a new car now would be much cooler. Paying for the car with poker winnings? Now that’s a great idea. That would justify an early purchase if I could meet the goal before graduating in two years, and if not, then I am buying the car anyway, and the poker winnings would pay part of the cost. Win-win.
With a little more thought, one goal bar wasn’t going to be enough. What would a second goal bar be needed for? The IRS’ cut. Every third dollar of poker winnings would end up going to the IRS.
Then I came across this posting today. A dollar saved really does work out to be two dollars earned. As a non-professional poker player, my poker winnings are just taxed at my tax rate, which works out to be about a third of my income.
Instead, lets say you are working for the man. You now are paying social security, Medicare and FICA. If you are smarter than that, and have thrown of the chains of industry and work for yourself, now you pay both sides of social security and Medicare as well as FICA. State income tax? Local income tax?
Starting to wonder why you work at all now?
How about a nice expensive example? Given: self employed in San Francisco; falling in the 28% tax bracket; how much would a pack of gum cost? This is an off the top calculation, so I am assuming you spent your lower federally taxed dollars on things like a studio in the tenderloin. By the time you get around to buying gum, it is paid for with your maximum tax rate dollars.
| FICA | 28% |
| Social Security/Medicare | 7.65% |
| Self Employed Social Security/Medicare | 7.65% |
| CA State Tax | 9.3% |
| SF Local Tax | 1.5% |
| SF Sales Tax | 8.25% |
Everything is taken off the top, except sales tax. So the 8.25% SF Sales Tax is add into the price first, then income taxes are applied.
| $5 x 1.0825 | = $5.4125 |
| 28% + 7.65% + 7.65% + 9.3% + 1.5% | = 54.1% tax |
| 100% - 54.1% | = 45.9% net income rate |
| $5.4125 / 45.9% | = $11.79 |
The same calculation if you live in Texas which doesn’t have state and local income taxes and your max tax bracket is only 25%.
| $5 x 1.0825 | = $5.4125 |
| 28% + 7.65% + 7.65% | = 43.3% tax |
| 100% - 54.1% | = 56.7% net income rate |
| $5.4125 / 56.7% | = $9.55 |
So what should you do? Buy your gum in New Hampshire with qualified dividend income!
| $5 x 1.00 (No sales tax) | = $5.00 |
| 15% (flat qualified dividend income rate) | = 15% tax |
| 100% - 15% | = 85% net income rate |
| $5.00 / 85% | = $5.88 |
So a dollar saved is more than a dollar earned and in some cases, more than two dollars earned literally.