How to Spend Your Paycheck. On Yesterday, Today, or Tomorrow
More employees today than ever face this challenging dilemma when they start a career after college: Pay down student loan debt, take care of yourself now or build savings for the future? To answer this question for yourself, you first need to understand your paycheck and other employee benefits, so you can minimize debt and maximize savings.
Step One: Understand Your Paycheck
First things first: If your salary is $70,000 per year, that's considered your "gross income," or the amount you're paid before taxes and any money you're contributing to things like your retirement account or health insurance. Your "net income" is your take-home pay (what you receive after all those deductions).
So, what are the primary "deductions"?
- Federal tax. Remember that W-4 form you had to fill out when you first started working? The number of "exemptions” – you marked on that form determines the amount taken out of your paycheck for federal taxes. You can use the IRS Withholding Calculator to determine what makes sense for you.
- State tax. The amount of state taxes taken out varies depending on the state. Some states don't have an income tax, so you may not see this line item on your check. If you work a certain number of hours outside of the state where you live and they both require income tax, you may have to pay taxes in both states.
- Benefits. If you're paying for health, dental or vision insurance, you'll see those deductions, as well as any contributions to a health savings account. (Remember the amount you set aside in one of these accounts can be used to pay for anything health-related, tax-free.
- Retirement plans. Deductions for 401(k) or 403(b) plans are listed on your paycheck, and you may also see any employer match on your contributions. This deduction is typically made before income tax is taken out but is taxed later in life when you take that money out of the plan.
Step Two: Take Care of Your Healthcare Needs
If you enroll in health insurance at your company, be sure to understand the impact on your paycheck.
What you pay for health insurance will vary depending on the plan you choose. Study the plans that your company offers; some pay more when you receive care but are more expensive to you via the amount you pay each month to have insurance. Other plans (like a high-deductible health plan) are usually very affordable month-to-month, but you will pay more when you receive care.
If you select a high-deductible plan, your company may offer a health savings account (HSA) – and may even contribute some money to your account as an additional benefit. You can use the money in your HSA, tax-free, to cover eligible medical costs, such as copays, deductibles or dental and vision care (such as eyeglasses or contacts).
Step Three: Save for Your Future; Maximize Retirement Savings
According to a Northwestern Mutual survey, one in three Americans has less than $5,000 saved for retirement, and one in five has no savings at all. Two-thirds of Millennials have nothing saved. Which is a big deal when you consider every decade you wait to save, you have to save twice as much.
In short, the sooner you start saving, the more time you'll have for your money to grow.
Many employers offer retirement investment accounts called 401(k)s or 403(b)s (for tax-exempt organizations like universities) with the average matching 2.7 percent of your salary (Abbott gives a 5 percent match if employees contribute 2 percent). To avoid leaving money on the table, find out if, and how much, your employer matches to ensure you contribute enough of your own money to get the full benefit. For example, a company may match 50 cents for every $1 you contribute, up to a particular percentage of your pay.
Some companies require that you stay with them for a certain amount of time – typically a year or two – before you're "vested" in the contributions they make to your retirement account. The money you contribute is always yours.
Be sure to check the rules of your plan; there are annual limits on how much you can contribute to your retirement plan and when you’re able to withdraw your money.
Step Four: Pay Off Student Loans
Many employees, especially recent graduates, grapple with whether to pay off student loan debt or build up savings. You should plan for unexpected expenses, so you'll want to have some savings to cover those. Plus, you also want to ensure you're maximizing 401(k) benefits offered by your employer.
So, once you set aside some money for savings and retirement, it’s time to face those loans. The baseline goal for paying off student loans is to meet your monthly minimum payment to avoid additional fees. However, consider paying more than your minimum so you save money in interest in the long-term.
With a first-of-its-kind structure, Abbott has been able to make it easier for employees to tackle student debt and save. For employees with student loans, Abbott's Freedom 2 Save™ program deposits the company's 5 percent contribution into eligible employees' 401(k) plans, even if the employees aren't contributing to their plan. To qualify, employees must contribute at least 2 percent of their pay toward paying down student loans.
Going over your first paycheck is critical to maximizing its benefits. Ask your HR team if there's anything you don't understand. Don't wait for your second, third, or fiftieth paycheck to pay attention—by then, you may have left significant money on the table.