You receive your first paycheck and instantly pull up your account with your mobile banking app, to check out your recent direct deposit, and hold your breath as you look - it's smaller than you thought. A lot smaller. Understanding your paycheck is important. Here are a few of the basics. Be sure to check out Part Two and Part Three on how to save money from your take-home pay, and good ways to spend it too.
1. Take Home Pay - Gross Pay vs. Your Net Pay
Gross pay and net pay can be loosely defined as a before and after picture of your paycheck and its relationship with taxes. Your gross pay is what you have earned prior to tax withholdings. Net pay is what you actually take home after taxes. Ask for a paystub if you do direct deposit so you know your total deductions from each paycheck. If the amount of taxes being taken out of your gross pay seems too high you may want to readjust your tax withholdings (if applicable) on what you claimed on your W-4. The goal is that enough taxes are taken out initially, so you don't owe additional income taxes the following year.
2. Check your Benefits
Many companies will offer different benefits like health, dental, vision, and life insurance. These are usually before tax deductions but are still taken out of your gross pay. Your company's offered health insurance is almost always the best bang for your buck. Life insurance, however, may not be the same. For instance, if you are single and in your early 20's, having $20,000 in life insurance may not be the best way your money could be working for you at that time. But that is always something that you can readjust later when you get married and have kids.
3. Your Retirement - Understand Your 401(k)
Your 401(k) is an automatic deduction taken out of your gross pay that goes into your retirement fund from your employer. This is taken out before taxes are withdrawn from your paycheck and often you can see how much is taken out each month on your paystub. You can adjust this usually within your Human Resources department or Self Service Portal with your company.
Now that you understand what makes up your paycheck, it's time to pay yourself first.