For most of us, there are two levers we can move to put more dollars in our pockets:
#1. Work more
#2. Spend less
Your investments earn money for you, but for most working people those dollars are being accumulated for later (retirement), not for today. For a fortunate few inheriting is an option. Various other (illegal) options exist, but we will not be covering those.
Option #1- Work more
Take a second job, work more hours at your first job, try to get promoted into a higher pay grade, etc.
Let’s look at the numbers for a mythical couple named Harry and Sally.**
Harry and Sally are married and file their taxes jointly. Sally makes $85,000 a year; Harry makes $75,000. This likely puts them in the 25% Federal tax bracket. Every additional dollar that either earns is “stacked” on top of their existing income and taxed at 25%. In other words, every new dollar of income incurs an additional 25¢ of Federal income tax. This is called the marginal rate. (If you are a fellow tax dork or otherwise excited by tax minutiae, please see footnote below).
In Massachusetts, the tax rate is 5.25% meaning another 5.25¢ is levied out of every additional dollar of income.
Harry and Sally also pay 6.2% in FICA tax (Social Security) and an additional 1.45% in Medicare tax. All together we are up to 37.9¢ of additional taxes levied on every additional dollar that Harry and Sally earn.
Using Option #1 how much more do Harry and Sally have to earn to put a dollar in their pocket?
Don’t panic, I did the math for you.
They have to earn $1.61 more.
If you are in a higher Federal tax bracket the number is even higher. If you live in a higher tax state it is even higher. If you are self-employed it is higher yet, because you pay double the FICA and Medicare tax. (Though FICA taxes are capped at $118,500 of earned income in 2015)
This is why your last raise didn’t seem to amount to much.
Option #2- Spend less.
Using Option #2 what does it take for Harry and Sally to put a dollar in their pocket?
They have to spend $1.00 less.
No pesky math problem. No delving into the tax code. I think you can see where I’m going.
Spending less is a powerful lever for putting more dollars in your pocket.
Scour your outgoing dollars for places to cut. For starters, look at your bank account and credit card statements for recurring automated expenses. The gym membership to the gym you haven’t been to since mid-2013? The recurring payment for the genealogy website you signed up for thinking you would research your family tree? The recurring payment for some computer thing your son hasn’t used in months?
There’s nothing wrong with earning more, in fact I recommend it! But don’t ignore the spending side. You get a lot more bang for your hard earned buck.
**A nod to one of the greatest romcoms ever .
footnote: A taxpayer’s marginal rate may not be their tax bracket. Each additional dollar of income may reduce adjustments, deductions, exemptions, or credits. Additional income may also incur surtaxes or cause otherwise non-taxable income (such as social security benefits) to become taxable. In these cases the taxpayer’s marginal rate is actually higher than their tax bracket.