Unraveling the Mystery of Your Pay Stub
written by Credit-HQ ExpertEvery time you get a paycheck, you get a little document with it that is a little present for you. Unfortunately, that little present is often a big mystery as to what it means. That little present is the pay stub that comes with your check and knowing what its telling you may bring out the Sherlock Holmes in you. Let’s see if we can begin to unravel the mystery with some clues to how to read that strange little document.
The two numbers that mean the most on your pay stub are called by accounting gurus your “gross pay” and your “net pay”. Your gross pay isn’t called that because its repulsive. Gross pay is how much you earned before anything is taken out of it. So if you make $100 an hour and you work 40 hours, your gross pay is $4000 (nice pay check!).
Your net pay is what you get to keep. If you subtract the net pay from the gross pay, that amount is money you earned but don’t get to put in your bank account. And for the most part, the rest of those little boxes on your pay stub are there to explain to you where all your money went. It doesn’t make it any less painful to give up that money but it is an explanation. And the term accountants use for the different ways they take money out of our check is “withholding”.
Probably the biggest percentage of that amount you earned but don’t get are the taxes you pay to the federal government, the state government and to social security and Medicare. You don’t get an option on whether those things will be taken out of your check. Its the law that you are going to pay them before you get a dime to spend on yourself.
Keep an Eye on Those Deductions
Make it your goal to understand each and every one of those deductions that come out of your paycheck each pay period. Don’t take it on faith that “they know what they are doing” when it comes to your hard earned money. The deductions that are taken pay your federal taxes, your social security obligation and your local or state income tax as well. There are also deductions for things like life and health insurance and any savings funds or retirement plans you participate in. You should know where your money is going because you can change how much or how little of your paycheck you get each month.
Once you know what the different boxes on your pay stub represent, make it your goal to watch those funds to make sure they are correct. Don’t assume the accountants or the computer programs that calculate your deductions always get it right. It is also helpful to watch the running total boxes because they tell you have much you have paid into each kind of deduction category as the year goes by.
By knowing what each of those deductions is supposed to be each paycheck, you can jump all over it if something changes unexpectedly. If there is an error on your paycheck, it is a lot easier to fix it when it first pops up than after it has been going on for a few months. That is what the Human Resources Department of your company is for so make them work for a living and be accountable for what is being taken out of your paycheck.
Your Pay Stub as a Budgeting Tool
It is pretty eye opening as you watch the different values accumulate throughout the year. But a great way to use your pay stubs to help you be a better money manager is to watch where your money goes and how much you are getting each month. This is valuable information to you in building and staying on a budget and watching how you spend the money that does make it to your bank account.
Sometime around the end of January, you will get a statement from your employer that is a final annual computation of all of your deducted amounts. This is your W-2 form which you have to have to do your taxes each year. The amount of federal deductions on that W-2 should match exactly the accumulated values on your last paycheck for the year. It’s a smart move to make they do mach up.
Those pay stubs are important financial documents to you. You should find a way to file them so you can get to that file and find all of the pay stubs for the year in one place. For one thing, your social security number is on the pay stub. So protect that document and tuck it away for future reference. You will be glad you did.
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