Just like an ATM transaction bill, a pay stub looks like a paper having an incomprehensible numerical on it. But just believe, decoding your paystub can help you in focusing on your finances with a different perspective!
You can barely strive for a goal if you don’t have an aim or objective. For example, starting your car without having any knowledge of the destinations left you with city dust and wanderlust. When you start traveling, your destination is the ultimate objective. Without that, traveling is nothing more than fatigue.
Just like prior knowledge of the destination is important, financial goals are a must when you earn a handsome amount. Financial goals can be anything, like buying a property, a new car, a vacation plan, or early retirement, etc. These goals are something that you pay heed to, plan about them, and make a restless effort.
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What is a Pay Stub?
A Stub is a part of a Paycheck that entails employee’s pay along with deductions and taxes. It has complete details of a person’s income. However, Paystubs can look a little different and this depends on the state that you’re in and the payroll provider your company uses. So, in a nutshell, a paystub is an employer’s statement of earnings.
You need to understand your Pay Stub.
Having basic know-how of personal finance and some basic finance laws can make you independent from other people who always try to tell you what to do in life with YOUR money.
Make a rough estimate of the amount of money that you need to save and reach your goal. Start separating that amount by each month or a year. Think of all ways and stick to your goal. Include your savings, cut the expenses, try to earn extra money, or find additional resources or business plans.
Here is how you can understand your Pay Stub:
To decode your Paystub like a piece of cake, you need to know these few things first!
Your Gross Earnings VS Net Pay
The Gross earnings are the amount of money with which you started before the deductions and taxes. These taxes could be:
- The Federal Income Tax
- Retirement Deductions
- Social Security
- Medicare or Health Insuranc
The Net earnings are the amount of money with which you left after the deductions or taxes. So Mathematical
Net Income = Gross Income – (depreciation, amortization, interest, and taxes).
Breaking down Paystub Deductions
So, the simple basic formula to decode your Paystub is your Gross Income minus Pretax Contributions or Deductions minus State or other Taxes minus Pretax Contributions or Deductions equals net income; and that is the amount you take home at the end of the month.
Let’s use this simple Pay Stub example to understand:
Mostly, the summary of a pay stub looks like this and includes all the descriptions mentioned below in the table! Take a look at it and understand each of them, one by one.
|Description||Current||Year to Date|
|Pre-tax Contributions or Deductions||$145.83||$2193|
|Post-tax Contributions or Deductions||$0.00||$0.00|
|Description||Rate||Hours||Current||Year to Date|
Pre-tax Contributions or Deductions:
Pre-tax deductions are things like health insurance and 401 K, these are contributions that are taken out before taxes and are calculated on your pay stub.
|Description||Type||Current||Year to Date|
|Guideline Tradition 401k||401 (k)||$145.83||$2193.33|
Employee Taxes Withheld:
Then employee taxes are state and federal income taxes, Social Security and Medicare state disability in some states, and local taxes in some areas.
|Employee Tax||Current||Year to Date|
|Federal Income Tax||$240.68||$48,48.05|
|CA state Income Tax||$63.53||$1579.40|
Post-Tax Contributions or Deductions:
The post-tax or after deduction also takes some careful accounting for tax purposes. These are deducted for your extra investments account. So, when you subtract those out, you’re left with your net pay.
Well besides these mentioned deductions, your pay stubs might include some reimbursements that are if you bought something for the business and you just need to be paid back for.
- Employer’s contributions
- Health insurance
- Employer Paid Taxes that may include FICA which is Social Security, Medicare, State, and Federal.
Focus on your Finances using Paystub!
The paystub not only talks about the monthly statement of your net income and proof of income but also helps to focus on your financial goals. This could be super easy if you follow 4 root points.
- Make a Goal
- Know your net income (monthly).
- Calculate the debt/income ratio.
- Make your investment.
First of all, make a goal! It could be a car, or a house, a jewelry set, or some upcoming wedding budget. After that, You need to understand your pay stub to know your net income. Then, do some math and save money from your income, according to your plan!