Triple Value of Income

Triple Value of Income

My friends and family know I’m frugal but recently my mom said, “Watching what you spend is fine but sometimes you just have to buy something nice for yourself without stressing out about it.”

While I do agree with this to an extent, the comment made me think about why I never like spending money.

I’ve come to realize the part of my personality that makes me seek out the best deal for everything I buy is the same part that causes me to be uncomfortable every time I spend any money.

Why? Because the very act of spending the money means that I’m not getting the biggest bang for my buck.

I’ll explain…


When I make a dollar at work, there are many things I can do with that dollar that will determine how valuable it actually is to me.

If I decide to take that dollar out of my paycheck so that I can spend it, I am getting $0.80 of value out of that dollar because of my effective tax rate of 20%.

I worked hard for 40 hours this week but if I spent my entire paycheck, I would be losing an entire day’s work worth of value from what I earned! I don’t know about you but I don’t want to work for free for a day a week just so I can buy things I don’t need.


If I instead put that dollar into a diversified stock portfolio, I am still initially losing that $0.20, because I am still paying income tax, but at least now it has the ability to recoup some of that lost value over time.

Leaving that $0.80 invested for 10 years, earning the 7% average stock market real rate of return (i.e. after inflation), the dollar will grow to $1.57, which will provide me with $1.45 of value (assuming a 15% capital gains tax).

Retirement Contributions

If I go a step further and contribute that dollar to my 401k or IRA, I am bypassing the income tax initially, therefore putting the full value of my dollar to work.

Assuming I begin withdrawing from my retirement account in 30 years, the value of the dollar I put into the account will be $6.70 (again assuming an average 7% return, after inflation, and a 12% effective tax rate at withdrawal).

Employer Match

What if my employer offered a retirement match program? If I contribute a dollar and my employer matches me, I am initially getting a whopping $2 worth of value! Who doesn’t love a 100% raise?

Again, assuming I leave those two dollars invested for 30 years, I would eventually receive $13.39 in value from that single dollar!

Investment Income

Okay, getting double the value of my dollar is really exciting and investing that $2 and growing it to $13.39 by the time I am 60 is even more exciting but who says I have to spend that dollar when I turn 60? What if I leave that money invested and instead spend the interest/dividends I am earning on that money. That dollar that would have only been worth $0.80 had I spent it when I earned it is now providing me over $0.80 every two years (assuming a 3.5% yield)!

It may not seem like a big deal when we focus on the value of a single dollar, but if we expand what has been discussed to larger numbers, you can see how these ideas can really supercharge your FI savings.

By maximizing the value of the dollars you earn, you can give yourself a huge raise without incurring any more responsibilities or working any additional hours.


Let’s assume you make $100,000 a year. If you spend everything you earn, your take-home value at the end of the year is roughly $80,000. If you instead put the majority of your income into your retirement, HSA, and investment accounts, you end up getting $263,663 of value out of that salary!

  • Matched Retirement Contribution (5%): $5,000 * $13.39 = $66,950
  • Retirement Contribution Unmatched: $12,000 * $6.70 = $80,400
  • HSA Contribution: $3,100 * $6.70 = $20,770
  • Invest: $48,650 * $1.45 = $70,543
  • Spend: $31,250 * $0.80 = $25,000

$66,950 + $80,400 + $20,770 + $70,543 + $25,000 = $263,663

Increased Value

By limiting your spending and maximizing your tax-advantaged allowances, you are getting over $263,663 of value out of your $100,000 salary. In order to get $263,663 of value out of a salary in which all proceeds are spent, you would need to make $366,199 a year ($366,199 minus 28% tax)!

Bonus: I’ve created a custom calculator for this article so that you can plug in your own numbers to see some figures that pertain to your situation.

To access the calculator, sign up for a free FI Laboratory account here, click the Calculators tab, select the Triple Value of Income calculator, and see how much of a raise you can give yourself by being more intelligent with what you do with the money you earn!

I know my mom just wants me to be happy and treat myself every once in a while but I hope she can see that I am not depriving myself of enjoyment now because I am a cheapskate – I am just putting off spending my dollar today so that dollar can grow into something that will provide me income and enjoyment for the rest of my life.

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42 comments for “Triple Value of Income

  1. Cindy
    July 18, 2012 at 11:25 pm

    GREAT motivational article! I look forward to reading your other posts.

    • The Mad Fientist
      July 19, 2012 at 1:25 am

      Thanks, Cindy! I look forward to hearing about your FI journey as well!

  2. Nick
    April 4, 2013 at 7:41 am

    Great article, keep up the nice work!

    • The Mad Fientist
      April 4, 2013 at 8:08 am

      Thanks a lot, Nick!

  3. David
    May 14, 2013 at 9:48 am

    I think exactly like this as well. I have an HSA, a Roth Ira, an IRA, and an employer match 401(k). My employer matches 8% which makes it very enticing to stay with the company long term!

    • The Mad Fientist
      May 14, 2013 at 10:54 am

      Wow, 8% is very generous! The crazy thing is, I bet there are still a lot of people at you work who don’t take advantage of it.

    • Sprock
      April 22, 2019 at 4:57 pm

      I would have to say we have similar views on this. That sounds like quite the job you have. With 8% being matched on your 401(k) is a big reason to stay with your company.

  4. Dstreet6
    August 20, 2013 at 7:00 pm


    I’m a newbie so I apologize if this may be a simple question.

    I’m currently enrolled at an Employee Stock Purchase Plan (ESPP) which allows me to purchase company stock at a 15% discount twice a year.

    Typically, I usually cash out earning the 15% return but do pay tax on it.

    Question: Since the money earned from ESPP is taxed at the end of the year:

    – where would be an appropriate place to deposit the remaining $?
    – Should I deposit it in a Roth/Traditional or Individual account to gain better return.

    In addition:
    – I do have 401k contribution
    – Work does not offer HSA accounts.

    Thank you much in advance.

    • The Mad Fientist
      August 20, 2013 at 9:26 pm

      I’m not very familiar with Employee Stock Purchase Plans so I may not be fully understanding your question but if you’re just asking where you should put the rest of the money you have to invest after contributing to your ESPP, I’d probably go with a tax-free contribution account like a 401(k) or a Traditional IRA. That way, you shield some of you current income from taxes and those funds can grow tax free. If you don’t intend on keeping that money invested for a long time though, you’d probably be better off just opening a taxable investment account so that you have easy access to the money, if you need it.

      • Dstreet6
        August 20, 2013 at 9:28 pm

        That answers it. Thank you much.

        • The Mad Fientist
          August 20, 2013 at 9:42 pm

          Great! My pleasure!

  5. Danielle
    September 17, 2013 at 7:54 pm

    Thanx for posting the calculator, Brandon. For me, it provided a great “visual analysis” tool. Nothing like seeing solid numbers in lost opportunities!
    Really enjoy reading your blog. Keep crunching them’ numbers :-)

    • The Mad Fientist
      September 17, 2013 at 9:08 pm

      Glad it was useful, Danielle!

      Don’t worry about the lost opportunities. There’s nothing you can do about them anyway so you might as well just focus on the future instead.

      Thanks a lot for the comment and hopefully I’ll hear from you again soon!

  6. Rich
    September 28, 2013 at 11:17 am

    Great post. However, why do you compare 10 years of stock investment to 30 years of 401k investment? Shouldn’t the stock be a 30 year investment as well yielding 6.09 pre-tax or 5.18 at 15% tax.

    Also, I get 1.57*.85=1.33. Am I missing something? Thanks!

    • The Mad Fientist
      September 28, 2013 at 2:44 pm

      Thanks, Rich!

      The reason I decided to use 10 years for the taxable account is because I figured that’s when the money would be spent (i.e. spend the taxable investments in early retirement and then spend the 401(k) investments in standard retirement).

      As far as the numbers are concerned, capital gains tax only applies to the gains, not the entire amount invested, so it would be 1.57 – ((1.57 – 0.80) * 0.15) = ~1.45

  7. Justin Case
    October 12, 2013 at 5:45 pm

    Hi Mad FIentist,

    Thank you for your personal finance site and your posts on how to retire early. Saving money on expenses (including taxes) allows more of one’s income to be invested. Live below your means and invest the rest. Lather, rinse, repeat. Retire early.

    One investment vehicle you might want to look into are publicly-traded companies that have a long history of raising their dividends. When their dividends continue to increase faster than the rate of inflation, Einstein’s eight wonder of the world (compounding) provides you with a growing stream of real dividend income. Do this anywhere, but from within a Roth IRA, your golden years will be golden after a few decades of compounding (I am an early-retired geezer now, but I wish I had known about this secret years before I figured it out). You can do your own spreadsheet simulations, or you can use the “Rule of 72” (Wikipedia it if you must), to convince yourself of the math.

    Although I do not blog, I enjoy reading blogs (including madFIentist). You might want to check out the Dividend Growth Investor site ( There are plenty of good articles there, but check out the one on Dividend Growth Investing is a Perfect Strategy for Young Investors.

    • The Mad Fientist
      October 14, 2013 at 3:23 pm

      Thanks for stopping by, Justin.

      While the regular income from dividend growth stocks is appealing, I still believe it is a suboptimal strategy. My buddy Jim Collins over at wrote a great post highlighting why dividend growth investing is not the best approach so rather than rehash everything he said, I’ll just give you the link –

      Don’t get me wrong, it’s not a terrible approach and if you are happy forgoing some growth in order to receive periodic payments, I’m not here to tell you you’re making a mistake. It’s just not a strategy I plan on pursuing at this stage of my life.

  8. MikeS
    October 16, 2013 at 12:48 pm

    Thanks for the very interesting article. I have a question regarding the math. The very last item in the list is Spending, which is reduced by %20. Why would it be reduced by an extra %20 when you’ve already taken out an effective tax of 16.7%? Does it account for sales tax and/or state income tax, and any other taxes and fees charged on purchases such as fuel, phones, property, etc.?

    • The Mad Fientist
      October 21, 2013 at 11:24 am

      Hey Mike, sorry for the delayed reply; I have been out of town and only returned late last night.

      Great catch on the tax! It looks like I was doubly taxing the Spend and Invest categories so I have updated the post to correct that (I looked through the calculator code and found that I was calculating everything correctly there but for some reason, I incorrectly included a line item for taxes in the example scenario).

      Thanks a lot for pointing that out!

  9. Syed
    February 13, 2014 at 10:58 pm

    Amazing amazing post. I was actually kind of getting to the point of buying something “nice” for myself (my blasted tax refund was too high this year) but this post knocked me back into my senses.

    I will now use that money the way I should be using it, to pay off my higher interest student loans and increase my 401k contribution. Thanks for the pep talk!

    • The Mad Fientist
      February 15, 2014 at 9:18 am

      Thank you very much, Syed! I’m glad you enjoyed the post.

      Definitely use your tax refund to buy some more future freedom instead…it will be far “nicer” than anything you could buy in a store!

  10. ben
    March 10, 2014 at 3:35 pm

    I currently have free health insurance under my parent’s plan. Unfortunately the, co-pay is too low and I don’t qualify for HSA contributions. Is it worth paying for my own insurance policy in order to be able to make HSA contributions?

    • The Mad Fientist
      March 10, 2014 at 9:20 pm

      Hey Ben, while I do love HSAs, free health insurance is hard to beat!

      Since I don’t know all of your numbers, you’ll just have to run them yourself and see which option would be best.

  11. Chris
    August 15, 2014 at 5:11 pm

    Great articles, love your blog!

    For the example which breaks down the $100,000.. I don’t see where income tax gets paid. The totals do of course add to $100k (5000+12000+3100+48650+31250) but shouldn’t the invest portion be reduced by the taxes owed after 401k, IRA and HSA contributions?

    The tax base would be have reduced from 100,000 to $79,900 so assuming the same 20% tax rate only 79,900*0.80=63,920 would be available for investing and spending. If spending is held at 31,250 then invest would = $32,670 (not 48,650).

    Is this correct?

    • The Mad Fientist
      August 18, 2014 at 9:07 am

      Thanks, Chris!

      Tax is being accounted for in the multiplier that is used to determine the “value”. If you take a look at the Spending and Investing sections, the logic behind the multipliers is described and you’ll see that tax is factored in.

  12. John
    October 26, 2014 at 10:04 pm

    Shouldn’t this article incorporate time value of money? If you do, the entire article falls apart in its assumptions.

    Inflation alone substituted for a discount rate would vastly change these scenarios. Something worth considering.

    • The Mad Fientist
      October 28, 2014 at 6:34 am

      Hi John,

      This article was just a way to highlight the benefits of tax-advantaged accounts and delaying your spending but yes, I completely agree that to truly get an accurate measure of present value, the numbers should be discounted. I just thought it was more illustrative to use future values rather than discounting everything back to present value because the idea of not spending a dollar now so that you could spend 6.7 inflation-adjusted dollars in 30 years (using the IRA example) makes the benefits easier to grasp than had I said “saving a dollar now would increase the present value of that dollar by $x when using a y% discount rate”.

  13. Frank
    December 14, 2015 at 11:32 pm

    Thanks for the great article and useful tools in the FI Lab. I’ve been reading many of your posts, and I really appreciate your ability to communicate information so clearly. Keep it coming!

  14. Joshua
    January 12, 2016 at 1:27 am

    Your future value could be even higher by increasing the 401k to the limit (17500) and lowering the taxable investment. In my understanding, the employer match is allowed to exceed the annual 401k limit, so an investor could put away 22,500 a year in 401k (17500 + 5000).

    • drgepetto
      November 1, 2016 at 10:12 pm

      Is that true to all 401k, or employer specific?

  15. Jef
    March 10, 2016 at 10:00 pm

    Although I’m an Aussie & we have the equivalent of 401K, IRA’s (correct me if these aren’t quite right, still learning the US system ha) over here called Superannuation, the principles you have above are great :) and applicable to most countries

    I’m very late here to the party although plan on smashing through your back catalog of articles and keep on growing my knowledge of Personal Finance :)

    Great value here Madfientist!

  16. Nick
    March 28, 2016 at 12:37 pm

    Hey MadFientist,

    it is insane to me how similarly we think, this article opitimises it! I’m a long way off my journey, especially as my other half had a long term illness and is only now recovering but we will get there, I’m in no rush. Are you still in Scotland? I’m normally over a few times a year if you fancy a coffee/beer, currently enjoying learning about you from your website!


    • The Mad Fientist
      March 29, 2016 at 1:48 pm

      I’m in Edinburgh so definitely let me know next time you’re over!

  17. Fireplanter
    June 16, 2016 at 6:30 am

    ‘I worked hard for 40 hours this week but if I use my entire paycheck for spending I would be losing an entire day’s work worth of value from what I earned’

    I can feel the subtle Paradigm Shift moving in my mind.

  18. Fientologist
    August 27, 2016 at 2:08 am

    Hey MF,

    Great article and one that I’ve referred more than a few folks to. However, looking at it again just now, it appears you may have under-calculated the “Invest” value, as this appears to be using a 10-year timespan while the others are using a 30-year timespan. Instead of “Invest: $48,650 * $1.45 = $70,543”, shouldn’t the multiplier for a 30-year timespan be substantially higher?

  19. Jonathan
    January 24, 2017 at 10:35 am

    This article tells a very cool story! I have never thought about savings in a such a unique innovative way, and I spend a lot of time thinking about savings. This would be fun to talk about on the podcast. This is an elevator speech for living frugally. Nice Job Fientist!

  20. Chase
    February 13, 2017 at 5:58 pm

    Pedantic observation: in your Lab Rat & Assumptions post you assume that your investments will return 5% after inflation, but above you return 7%. If 5% was the right number originally, isn’t it still!? I do appreciate what I’ve read from you so far, though. Thanks for your efforts.

  21. Trevor
    April 14, 2017 at 1:43 pm

    How did you determine your “effective tax rate” is 20%?

  22. Chris
    March 22, 2018 at 1:58 pm

    Hey man, thanks for the stuff you have online. Been listening to you on YouTube this and last week.

    You guys (initially, I found Moustache guy, which led to your podcasts) have really helped me. Just a day after I told my wife what I’d heard, without thinking we would jump into any of it, she said one morning:

    “We don’t need to replace the kitchen.”
    “Sure,” I said, “we’ll just replace the cabinets and counters.”
    One of the cabinets is busted.
    “No,” she replied. “It all works. We can replace it later.”

    Then she talked about going back to work and putting 100% of her pay to debt. If she did, we’d be completely debt-free in 6 years. That’s about $70k in unsecured debt, and 2 houses that we owe a total of $$30k on, completely paid off.

    We’re on a schedule to be out of debt 2041, but she’s talking about getting radical and cutting it in half now, because of you guys.

    Also, my oldest who’s 17 said, “I can just use my allowance for spending money. Because I don’t want to still live here when I’m 21.”

  23. Adam
    April 13, 2019 at 10:09 am

    Do you have or know of an Australia web site that is aligned to Australian laws/taxation/retirement superannation etc to achieve the same as you describe here in America?


  24. Jenny
    April 15, 2019 at 10:20 am

    Which do you prefer a Roth IRA where taxes are taken out at the beginning or an IRA where taxes are taken out in a lump sum upon withdrawal?

  25. Jay M.
    April 22, 2019 at 8:10 pm

    The breakdown of making a dollar a work really changed my perspective of spending money on myself. I never really calculated how much taken out my paycheck would equate to a day I worked in a week.

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