Decode and Understand Your Paycheck

The first paycheck always comes with a mix of excitement and disillusion: excitement over the milestone of taking that first step towards independence; and disillusion with the realization that the government really does take a big bite out of our earnings.

There aren’t many people who understand their first pay stub, there are those who go through life without ever understanding quite how a paycheck works.  To the uninitiated, a pay stub is something that looks like it was actually written in a secret code.  If you take the time to really look your pay stub over though, you’ll find that a big amount goes to federal taxes and then to state taxes.  Apart from taxes and what you eventually take home though, some other things might be confusing.

Deciphering Your Pay Stub
Your pay stub is not as complicated as it seems.  Yes, there are a lot of factors that affect how much money you actually take home, but these factors fit into two main categories:  earnings and deductions.

The earnings portion lists your gross pay and everything that went into arriving at the final number: your hourly rate, the number of hours you worked; any overtime work you rendered and your corresponding overtime rate; any work you rendered during holidays and the corresponding rate for those hours; and finally, money for paid sick or vacation leave days that you consumed.

The deductions section can be divided further into two sections:  Statutory deductions and other deductions.  Statutory deductions are required and are regulated by the government.  Other deductions are usually for company provided benefits.

The bulk of your statutory deductions will go to taxes, federal and state taxes can be reduced if you take the time to study your W-4 form.  You can greatly reduce what you need to pay in taxes if you declare all allowances you are eligible for.  You should consult a CPA to be sure you don’t miss any possible tax breaks.  Take care though to not give any false information just to get a deduction.  This could get you into serious trouble.

There will also be smaller deductions listed under FICA (Federal Insurance Contributions Act).  These will be for Medicare and Social Security.  These deductions cannot be manipulated in any way.  In 2010, the Social Security deduction is 6.2% of your salary, or up to $106,800 a year; for Medicare it’s 1.45%.

Other Deductions
The other deductions portions is for your heath plans, dental plans, loan payments for company sponsored loans, and contributions to retirement funds.  These can be tweaked as well, you can kick up or lessen your retirement contributions, some companies give you the option to downgrade your health plan.  Bear in mind though that for the most part, contributions to retirement funds and HRAs (bank accounts for health related emergencies) are not taxed.  So despite the fact that getting access to cash now may seem more attractive, you are actually getting less money in total in the long run.  All tax exempted contributions in the other deductions portion are designated by an asterisk (*).

Non-Monetary Benefits
Most pay stubs will also list the non-monetary benefits you get from your company.  Regular employees at all companies must be given paid time away from work.  Some companies call it sick leave and vacation leave, other simply call is paid time off.  These are days when you don’t go to work, due to illness or simply to relax, and your company still needs to pay your salary.  Your pay stub will usually give you a running total of how much paid time off you are entitled to.

Checking Account Basics

Checking accounts allow individuals and businesses to deposit and withdraw funds from federally-protected accounts at banks, credit unions, savings and loans, and other financial institutions.  Checking accounts are a safe and efficient way to pay bills and deposit money though savings accounts pay more interest.  Most checking account holders can use checks to pay debts and use debit or ATM accounts to make cash withdrawals.  Some banks require a minimal initial deposit and proof of identification when creating a checking account.  Some states grant lifeline checking account options for low income customers and the elderly.  These checking accounts usually waive fees, including surcharges for ATM usage and service fees for low balances.

While banks will send accounting statements, owners of the account must keep track of their available funds.  If a check-writer writes a check for a higher than available balance, he may have to pay overdraft fees and there may be legal action.  While some banks protect checking account holders by notifying them when an overdraft occurs, most recoup losses through heavy service charges.

Banks have various ways that allow customers to check their balances.  Banks send monthly statements of debits and deposits to account holders.  Account holders can contact banks electronically – online or by phone – to receive real time updates of their checks and balances.  Even ATMs offer an option to check the balance.  Owners should also record their deposits and withdrawals in check registers and compare the two to ensure there are no disparities.

Advantages
There are numerous reasons to own a checking account.  First, the Federal Deposit Insurance Corporation insures them, which grants the holder the security of knowing his money cannot be lost.  Second, employers can make direct deposits, which save the holder time and effort from having to deposit the money on his own.  While this is a convenient method, the holder should still look at the check to ensure there are no mistakes.  Third, checks are more secure to send by mail than cash.  When receiving a check as paid, the owner has a receipt of payment.  Should he suspect someone stole the check and it hasn’t arrived to its destination, he can even stop payment on a check or report this indiscretion to the bank for a small fee.  If cash is stolen, however, there are no like remedies.  If a check is stolen, the owner can easily change the account number as well to prevent future theft.

Fourth, online banking is very convenient and most banks presently offer this service.  Online banking benefits those who had had issues balancing accounts in the past, as they allow holders to download information in order to balance accounts.

Fees
There are some small fees to holding checking accounts, though more and more banks offer free lifetime checking accounts.  Some, in fact, offer money on every ATM purchase the holder makes.  There are also interest bearing checking accounts, which require the holder to maintain a minimum balance.

Checking Account Terms

Checking and savings accounts are some of the most basic staples to a person’s financial picture. While checking and savings accounts can provide us with a way to make everyday payments and purchases, they can also earn us interest. Understanding some of the basic checking and savings account terms can help us to make better financial decisions on a daily basis.

ATM Surcharges- These charges are one of the easiest ways to lose money, as they are small and often go unnoticed. An ATM surcharge is a fee that is charged by one bank to an individual who withdrawals cash from their ATM if they are not a bank member. This is common, as of course an individual’s bank may not be always convenient. It is important to notice your habits and how often you are being charged $1-2 per withdrawal. Why this may not seem like a significant amount of money, these small charges can become significant over the course of a year.

Debit Card- A debit card from a bank can often be used to not only make ATM withdrawals, but if they have a credit card logo, can be used at merchant establishments to make payments. The debit card will be linked to either your savings account or checking account and will withdrawal the amount you charged immediately, just as if you were paying cash.

Interest Bearing Checking/Savings Accounts- It is important to know that not all checking and savings accounts will pay the owner interest. When possible, consider searching for an interest bearing account so that you can take advantage of small interest amounts on your money over the course of a year.