Why Benjamin Franklin Would be Wrong Today

By David S. Chang

The famous phrase “A penny saved is a penny earned” is attributed to Benjamin Franklin. A version of it does appear in his 1737 book Poor Richard’s Almanack, but it actually first appeared about 100 years earlier in a book called Outlandish Proverbs by George Herbert.

Regardless of who said it first, wise people have recognized the importance of saving the money you earn. Benjamin Franklin made it clear that saving is another form of making money because of the effort required to not spend it!

He is still right today with one exception. When he wrote his Almanack there were no income taxes in America. The first income tax was enacted in 1862 during The Civil War and made permanent in 1913. Today, many people pay close to 50% of their income to taxes: federal, state, social security, medicare, and other taxes such as sales, property, and fuel.

Because of taxes, “A penny saved is actually TWO pennies earned!” When you spend $10, you actually have to make double in order to spend it: $10 to you, and $10 to the tax man. When you realize that for every dollar you spend you have to earn double, it changes your spending habits.

You may not be able to control your income, but you can control what you spend. The SMART Wealthy understand how to be a more efficient consumer. This is one of the best ways of having more money in your pocket and way to fight inflation. How?

If you hold onto your money and buy the things you need (not on credit or debt!) on days like Black Friday or Cyber Monday and get 30 to 50% off, then you actually end up saving much more than you think! That savings is tax-free and when you get things on discount, you also fight inflation. This is why buying in bulk, like at Costco, can be a good thing as long as you use it all and need it (on the flip side, if you buy in bulk only to waste things, it defeats the purpose!).

Here is an example:

  • You enjoy a pack of diet soda every week for $10 (one of my indulgences!)
  • You get a 10% discount to buy in bulk at 12 cases. So your total price is now $120 dollars – 10% discount = $108 dollars total
  • In addition to the regular $10 you would have normally spent, you are spending an extra $98 in order to get the $1 discount per week
  • You are keeping at most the $98 tied up all year to save that $1 a week = $52 savings a year
  • And “earning” $52 a year by tying up $98 is earning 53% tax-free!

But what about the other $98 dollars you would have to come up with every-time you need to go purchase the cases in bulk?

  • You would initially have to spend “or invest” the $98 extra dollars on the first trip for 12 cases (weeks).
  • Since you are saving $1 a week, 12 weeks later, you only need to bring an extra $86 ($98 – $12 dollars saved)
  • After the next 12 weeks, you would only need $74 extra to purchase the cases – and so on…
  • On average, over the course of the year, you are using far less than the original $98 you had to use
  • Since you are tying up less money over the year, the return from this 10% discount is actually 177% annualized!!! 

Here is how the calculator equation works:

  • Cost of case = (12)($10)(1 – .10)
  • Cost of case = $108

Now, we need to find the interest rate. The cash flows are an annuity due (fixed payment you make in this case weekly), so:

  • PVA = (1 + r) C({1 – [1/(1 + r)]t } / r)
  • $108 = (1 + r) $10({1 – [1 / (1 + r)12] / r )

Solving for the interest rate, we get:

  • r = .0198 or 1.98% per week

So, the APR (Annual Percentage Rate) of this investment is:

  • APR = .0198(52)
  • APR = 1.0277 or 102.77%

And the EAR (effective annual rate, we use this since APR only takes simple interest, not compound interest into account) is:

  • EAR = (1 + .0198)52 – 1
  • EAR = 1.7668 or 176.68%

The math works out this way for products/goods/services that you purchase regularly and it is an annual return.

The takeaway is that if we spend wisely, at the right time, and the right amount, we are saving (and earning) quite a bit more than the face value. Mark Cuban, the billionaire owner of the Dallas Mavericks calls this the “transactional value of cash.”

This shouldn’t be used an excuse to buy things just because it is on sale! The purpose is to be a smarter shopper, not just a bargain shopper. It is important to understand how taxes affects our financial decisions and that spending less is just as important as earning more.

Just to add to this, buying bulk like the one in this example, not only helps you save, but here are some other benefits:

  • Less trips to the market or store, which can end up saving on gas and time
  • If you have a stockpile of goods you need, it has an extra layer of security, especially for us that live in places like Hawaii.
  • Take the difference in money that you would have spent and invest it, this will help you get to your goals quicker!


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David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant ArtofThinkingSmart.com | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!


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