Money Saving Tips : Paycheck

The most important thing in this journey of Frugality is your INCOME aka Paycheck.  It’s typically for most Americans the main source of your purchasing power.  So ABOVE anything, it’s important the foundation of your Finances is set up properly.  TAXES is very important component in how I navigate my finances and considering for the average New Yorker it eats up on average 25% of all your earnings its not an expense to you want to ignore.  So I listed the 4 most important things I always make sure to be aware of  in regards to my Paycheck.

Make sure you’re claiming the proper withholdings so you get most money back from each Paycheck.  Most people I know get really excited to see a big IRS refund check.  If you are someone who has stayed in same income range and is consistently getting back huge refunds each year, you should consider talking to your Tax Advisor about adjusting your withholdings.  In my head, a huge refund means you basically gave the Government a big fat free loan of your hard earned money.  Money that should have been in your pocket after your pay check was paid to you.  Money that could have been earning interest!

It’s a little tricky to figure it by yourself considering as I am writing this we’re still dealing with the Fiscal Cliff and taxes next year feel like the wild wild west even for seasoned accountants.  But if you have a friendly payroll department, you can always ask if you can submit a W4 correction anytime of the year.  Meaning possibly, decrease your withholding so you get more money from each paycheck and as the fourth quarter hits assess your tax situation and possibly increase your withholdings if necessary.

The Flexible Spending Account.  My personal opinion, if you are lucky enough to have this Benefit from your employer take it because not every employer offers it.  I would jump at the opportunity to reduce my taxable income.  To illustrate my point, if you earned a $100 and you are in the 25% tax bracket.  Your take home pay would be $75 after taxes.  The blood, sweat and tears you put into earning that original $100 immediately once it gets hit with taxes, gets reduced down to $75!!!  Once your earnings, become taxable your purchasing power gets immediately reduced by your tax bracket (in this really basic example) 25%.

If you move your pre-tax income of $100 to your FSA, it will go to a separate account as a $100.  And you can use that money to pay for Co-Pays, Prescriptions, Root Canals and other eligible expenses. 

More and more employers are switching to more HMO like health care plans.  Which means you are paying more and more out of your own pocket when you visit the doctor and dentist.  So if your company offers a FSA, option estimate how much you think you will need and this will allow you to use your Pre-Tax Dollars to pay for your eligible medical costs.  Pro: is you are reducing your taxable income (so it’s like saving 25% if that’s your tax bracket).  Con:  Your take home pay is reduced by your contribution and if you don’t use the funds set aside you, lose it. 

Even better, and this depends on your Company’s plan and administration procedure is when you can use your FSA almost as a 0% interest loan tool to pay for an expensive eligible medical procedure.  Here’s an example, let’s say I let me my employer know I wanted to have $1200 set for my 2013 FSA.  Each pay check I have in 2013 will know have a $50 deduction (contribution total/ 24 bimonthly paychecks).  In February, I have expensive Root Canal and charge the $1000 expense to my credit card.  My FSA plan allows me to then submit my receipt for the Root Canal and it will pay me back $1000.  Even though, so far I’ve only contributed $100 via my paychecks.  My paychecks will continue to get the small deduction, taken out till the end of the year but I didn’t have to wait for my deductions to total $1000 before having my procedure.  Hence, why it’s almost like a 0% interest loan.  On top of that since I paid for original procedure with my Cash Rewards Credit card that earned me an additional 1% in rewards!

401k, Pension, Traditional IRA’s.  Contributions to these retirement plans usually come from your Pre-Tax Dollars so it’s definitely worth looking into.  Again, you should consult with a tax advisor of some sort to make sure you qualify and the amount you can contribute.  I won’t get into much since we are in what I consider a recession and most people can’t afford to contribute to these plans right now.  But if your employer does a matching plan, look at the terms carefully as companies are much more stingy these days and typically require a length of employment before they kick in funds.  But hey free money is free money.  And as many books, will say Retirement plans are very important.

NYC Transit Checks.  If you are a New Yorker in the TriState area and your employer offers this …get it!! I would say this is one of the best benefits ever because everyone shells out money for a Metro Card, its unavoidable unless you drive or bike to work.  It basically allows you to use your Pre-Tax Income to buy Metrocards.  The savings is amazing and this is one benefit you can be sure you will be able to use.  Again on the most basic level if your paying 25% in taxes, then it’s about a 25% discount on your Commuting costs!

I actually go take the max amount possible. And use the left over funds to buy more than I need.  For several reasons, you never know about job stability and whether or not your next employer will offer this benefit.  If you are a New Yorker, you know you will need to buy a Metrocard, its inevitable.  And so having extra Metro cards at such a discount is Definitely worth it!  And if you really need to get rid of them there are plenty people you can give these to hint hint family members and friends.  Because even if you give it at a 10% discount, you have probably saved way more since it was done at a pre-tax level.

**None of this should be construed as financial advice and the tax example is more just to help illustrate my point, actual taxes are much more complex and not flat.