It would be great to take home every cent you earn, right?! Unfortunately, we have to pay taxes which changes our income quite a bit. Sure, we get some back after taxes (and sometimes you have to pay—scary), but overall a significant amount of money is being taken out of our paychecks each month.
The Problem: When I first started working, I made the mistake of subtracting my estimated living expenses from my “salary” which meant I had x amount to put towards debt each month (so I thought). Month after month I would get so frustrated when I didn’t have my predetermined amount to put towards debt (especially since Dave Ramsey says, “Your budget tells your money where to go instead of wondering where it went). I had my precious budget that I was following to a “T” but didn’t have my calculated leftovers. What was going on?
The Light Bulb: I eventually realized that I had to figure out how much was actually getting taken out of my check each month. Pay stubs list this information for you, so it should have been easy for me to calculate, but I was working per billable hour at the time so my paychecks weren’t consistent. I finally estimated how much I would make each pay period and used the chart below to come up with my actual “take home pay”.
The Solution: According to this chart from bankrate.com, if you are single and make between $36,251 and $87,850 per year, 25% of your income is taken out of your paycheck for federal taxes. Therefore, if you make $40,000 per year (the average household income is $50,000), your take home is actually $30,000. This is important when calculating how much debt you can pay off each month. When you are sticking to your budget and calculate your take home pay, you’re able to accurately calculate how much money you’re realistically able to put into savings or pay towards debt each month.
The Accomplishment: It’s an amazing feeling of accomplishment to set a goal (put away “x” amount of dollars each month) and meet it continually. This is a great way to feel successful and maintain motivation.
Resources: Check out http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators.aspx to see how much you make per year. The calculator allows you to indicate your home state which includes your state tax deductions per year. This tool helps you calculate your take-home pay if you’re salaried or paid hourly.
Tell us what has been working for you or what you’ve learned throughout your financial struggles or successes.