It’s not true that “A dollar saved is a dollar earned!” One has more value, but which one?

In an era where the price of everything seems to be conspiring against our wallets – from the morning coffee that now costs as much as a small island to rent prices making us consider tiny houses not just cute but practical – managing finances has become an art form. It's a daily juggling act where we often wonder if our money is participating in some vanishing act.

Higher Earnings or Higher Savings?

This brings us to a pivotal question in personal finance: is it more advantageous to focus on earning more, or should we champion the art of saving on expenses? While dreaming of a bigger paycheck is as common as misplacing our keys, a deep dive into the numbers reveals a surprising victor in the financial tug-of-war between earning and saving.

You got a big raise! Or did you?

Consider the case of an individual with an annual salary of $80,000 who's just landed a $5,000 raise. At first glance, it's like hitting a mini jackpot. But hold the confetti – after taxes take their share, with federal income tax, Social Security, and Medicare chipping away, what's left of the raise is a mere $3,517.50. It turns out that Uncle Sam can be quite the party crasher.

Saving on Expenses vs. Earning for Expenses

Let's pivot to the unsung hero: saving on everyday expenses. It's like finding a financial oasis when you save that same $5,000. This amount is yours, free from the clutches of tax deductions. It’s also free of sales tax! This is precisely where innovative saving strategies come into play. By making informed choices, you can ensure that each dollar saved retains its full might, unlike its earned counterpart, which often ends up feeling short-changed after taxes have their say.

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The Details are in the Math, but proceed cautiously… do you really want to know?

To calculate the net amount an employee would take home from a $5,000 raise on an $80,000 income, we need to consider various factors, including federal income tax, state income tax (which varies depending on the state), and other potential deductions like Social Security and Medicare.

For simplicity, let's focus on federal income tax and the standard deductions for Social Security and Medicare in the United States. As of my last update in April 2023, the federal income tax rates are graduated, and an $80,000 income places a single filer in the 22% tax bracket for income over $41,775 but less than $89,075. However, tax is not applied uniformly across the entire income but in segments according to the bracket structure.

The Social Security tax rate is 6.2% on income up to a specific limit, and the Medicare tax rate is 1.45%, with no income limit.

Let's calculate the net amount of the $5,000 raised after these deductions:

1. Federal Income Tax: Since the raise falls within the 22% tax bracket, we'll apply this rate to the $5,000 raise.

2. Social Security Tax: 6.2% on the raise.

3. Medicare Tax: 1.45% on the raise.

From the $5,000 raise, an employee would net approximately $3,517.50 after accounting for federal income tax, Social Security tax, and Medicare tax. This calculation highlights your point about the impact of taxes on additional earnings, contrasting with the tax benefits of saving money, especially when considering sales tax and the absence of income tax implications on saved amounts.