1. Why is my paycheck so different from my wage?
Your first paycheck is definitely a cause for celebration — but it can also be shocking if you don’t know what to expect. Gross pay is the amount your earn before taxes. Net pay, or “take home pay,” is the amount remaining after all withholdings, like taxes, health insurance, and your 401(k) contributions. Your tax withholdings include state, federal, Medicare, and Social Security. The W-4 form you complete when hired helps an employer determine how much to withhold for federal taxes. Completing it accurately can prevent you from owing taxes at tax time or from overpaying taxes. If you’re not withholding enough, you’ll end up owing money when you file your annual state and federal taxes in April. If you withheld too much, you’ll get a refund. Ideally, you should try to come out even. You don’t want to be surprised with a big tax bill or tie up your money in an interest-free loan to the government. You can consult with your employer’s payroll department to update your withholdings.
Things work differently if you’re a 1099 independent contractor, such as a driver for Uber, Doordash, or other “gig economy” jobs. With this classification, taxes are not deducted from your earnings throughout the year, so you’re on the hook to keep track of them. If you make over a certain amount, you may also need to file quarterly taxes to avoid penalties, so be sure to consult a tax professional.
2. Why shouldn’t I save my money in a mattress?
While having a little cash on hand for an emergency is a great idea, storing your life savings at home is dangerous. You’re out of luck if it gets lost, stolen, or burned in a fire. Saving your money at a financial institution — like a credit union — offers you protection. The federal government also insures deposits up to $250,000 at financial institutions through the FDIC (banks) and NCUA (credit unions). No member of a federally insured credit union has ever lost one penny of insured savings. Plus, your deposits earn interest instead of dust. In addition, having a debit card can give you quick access to the money in your account when needed.
3. When should I start thinking about building credit?
You can start building credit as soon as you turn 18. Building and maintaining a good credit score is important because it can affect the amount you pay for loans, approval for apartments or housing, and whether you get hired for some jobs. But how do you get started?
One of the best ways to get started is with a secured credit card. You make a security deposit that is equal to the card’s credit limit. Once you have established a good repayment history, the card issuer can convert it to a regular credit card. Sometimes a parent or family member is willing to add you as an authorized user on their credit card. You get the benefit of their good payment history. Also, a family member can cosign for a loan (like for your first car) so you get the benefits of their credit history while building your own. But be careful — if you don’t make payments on time it will negatively impact the co-signer’s score.
Any student loans you have will also appear on your credit report. However, most don’t begin the repayment period until after you graduate, so they won’t help you build any credit activity until you start making payments.
4. Is it true that keeping a balance on your credit card is good for your credit?
No. This is a common myth. The most important way to build your credit score is by simply paying your bills on time. The second most important factor is keeping credit card balances low. This means using 50% or less of your card’s credit limit during the month and paying your balance in full each month. If you need to carry a balance for a while, aim to keep it under 30% of your credit limit. For example, if you have a $1,000 limit on your credit card, keeping your balance under $300 is ideal. And if you run up your balance because you use your credit card for everything, you can actually make more than one payment each month to keep your credit utilization ratio low.
5. When should I start saving for retirement?
You might think retirement savings can take a backseat since retirement is a lifetime away. At the moment, you probably have other financial priorities, like paying for school or saving to buy a car.
However, the key to efficient retirement saving is time. Even if you only put a little bit of money away right now, it makes a significant difference down the road. This is because of a little magic called compound interest — where you earn interest on interest. Over time, it really adds up. People who start early can save thousands of dollars less and still end up with thousands of dollars more in their retirement fund than someone who puts off saving for just 10 or 12 years.
Enroll in your employer’s 401k program, if offered. You’ll allocate a percentage of your paycheck, either pre or post-tax, to be automatically set aside. Many employers offer matching funds, where they contribute to your fund when you do. It’s essentially “free” money. Matching typically has a vesting period, which means the employer’s portion becomes “yours” over a period of time, contingent on your employment.
It’s also a good idea to start an Individual Retirement Account (IRA). This is available to you whether you have an employer plan or not. All you need is earned income. SESLOC offers Traditional IRAs and Roth IRAs with low minimum balances and no maintenance fees so there’s no barrier to get started. Simply deposit money into it when you’re able to. Or better yet, set up automatic deposits so you don’t forget. The Internal Revenue Service sets a limit on how much you can contribute to your IRA during each tax year, but you can get started with as little as $5.
Have more money questions? Join us at our next webinar.