Check yo check

In Budgets, Part 1, we talked about the what’s going out part of the budget equation. Let’s turn now to what’s coming in … your income. If you’re a salaried employee, this number is likely steady and predictable. Each pay period, your employer withholds taxes and deductions—items such as your 401(k) and health insurance contributions—and you receive the balance.

Just curious … how many of you could explain in detail what all the amounts taken out of your pay are for? And how those numbers are calculated? And when you’ll ever see them again? Do you know what OASDI stands for? If you said Old Age, Survivors, and Disability Insurance, you are a baller and we should hang out! Given the results of my completely unscientific survey, though, I would say relatively few people know exactly how to get from their gross pay to what actually gets deposited in their bank account.

Here’s a way to learn a lot about personal finance in a short amount of time: understand your paycheck.

In my classes, we learn what everything on that oh-so-important piece of paper means—what it means for our finances now, what it means for our finances next year, and even what it means for our finances 20, 30 years from now. And once you get that picture, you can ask, is that what I want my finances to look like?

True story: when I left my salaried, full-time job in March, I actually stayed on with the company in a different, hourly role. For those of you who don’t know me—i.e. no one reading this—when I’m not offering pearls of wisdom here, I’m an instructor for a test prep company. As if you could like me more!

I was fortunate enough to retain my full-time benefits in this new role, the only catch being that I would have to contribute the same amount for those benefits, an amount that was based on my former salary. For my very first pay period as a part-time instructor, I netted … $0. It stung a little, but while the situation wasn’t ideal for today (umm, no income), I was still doing the right things for tomorrow—contributing to our Health Savings Account—and for future little old lady me—contributing to my 401(k).

Hopefully, your paychecks have a few more digits than mine did. Regardless, here are some other useful questions to ask yourself about what’s coming in:

— Do I have the right amount in income taxes taken out? If you get a big tax refund each year, you’re essentially providing an interest-free loan to the government. That said, there is that nice psychic bump that comes with getting a lump sum “back” from the U.S. Treasury … even if it was yours to begin with. A little bit of interest or forced savings—which one do YOU need more?

— Am I taking full advantage of all the pre-tax deductions available to me? If you have access to a 401(k) at work, are you putting the right amount in? What about a Medical Flexible Spending Account (FSA) or a Dependent Care FSA, two commonly misunderstood and under-utilized benefits? We’ll cover all of these in more detail in future posts.

And finally …

— Is it enough? No doubt, we here at Live Beneath Your Means spend a lot of time talking about what’s going out. In the short term, it’s much easier for most of us to control and change what we spend than it is to control and change what we earn. In reality, though, we can’t always cut back or trim our way to our goals. Sometimes, we just need more money.

Even I can’t live on $0 forever.