Why Wealthy People Can Be So Frugal

Tax Breakdown for Every Dollar, using rough estimates.

The short explanation to why even wealthy people continue to be frugal (coupons, discount shopping, sale sections, outlet malls) comes down to taxes. American's are heavily taxed, more than 50%. A lot of the costs are hidden to most, especially if you don't understand how the complex tax system works. The more money you earn at work, the higher percentage Uncle Sam will tax you at the end of the year. Here, I explain why couponing is beneficial regardless of how much money you make. Before beginning, I am by no means a tax expert, and everyone's situation is different. This is for educational purposes.

How $50,000 Earned Becomes $27,000 Spendable Cash

In the example we're about to cover, this individual earns approximately 60 cents per dollar earned assuming at 25% Federal Tax rate in 2015 tax years. You'll get taxed 25% if you're making between $37,451 to $90,750 (to simplify the situation, we'll assume zero deductions). But, for every dollar, this is a hypothetical breakdown:

  • 1.45% Medicare
  • 6.2% Social Security
  • 9.3% State Income Tax
  • 25% Federal Income Tax
  • 58.05% - Your Money

So, if you make $50,000 a year, you'll only get $29,025 to spend after all the major taxes. That SUCKS, but it gets worse. If you were to spend all $29,025 at once, part of your cash will go towards paying sales tax. In California, sales tax is a minimum of 7.5% (it can be higher depending on municipality up to almost 10%). That means before tax, you can spend $27,000 given a tax rate of 7.5%. At the end of the day, your $50,000 can go towards $27,000 worth of purchases, which is a tax rate of a whooping 46%! 

This assume a Federal Tax Rate of 25%, but the highest tax rate can be as high as 40% for high earners! See the IRS Tax Tables for where you stand (or Google 'federal tax brackets' for sites that provide easy to read tables).

So Where Does Couponing Fit In?

So now that we have established the basics of where our money goes, how does being frugal help? The saying, "A dollar saved is a dollar earned" isn't really true. Recall all the taxes Uncle Sam took? You actually save more! See the examples:

  • $1,000 saved in a year is actually ~$1,850 earned
  • $2,000 saved in a year is actually ~$3,700 earned

The impact of couponing is greater when you earn more money, because you're taxed at a higher rate. That being said, the wealthy have the opporunity to save more money. Many may question if its worth the wealthy's time to spend the time required to save money.

The bottomline, couponing benefits everyone, regardless of how much money you earn.

How to Start Become Frugal?

There are tons of ways to save money. Some may depend on your situation, but most apply to everyone:

  1. Think Coupons - We spend a large percentage of our money or groceries or restaurants. Costco has occasional sales, Bed Bath and Beyond has tons of 20% of coupons, and Safeway/Lucky's has weekly deals. If you're not browsing, you're not saving.
  2. Stop shopping based on convenience - That bag of chips you bought in the vending machine is much more than a large bag from the grocery store. Planing ahead can save you money! The same goes for that morning Starbucks or Peets.
  3. Cash Back Credit Card - One of the easiest ways because you can get a percentage (1% to 5%) back on every purchase. More on cash back credit card!
  4. Apps that pay money - These apps usually require your to watch ads or scan receipts and don't pay much, but something is better than nothing!
  5. Cash Back with Online Shopping - This one can be stacked with Cash Back Credit Cards, but some websites pay you to shop online via their pages. Depending on the merchant, your online shopping cash back online credit can be very lucrative. Try Ebates!
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