Let’s try a brief thought experiment. For purposes of this experiment, assume you’re an average wage earner ($50,000 per year) and typical spender ($45,000 per year after paying for taxes and social security).
Compare these two scenarios.
Scenario No. 1
Let’s say your employer, in an inexplicable fit of generosity, decides one day that your labors on its behalf are worthy of greater reward. So it gives you, out of the blue, a raise of thirty percent, which works out to a boost in salary of $15,000. That’s real good news, but it comes with a bit of bad news as well: you have to pay taxes. After various withholdings, your $15,000 raise gets whittled down to $9,195. Here’s the math:
|Minus Social Security Withholding ($15,000 x 6.2%)||($ 930)|
|Minus Medicare Withholding ($15,000 x 1.45%)||($ 218)|
|Minus Federal Tax Withholding (at 25% rate)||($ 3,750)|
|Minus State Tax Withholding (at 6.05%, avg. nat’l rate for $65,000)||($ 908)|
|Net After–Tax Earnings:||$ 9,195|
Scenario No. 2
In this scenario, let’s say you receive no raise at all. You’re stuck playing Bob Cratchit to your boss’s Ebenezer Scrooge. Like many other factors that affect your life, employer austerity is beyond your control. But you refuse to become another victim of wage stagnation. As a reader of this site, you know that mainstream households are wasteful in their spending. Although this waste usually stays hidden, it reveals itself upon close observation. You also know that converts to frugality report savings of twenty percent or more each year—savings that occur painlessly because they arise from needless spending. Armed with this knowledge, you take easy steps to curb your household’s excesses. That’s real good news, and there’s even more good news to follow: unlike any raises you receive, the money you save isn’t taxed. Here’s the math:
|Incremental Savings ($45,000 x 20%)||$9,000|
|Minus Social Security Withholding||($ 0)|
|Minus Medicare Withholding||($ 0)|
|Minus Federal Tax Withholding||($ 0)|
|Minus State Tax Withholding||($ 0)|
|Net After–Tax Savings:||$9,000|
* * *
Bottom line from these scenarios: by cutting household waste, typical wage earners receive about as much money as they do from a thirty percent pay raise. So if your employer hasn’t seen fit to boost your income recently, why not have a go at your household spending? Like a well-deserved raise, these new earnings will impact your life right away—and unlike a raise, they won’t be taxed.