A Penny Saved Is a Penny Earned, and More!

A Penny Saved

Benjamin Franklin coined (no pun intended, really) the expression, "A penny saved is a penny earned." But a penny saved is really more than a penny earned, if you think about it. Why?

Ben Franklin came up with his enduring aphorism before we had a federal income tax system. And Social Security and Medicare taxes. And state income taxes. And local income taxes. See where I'm going here?

How Much Is a Penny Really Worth?

You can earn your penny from employment or investments. Let's focus on employment. Employment earnings are subject to federal, state, local and FICA (Social Security and Medicare taxes). Let's say your marginal income tax rates (the rate at which you are taxed on an additional penny of income) are 28% federal, 5% state, 2% local and 7.65% FICA. That's a total of 42.65%. So a penny earned is really 1 cent minus your marginal income tax rate of 42.65%. In other words, your penny is actually worth 57.35% of one cent, or $0.005735 after income taxes.

To spend one penny you have to earn 1.74 cents because 1.74 cents after taxes of 42.65% is one penny (1.74 x 42.65% = 74 cents of taxes, leaving you with 1 cent).

Put another way, to spend $100 you have to earn $174 dollars of employment income. To spend $1,000, you have to earn $1,742. To spend $10,000, you have to earn $17,420. Pretty soon you're talking serious money.

"To spend a penny, you have to earn more than a penny. "
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Spending Costs More Than You May Think

You get the picture. It costs a lot more to spend money than meets the eye, when you consider what you have to do to earn it.

A penny saved is more than a penny earned. You heard it here first!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Beware of Buying Individual Stocks: You May End Up Owning Something Else

Stock History

My stepfather, who will be 90 years old this summer, owns some JPMorgan Chase & Co. common stock. The JPMorgan Chase stock dividend was cut in the 2008 global financial crises and the share price was recently battered by international trading scandals. Is this a good stock for an 89-year-old?

Do You Really Know What's In Your Portfolio?

My stepfather never bought JPMorgan Chase common stock. He didn't inherit it or receive it as a gift. How did he come to own it today?

More than 30 years ago, my stepfather bought some stock in The Farmer's Savings and Trust Co., a local savings bank in his hometown of Mansfield, Ohio. The Farmer's Savings and Trust Co. only had offices in Mansfield and only made local loans. He knew the bank's president and many of the people on the board of directors. It was a simple, safe, local investment.

But then The Farmer's Savings and Trust Co. was bought by Bank One, a larger Ohio bank. Bank One started to expand regionally. In the 1980s and 1990s, regional bank stocks did very well, so his original investment accumulated quite a capital gain. Such a large capital gain became an obstacle to selling the stock.

"When you buy an individual stock, your original investment may grow into something completely different."
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Corporate Mergers Can Affect Your Investments

I've lost track of the corporate mergers, but I think Bank One bought Continental Bank in Chicago. Then JPMorgan & Co. merged with Chase Manhattan to become JPMorgan Chase & Co. Then Bank One merged with JPMorgan Chase. There may have been some other mergers along the way.

JPMorgan Chase common stock recently got pummeled by international trading strategies. But the bank that my stepfather originally bought stock in never did international stock trading. Many smaller, local banks in many communities were able to maintain and not cut their dividends during the 2008 global financial crises. But my stepfather's stock had "morphed" in to a much different bank than he invested in.

There are many similar stories of other companies in many industries. Some corporate changes have turned out well, some not so well.

Be Careful When You Buy Individual Stocks

One thing is for sure. Beware of buying individual stocks to buy and hold forever. Or be willing to sell and pay a capital gains tax, which most people won't do. When you buy an individual stock, your original investment may very well grow into a completely different animal.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.