The Absolute Best Way to Become Wealthy

Posted on 05. Sep, 2006 by in Taxes

That’s right – you read the title correctly. This is the absolute BEST way to become wealthy! Are you ready to find out what it is? Well, here you go:

Stop spending.

I’ll wait until you stop moaning and groaning to go on – because I know that 99% of you reading this right now feel like you were just hit with a giant “obvious” stick. But instead of dismissing my perhaps simplistic approach to wealth accumulation, hear me out.

The reason spending less is the key to wealth is taxes – the magical force which makes this tip so powerful. You’ve probably heard the old addage “A penny saved is a penny earned” right? Well, thanks to Uncle Sam that little saying could now be updated to read “A penny saved is 2 pennies earned.” And it’s all because of your marginal tax rate.
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I’m not talking about your average tax rate, but the percentage of taxes that you would have to pay if I gave you $100 right now. How do you figure that out? The simplest way is simply to look at last year’s tax return, and figure how much in taxes you would have to pay for an additional $100 in income. If you’d have to pay $35 in taxes for that $100 then your marginal tax rate is 35%. It’s that easy. But, if your tax returns aren’t handy you can also visit the Marginal Tax Calculator over at DinkyTown.net.

Using that calculator, the marginal tax rate on a single individual making $60k is 25% even though the effective tax rate is only 15.74% (meaning that your TOTAL tax bill is 15.74% of $60k).

Now, we can use this 25% rate to explain why spending less is the absolute best way to become wealthy. Let’s pretend that since you’re single you eat out a lot – to the tune of $100 each week. Now, if you could cut your fast-food habits down to only $50 each week most people would say that you’ve just saved yourself $50. But in reality you’ve saved yourself so much more.

How much would you have to work to earn enough to make that extra $50 after taxes? At a 25% marginal tax rate you’d have to earn $67 worth of wages just to pay for that additional $50 of take-out food. So by cutting down your fast-food habit you’ve now saved yourself $67 – not $50. Now, just imagine the impact this way of thinking would make if you had a marginal tax rate of 50% (some people do)! You would literally save 2 pennies for every penny saved!

Can you start to see why this is the absolute best way to become wealthy? I could go on and on here, but I think you are beginning to get the point. If you start to think about how easy it is to save money compared to earning more (your boss can give you only so many raises) this idea makes even MORE sense. Curbing your spending is the most effective way to earn a “return” on your hard-earned cash – a return much higher than any long-term stock return.

6 Responses to “The Absolute Best Way to Become Wealthy”

  1. Todd Brill

    05. Sep, 2006

    Great article! Many people have come to overlook the consumer frenzied society we have become and join in with the spending spree – even to the point of not using their own money (i.e. credit cards). Savings in most of the western world have plummeted as a result to the lowest levels since the Great Depression.

  2. Neil McIntyre

    05. Sep, 2006

    The savings (and your example) are misleading (/wrong). You still have to pay the tax on the $67 to get the aftertax $50, so that cost is still incurred. You don’t save that tax if the income is saved instead of spent, that’s the problem with income tax vs. consumption tax.

  3. Jason Guthrie

    05. Sep, 2006

    Neil, it’s all about how you view your spending. If you look at it according to how much you need to work to earn the same amount of money, then it makes perfect sense. It’s all about your spending power. That’s how people are able to survive with incomes of $25,000 while those earning $100k complain about not having any money. If they were able to spend less money, they wouldn’t have to work 80 hours a week to earn that $100k. They could work half as much and still have almost the same buying power.

  4. Neil McIntyre

    09. Sep, 2006

    You can save yourself the $50 or you can save yourself the $17 in your example. You can’t save both because in either case the saving of one precludes the saving of the other. If you save the $17 tax, you didn’t earn the $50 and don’t have it to save. If you save the $50 by not spending it, you still have paid the $17 tax.

  5. handmade cards

    28. Jun, 2007

    Great article I can see what you are saying and maybe I need to look at what I’m spending then look at what I can cut down on that is not essential. Maybe it wont make me rich but If I can get a holiday out of it at the end of the year that will do me.

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