Many people like to quote the old saying
“A penny saved is a penny earned”.
I disagree vehemently!
(You will see why later.)
Obviously, people will disagree with my disagreement.
Some people think that earning more money is better than frugality.
Others say that you don’t need to earn more to get rich.
Both sides make decent arguments.
I happen to find they each only has half of the equation covered when it comes to building wealth.
I mean, saving money is always a good thing.
And who would say “no” to an increase in income?
If anyone’s ultimate goal is wealth creation, you need to be doing both.
Look, I get it, it’s tough to have thought one way and then be expected to be persuaded toward thinking another way in the span of a thousand or so words.
It’s not like I’m trying to make you think differently about everything you ever knew.
I’m just asking you to open your mind when it comes to the concept of building wealth for your own financial benefit.
A Penny Saved Or A Penny Earned
Let’s start by breaking down the quote regarding building wealth by the manner in which it is used today.
“A penny saved is a penny earned” is essentially saying that if you decide not to spend a penny, or if you spend a penny less, the effect is the same as earning one.
The reason I disagree with this logic is simple:
When you save money you are preserving your wealth, but when you earn money you are adding to what you already have accumulated.
This is where the idea of doing both earning more and saving begins.
There are two steps to becoming wealthy–creation and preservation:
- When you earn more money, you are creating more wealth for yourself. New sources of cash inflows can be investment real estate, new businesses, dividends on investments, or any other side project that bring in money separate from your ordinary job income. This is where the accumulation occurs. Job income is what pays your living expenses, while the added cash flows are what add wealth.
- Saving more of your money doesn’t specifically increase the wealth you had already created. Rather, when you save money, you are only preserving what you have already accumulated. You are not better off for not spending the aforementioned penny because you already owned it in the first place. What you actually did was preserve it’s place in your possession.
It’s kind of like a Yin and Yang–one complements the other.
You can’t be building wealth if you aren’t adding to your existing income level.
You also can’t preserve it if you’re spending every extra penny you earn.
A Penny Saved = Preservation Of Capital
Think of it like this:
When you go grocery shopping, or anyplace where you would spend money, your checkbook has a certain balance in it.
When you go to pay, you have money taken out via a check, debit card, cash you removed from the ATM, whatever floats your boat in this instance to pay for your purchase.
Now, regardless of whether nor not you used a coupon or got some sort of discount, your balance is still going to be less than when you started out.
If you shop using Rakuten where you get a rebate on your purchases, you still end up with more going out than coming in.
Even if you decided not to make a purchase at all, your balance at best will be the same.
In fact, your bank account will never have a higher balance than when you started out regardless of the actions you take (or don’t).
It also doesn’t matter how you are saving money:
The point is to save wherever and however much you can.
This is why a penny saved is simply a penny saved and only part of the process for building wealth.
A Penny Earned = Increasing Capital
Now, let’s look at earning a side income (or just making more at your job).
Same scenario as before: when you go to collect payment from a renter, or a side project, your checkbook has a certain balance.
No matter how much or little you collect you are going to have a higher balance after the transaction.
Even if they don’t have the entire payment, or only give you a single penny toward the rent, you will at worst have a bit more than when you started.
When you increase your income, all other things being equal, you will never be worse off.
How you earn the money doesn’t matter:
- Starting a business
- Working a second job
- Asking for raises
You just need to increase what you are bringing in.
Just like above, a penny earned is only part of the process for building wealth and requires the saving part to make it a complete process.
Building Wealth & Income Taxes
A big counter-argument involves the effect income taxes have on the equation.
One of the points made is that reporting the money on your income tax return will stunt your goal of building wealth because taxes will offset the increased income.
Or people will say something like “you can’t be taxed on your savings so it’s better than earning” (I read something like that before too).
Honestly, I have to chuckle at those theories.
Even if you paid 95% in taxes, you will always end up with more money in your pocket than if you didn’t earn anything extra.
Sure, paying taxes suck and it’s even worse if you live in an area with a state income tax.
But a logical person will look at it as being a net-positive when it comes to building wealth regardless of how much you pay in taxes.
Saving ≠ Earning and Earning ≠ Saving
So, taking all of that into consideration for the goal of building wealth, saving money is not the same thing as earning money.
Saving money aims to minimize the loss of wealth while earning money aims to increase the amount of wealth.
But, one really cannot provide you as much benefit without the other.
In terms of building wealth:
- Earning money is pointless if you don’t have saving controls in place to make sure it stays in your possession, and
- Saving money is equally pointless if you don’t have anything coming in to save.
So going forward, you shouldn’t choose which side of the fence to be on.
Instead, you should have one foot solidly planted on each side.
Save where you can, but at the same time look for ways to earn more and build upon those savings quicker.
Building wealth is really a pretty simple concept.
Summing it all up in a succinct manner:
- Find ways to earn more money
- Save more of what you bring in
That’s the complete picture to building wealth in a nutshell!
Of course putting it into practice is a totally different story, but for this we’re only laying out the basic concept of building wealth and need for both saving and earning.
Where do you stand on the issue of building wealth: do you think saving and earning are in essence the same? Do you think one is better than the other? Or, do you feel that they are both important pieces to the financial puzzle?