Our debt counselors know that financial worries create added stress to employees on the job. While many think it’s easy to understand your paycheck, that’s not always the case. According to a 2014 report from the Federal Reserve, 20 percent of Americans spend beyond their means, and one-third of households are living paycheck to paycheck. In addition, nearly 73 percent of adults agree that they would benefit from basic financial advice from a professional, according to a recent Consumer Financial Literacy Survey (“The 2014 Consumer Financial Literacy Survey,” prepared for the National Foundation for Credit Counseling, prepared by Harris Poll). Our credit counseling advice is to take the time to understand your paycheck. Here’s how to do so.
Ways to Understand Your Paycheck
- Understand Gross Pay vs. Net Pay: It is important to understand the difference between your gross pay versus your net pay. Gross pay is your overall salary or wages. Net pay is what you are actually taking home after required withholdings. At a minimum, every paycheck lists withholdings for federal taxes, state taxes, social security, and Medicare.
- Sign Up For Direct Deposit: Direct deposit is the fastest way to get your paycheck into your bank account. It also takes away the stress of having to go to the bank to deposit your check and waiting for it to clear.
- Understanding Company Benefits: A complete understanding of your company’s benefits package will help with long-term financial planning. If you participate, each pay period will display withholdings for health, dental, vision, and your 401K.
- Other Types of Pay: Pay attention to other types of pay listed near your regular pay box. These types of payments could include overtime, holiday, personal, and sick pay. Make sure that extras such as overtime are calculated correctly as these payments are usually time and a half.
- Understanding Your Pay Period: Every company has a different pay period. The most common pay periods are weekly, bi-weekly, or monthly. Either way, it is important to understand how much and how often you are getting paid in order to budget your expenses.
Understand Your Paycheck – What Do These Mean?
Here is a brief description of the different elements that you may see in your paycheck.
- Federal Tax: This one is pretty simple. This is the federal tax you pay from each check.
- State Tax: This is the state tax you pay.
- FICA: This is your social security tax. You pay 6.2% of your salary to FICA (Federal Insurance Contribution Act). In addition, your employer contributes an additional 6.2% into FICA.
- Health: Your health insurance may be taken from your paycheck either pre-tax or post-tax. Either way, this is a deduction from your gross pay that makes your net amount smaller.
- Life: Your employer may offer a life insurance policy. The policy is usually for a small amount, such as two times your annual salary.
- Retirement: There are several categories available here. This includes the amount you chose to contribute to retirement planning programs such as a 401(k). Some employers automatically deduct a certain percentage and place it into an account for you.
- FSA/HSA: The Flexible Spending Account or a Health Savings Account is an amount you choose to set aside entire for medical costs.
- ESOP: The Employee Stock Ownership Plan is a benefit that you signed up for. The ESOP is money taken from your paycheck and used to purchase company stock. Sometimes the company will match a portion of your ESOP contribution, but they do not have to. An ESOP is another form of savings.
Your paycheck plays a key role in balancing your finances on a daily basis. Therefore, managing your finances goes much smoother if you understand your paycheck. If you are on a mission to find ways of getting rid of debt, you have taken a step in the right direction by understanding your paycheck.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.