Have you heard about people who earn six figure incomes but still swim in debt? That goes to show that a higher income does not necessarily mean you will be debt free. Sometimes, you can earn only $30,000 a year and be free from credit.
If you just graduated and you are beginning to explore employment possibilities, you have to keep this fact in mind. The amount of money that you earn will not determine if you will be financially secure or not. Money management is the most important factor to help you stay out of any financial difficulty.
But before you can really learn about financial management, you need to understand just how much you are really earning.
Know your payroll deductions to manage money correctly
When an employer comes to you with a job offer, that usually includes the income that you should expect to receive. But before you rejoice in the amount that you will receive, you have to know that they usually show you the gross income that you are entitled to. However, do not assume that you will receive the whole amount. Nobody ever sees the gross income – at least, this is true for the regular employed workers.
There are many deductions in your gross income that you are most likely to receive a lower amount than what is offered to you before your employment is finalized. You need to understand these deductions so that you can perform better money management. That way, any expense that you will base on your income will be from an accurate figure. That will keep you from falling short and could keep your life out of debt.
So what deductions should you expect to be taken from your paycheck?
Federal and/or state withholding tax. This is also known as the income tax that is mandated by the federal and/or government. Take note that there are states that do not collect income tax. Make sure you know if your state collects them so you can verify in your payroll slip. The amount that will be taken from your gross income will depend on the exemptions that you will declare. For instance, if you are the breadwinner in the household, you will have lower tax deductions. You can declare the number of people that rely on you and your income. This can be your spouse, children and even your elder parents. All of these will be placed in your W-4 form. But be careful about the exemptions you will indicate in your W-4. Although it will increase the income you can take home, it could end up costing you when your tax returns are filed.
Social Security contributions. Another deduction that is mandated is the contributions to your Social Security. This is also known as the Federal Insurance Contributions Act or FICA. This helps you with a lot of claims. It can be disability or retirement benefits that you can receive when you need them.
Aside from these two, there are other deductions that you could be subjected to in order for you to enjoy certain benefits.
Retirement contributions. These include 401K or other pension benefits.
Health insurance. Some companies will give you a health benefits but most of the time, you need to pay a portion of it. You also have the option to include your family members in the coverage but that usually means you need to brace yourself for more deductions.
Life insurance. Some hazardous jobs or well privileged ones are given life insurance coverage too. The same conditions are usually implemented as the health insurance.
Apart from these, any court ordered deductions may also be in effect.
Wage garnishments. The most popular court ordered deductions that you may receive is wage garnishment. This can be due to a previous legal action that a creditor filed against you. This is automatically deducted and the employer arranges for it to be given to the corresponding creditor.
There may be other deductions on your payslip that you should know about. Always review the amounts removed from your gross income. If there is anything that you do not understand or a deduction that suddenly went up or down, ask the Human Resources department. Monitor these as you might be subjected to higher deductions than necessary.
Budgeting your net income for accuracy
The reason why you want to understand your income is because you want to be able to input an accurate figure in your budget. The most prominent tool in money management is a budget plan. To make your budgeting efforts effective, you need to input accurate amounts in it.
If you put the gross income in your budget and your expenses balance it out perfectly, you will end up falling short every month. You should never put your gross income unless you plan to include all your deductions in your budget plan. But to keep the plan less complicated, just input the net income and keep the deductions from it. If you need a reference for the deductions, you can use your payslip instead.