Congratulations on your upcoming graduation!!! Whether or not you know your next educational or career endeavor, we encourage you to know where you stand financially. This is Part I of our series on preparing for life after college.
Know Your Money – INCOME
Do you know your take-home pay for your first job? If so, you’ll need to prepare before spending your new shiny paycheck. You can do that by using this paycheck calculator to estimate your take-home pay. The salary you agreed to WILL NOT be what you take home. That is, your gross pay (amount before deductions such as taxes and company benefits) will be higher than your net pay (amount received in your bank account after deductions). It’s inevitable – deductions will occur and reduce the amount of money you receive in your paycheck. So, use the payroll estimate calculator at your employer or the link above to figure what you will be working with.
The Taxes
Typically, filling out tax forms is one of the first and usually most confusing thing to complete on your first day of work. However, this step is important because it will affect your take-home pay and your taxes in April. It can be the difference between owing the government, the government owing you, or more ideally, breaking even (no one owes anyone). We want you to take home as much as possible, optimizing your wallet. Below are some deductions you will see mentioned on your first day of work.
- FICA (Federal Insurance Contributions Act) tax is used to fund Social Security and Medicare. This tax is approximately 7.65% of your gross pay (up to the first $118,500, it incrementally drops thereafter). This cannot be avoided.
- Form W-4 is your federal tax. This forms essentially sets up prepayments to the government of your potential tax liability so that less money is taken out-of-pocket when the actual tax is due. The amount taxed is calculated by the selected allowances chosen. The instructions are fairly straightforward. Just understand that the higher the allowance chosen, the less tax is taken BUT, you might have to owe the government in April. The majority of people like to get the BIG tax return in the beginning of the year, but that just means that the government held extra money from you for a whole year. What could you have done with those funds? We try to breakeven as much as possible and use this calculator to periodically measure our progress.
- State Tax Form (unless your state has no state tax – AK, FL, NV, NH, SD, TN, TX, WA, WY) is the same concept as the W-4 but for states.
Company Benefits
Now, do not neglect these deductions that are a part of your “compensation”. Take advantage of them, please, especially your 401(k) plan (even if your company does not match, this is a great way to save for your retirement and reduce your taxable income. You may find that you actually take home more money when you contribute to this tax-deferred company benefit.). Some company benefits may include:
- Health/Medical
- Dental (optional)
- Vision (optional)
- 401(k) retirement plan (optional)
- Supplemental Life Insurance (optional)
- Pet Insurance (optional)
- Accidental Death and Dismemberment (AD & D) Insurance (optional)
- Health Savings Account (HSA) (optional)
- Flexible Spending Accounts (FSA) (optional)
- Commuter Benefits (optional)
- Critical Illness (optional)
- Legal Assistance (optional)
Be sure to take the time to review these benefits with your employer to get a full understanding of the pros and cons. Do not just dismiss this. If you have further questions about any of these, leave a comment and will be happy to help. Know your money because if you don’t, it will run wild and you will waste opportunities to grow your Net Worth. Now that you have determined your income, it’s time for the fun – determining how you will spend it. This article is a good start. Hope you enjoy. Until next time, remember
Until next time, remember it’s not how much you make but what you do with what you make. Anyone can win with money. Make the most of it.
Wallet Coach