Budgeting and Financial Considerations
This is the amount you are offered to do your particular job – a fixed annual sum paid at regular intervals. Salary includes all the time you will spend to do your job, which may include overtime. Wages are usually hourly, daily or weekly, and will be paid according to the number of hours you work.
These are amounts deducted from your salary to cover federal and state (and sometimes local) income taxes you will owe, plus FICA, which includes both Social Security (what you pay in now to – hopefully – get back when you retire) and Medicare.
Your Social Security Tax Rate is 4.2% (taxed on up to a maximum income of $106,800 in 2011 – anything you make over that amount is not taxed for Social Security purposes), and your Medicare Tax Rate is at 1.45% (there is no maximum income at which this rate stops). Your employer will also contribute an additional 6.2% for social security and 1.45% Medicare on your behalf. Be aware that if you choose to be self-employed, you will pay at the above rates combined – an additional 7.65% (that’s an additional 6.2% for Social Security and 1.45% for Medicare), or total of 13.3% of your income - as you are also considered to be your own “employer”.
The federal rates will reflect your income tax bracket (the more you earn, the more you’ll be expected to pay in) and the state/city taxes will be determined by where you live and work. For example, in Vermont, you will pay a state tax; in NYC, you will pay both a state and a city tax.
There may be other deductions taken out of your pay check before you receive your take-home or “spendable” pay. These may include any amounts you may pay in for medical/dental/disability/life insurance coverage, your retirement contributions, any planned charitable giving, money set aside in a medical/childcare reimbursement account, or automatic savings.
If you are granted benefits as part of your compensation package, the company may be paying you a great deal more than just your salary. Benefits alone may be worth 30-35% of your salary figure. In some cases, you may not receive any benefits. In others, you will need to contribute part of the cost while your employer contributes as well. Some packages may be more complete than others. Always review your benefits package with the human resources department and ask questions to make sure you understand what is covered, and what you might pay out of your own pocket.
Reading your Paycheck Stub
Educating yourself on how to read your pay stub and understanding the information it contains can play a vitally important role in effective money management and proper budgeting. Knowing where your money is going can help you stay on top of your finances and make the most of your hard-earned paycheck.
Although every company prints paychecks that are unique in their own way, there are some aspects of the employee paycheck that employers must include by law. Some paycheck stubs can be extremely detailed including such items as retirement plan contributions or accrued vacation time, and others will only detail the required information. The following items will appear on every paycheck stub:
- Gross Pay: Includes the total amount of income that you earned during a particular pay period. A pay period is determined by your employer, but is typically weekly, bi-weekly or monthly. This figure does not factor in tax withholdings.
- Net Pay: Includes the amount of income that you actually take home after all withholdings have been applied.
- Federal Tax Amount: When you were first hired by your employer, you were required to fill out a W-4 form. This form covers any tax that you may owe to the Federal government come tax time. It is deducted incrementally from each paycheck, and can vary depending on the number of exemptions you chose to claim – for a single person, usually 1 or 0 exemptions.
- State Tax Amount: Depending on your state of residence, you may or may not be required to pay a state tax. Most states however, do participate, so this amount is deducted from your paycheck (the same way as Federal tax) to cover the amount of tax that you may owe to the state when your tax return is filed.
- Local Tax Amount: Although rare, a local tax is sometimes applied to employees of certain cities, counties or school districts.
- Social Security: The Federal government requires every employee to have a certain percentage of their paycheck withheld for social security purposes. This entitles you to receive a monthly social security payment upon retirement. The amount is currently 4.2% of your earnings (see above). Under the Federal Insurance Contribution Act (FICA) your employer will also contribute another 6.2% toward this for a total of 10.4%. The annual percent withheld and the maximum earning is subject to annual change.
- Medicare: Like Social Security withholdings, Medicare withholdings are also mandatory. Every employee pays 1.45% of their paycheck toward Medicare, and every employer contributes an additional 1.45% on behalf of the employee. Upon current eligibility for Social Security, an employee is entitled to coverage for a majority of their medical expenses.
- Year-to-date (for pay and deductions): The year-to-date fields on your pay stub show how much you have paid toward a particular withholding at any point in the calendar year. This can be useful when budgeting for monthly expenses or long-term goals.
Additional Items that May Appear on Your Paycheck Stub
Although not required, the following are items that may appear on your paycheck stub and are useful to money management and relevant to your employment status.
- Insurance Deductions: Monthly payments for such types of insurance as health (medical and dental), and life insurance.
- Retirement Plan Contributions: Plans such as 401K or 403(B) retirement savings plans.
- Leave Time: Including vacation hours or sick hours. Most employers will detail how many hours have been used to date, and how many hours are remaining for the calendar year.
- Other Deductions: Each employer has benefit options that you may participate in. Always make sure you understand your benefits package.
Be Proactive about reviewing your paycheck
If you need further explanation on any portion of your paycheck or if a particular calculation doesn't seem correct, consult your Human Resources Department for assistance. Don't procrastinate, as an error can be repeated every pay period.
Sample Pay Stub
Creating a Budget
Budgeting is a direct way to make sure you stay on track when managing your money. It’s essential to insure that you are not overspending your income or becoming mired in debt. It opens your eyes to what you are spending and where your money is going.
The key to budgeting is to write down your spending EVERY DAY. In this way, you capture even the smallest outflow of cash which can add up quickly. There is a budgeting worksheet attached below for recording your income and expenses to help you stay on track.
How do you prepare a budget? First, figure out your net income – your spendable cash after your employer takes out taxes and benefit costs. It is essential to become familiar with your paycheck and the deductions that are processed each pay period (see section above). This income, plus any interest from savings, bonuses, or other sources, becomes your total income for the period (weekly, bi-weekly, monthly, or yearly, depending on how often you are paid).
The second factor is to “pay yourself first.” Arrange to have your pay automatically deposited into a checking account rather than having a check issued to you. Then plan to have money taken from your paycheck to go toward your retirement and any savings (rainy day/nest egg, vacation plans, holiday spending, saving for a home or vehicle). It’s easy to have a percentage or specific amount automatically deducted and stashed away in other accounts so that you don’t have the tendency to access it for routine spending.
The third factor is to record your expenses. It’s relatively easy to figure out your fixed spending amounts. These can include rent or mortgage payments, car payments, insurance (health, home or renter’s, car), parking or commuting costs, monthly amounts for phone, cable, and internet access. Variable expenses include utilities which may vary month-to-month, clothing, entertainment, gas, cleaning/dry cleaning, and groceries/food. Incidental expenses and impulse purchases can add up fast – a $3.50 latte three times a week can be over $10 per week, $40 per month, almost $500 per year. This is why it is important to begin tracking all of your spending on a daily basis, closely watching your habits.
To finalize, plug your numbers into the attached spreadsheet. Make sure they are all on the same timing basis – for example, if you are paid every two weeks, you’ll need to double that amount to make it comparable to a monthly rental payment. Add it all up, and hopefully you will have a bit left over at the end. If not, you’ll need to take a hard look at where you might be able to save or do without to make ends meet.
Financial Literacy Budgeting Worksheet