Why Becoming More Frugal is Better Than Making More Money

While most people consider spending less ( being more frugal ) to be the equivalent of making more money, such is not the case unless you have no taxable income.

A progressive income tax favors saving to earning.
If you go to the IRS web site and grab a copy of the 1040 tax form instructions, you can verify all of what follows for yourself.

While I have always disliked the way that the income tax works and felt that there was something fundamentally wrong with it, it was not until I went through the tax chart one year that I could clearly explain why I prefer to save a few dollars to earning a few extra dollars.

If you just go over the actual 1040 form itself, you find that taxes are determined by taking the amount of money you made, deducting certain items from that money to find out your taxable income, applying credits against your taxable income to reduce it, figuring the tax amount, and finally adding any extra credits which you qualify for.

If you take your taxable income and compare it with the tax chart contained within the instruction manual offered by the IRS, you will find a particular amount of tax that is owed.

The more money you make, the more tax that you owe.

To illustrate this better, consider the following for someone who is single:

$0.00 taxable income = $0 tax imposed (0%)
$1000.00 taxable income = $101 tax imposed (10.1%)
$5000.00 taxable income = $505 tax imposed (10.1%)
$10000.00 taxable income = $1103 tax imposed (11.03%)
$20000.00 taxable income = $2603 tax imposed (13.01%)
$40000.00 taxable income = $6350 tax imposed (15.87%)
$80000.00 taxable income = $16385 tax imposed (20.48%)

These numbers are misleading.
The way things actually work is that at certain levels, additional earnings are taxed at a higher rate.

The following table shows more clearly what is going on, using the individual tax rate:

Make under $5 and get taxed $0.
Make $5 to $14.99 and get taxed $1.
Make up to $100 and get taxed up to $9.
Per added $100 ( up to $7999 ) and get taxed another $10 ( 10% of each new dollar ).
Per added $100 ( up to $32,550) and get taxed another $15 (15% of each new dollar).
Per added $100 ( up to $78,750) and get taxed another $25 (25% of each new dollar).

After that, each new hundred dollar increment has an increased portion taken out. As you move past a hundred thousand dollars, each new dollar has 28% or more taken out of it.

This is part of the reason that the more you earn, the less you notice any new increase. Between this fact and social security, medicare, and other things taken out of your checks on a percentage basis, you will see less and less of an increase as you make more money.

What does it mean?
It is much more effective to cut costs than it is to make more money. The numbers below are based entirely upon someone without children and the taxes that are based upon taxable income. When you figure in extra taxes which are taken out before you even see your paycheck, the effectiveness of saving becomes even greater.

While you make under $8000 in taxable income:
For every $20 more you make, the government takes $2.
Saving $19 is akin to making $20 more.

From $8000 to $32,550 in taxable income:
For every $20 more you make, the government takes $3.
Saving $17 is akin to making $20 more.

And from $32,550 to $78,750 in taxable income:
For every $20 more you make, the government takes $5.
Saving $15 is akin to making $20 more.

As you can see, saving is much better than earning. This becomes more and more true as you have more taxable income. While it is true that inflation eats away at savings, until inflation gets a good deal higher it will remain better to save than to earn.

If you need more money, but do not feel it would be a good idea to ask your employer for a raise, it might well be worth your time to look over your current expenses and see where you can cut some corners.

List of Sources:
"1040 Instructions", The Internal Revenue Service