Would you like to know more about:

How your savings rate compares to the national average?learn more

Was Ben Franklin Right?

One of Dr. Franklin's famous quotes is the old adage we've all heard many times, "A penny saved is a penny earned." I figure I'd better write about that now because I read in the newspaper last week that there's a movement afoot to eliminate pennies since they cost more in materials (copper and zinc) to make than their assigned value.

That possibility brings up another question. IF the penny is eliminated, can we still say things like, "A penny saved is a penny earned?" I should think NOT! The United States of America is, in all likelihood, the most "politically correct" nation in the Universe, of which California (where I live) is THE MOST politically correct. Ergo, no pennies, no old sayings related to pennies. Franklin's most famous saying will go the way of other fondly remembered-but lost forever-traditions like postage stamps you have to lick, penmanship, hand written letters, learning geography, dressing up when you go shopping, women in skirts, and smoking anywhere in the State of California.

So, I'd better get back to the main topic for this article while there's still time, that being the issue of whether or not our man Ben was right when he wrote about a penny saved being the equivalent of a penny earned. Even though we may have to modify that some day to "a nickel saved is a nickel earned," Dr. Franklin was correct-for his day and age anyway-and the notion is a good one.

If through sound planning of your expenditures (avoiding impulse spending), comparison shopping, superior bargaining skills, or other means, you save a penny, you've still got that penny to buy something later. If you DON'T save the penny- well, you'll just have to go out and bust you buns to earn another one for your future needs.

Ok, Ok, so you can't really buy anything for a penny anymore. The same idea holds true for other currency. "A thousand dollars saved is a thousand dollars you don't have to earn." "Ten thousand dollars saved is ten thousand dollars you don't have to earn." NOW WE'RE TALKIN'!

So Dr. Franklin was accurate with respect to his time, but there weren't many taxes in those days other than the one that resulted in a bunch of Boston guys dressing up as Indians and throwing a lot of tea into Boston Harbor. I hear the Brits got real cranky about that. What about this day and age?

These days the best perspective I've heard related to Dr. Franklin's observation is from Andrew Tobias in his book, "The Only Investment Guide You'll Ever Need." Mr. Tobias points out that, because of taxes on earnings and spending, saving a penny means MORE than it did in Franklin's time. These days you end up paying nearly fifty percent of your earned income in various taxes including , (but not limited to as they say) income taxes to federal and state governments, social security taxes or self employment taxes, property taxes, and sales taxes on just about anything you buy. The result, says Mr. Tobias, is that, "A Penny Saved is Two Pennies Earned." As a matter of fact that's the title of one chapter in his book.

That above being the case-and it is-the Tobias modification of Franklin's saying also works for denominations other than mere pennies. "A thousand dollars saved is two thousand dollars earned." "Ten thousand dollars saved is twenty thousand dollars earned."

This is a very important concept because it highlights one of the reasons that developing a savings habit is critical in money management efforts. If you compare the two bucks you'd have to earn to equal one buck you save, well, that looks to me a lot like a 100% return on your money. Alright, that may be a little extreme, but saving a dollar DOES at least equate to a 50% return-the amount you DON'T pay in taxes that you can add to your net worth.

Just for fun, let's see if we can take the whole concept one step further by adding the words, ". . .and invested. . ." to the adage. What would happen if we took Dr. Franklin's, and Andrew's, pennies and invested them? Let's use a ten percent average annual return and a time span of forty years. The penny would grow significantly. So, for Franklin's time we could say, "A penny saved, and invested, is 45.25 cents earned," and modifying the Tobias modification of Franklin's saying, we can say, "A penny saved, and invested, is 90.5 pennies earned." Further, working with other denominations, we can say for this day and age, "A thousand dollars saved, and invested, is ninety thousand five hundred dollars earned," and "Ten thousand dollars saved, and invested, is nine hundred five thousand dollars earned."

NOW WE'RE REALLY, REALLY TALKIN'!

Hmmm. Can you think of ways to save ten thousand dollars this year? No? How about saving one thousand bucks. I'll bet you could figure out how to do that! In fact, I'd lay odds that you could decide how to save ten percent of your income were you to take the time to develop a formal savings plan.

Remember, a penny saved CAN BECOME 90.5 pennies earned.

arley