PF1 - Income Lesson
Types of Income
Several different methods exist to earn money. You could earn hourly wages, which means when you work more hours, you earn more money! Maybe you earn a yearly salary that does not change even if you work overtime. Most of your income might be generated by the generosity of your customers through tips. You could earn money through investments. A capital gain occurs when your investment, like a stock, increases in value, while you could earn a dividend that pays you money per share of a company.
However you earn your income, it will be subject to federal and possible state income taxes. Most employees receive a W2 by January 31 each year, which they use to complete a federal individual income tax form 1040. On the next page, you will practice completing a 1040 using a sample W2. However, you could be an independent contractor, which basically means you need a different tax form, called a 1099, rather than the typical W2.
Taxes and Your Paystub
Have you ever really looked at your paycheck? What is the difference between gross pay and net pay? What is a deduction? Why is so much taken out for FICA? What is FICA anyway?
Basically, your gross pay is the money you earned before taxes. Common tax deductions are federal income tax, state income tax, Federal Insurance Contributions ACT (FICA which includes Social Security and Medicare), as well as deductions you choose like 401k and health insurance. Your net pay is how much you actually receive. It is often a lot less than your gross pay.
Paystub Practice
Budgeting
Now that you have been paid, you might need to make a budget to ensure you do not end up spending money you do not have. Remember to base the income of your budget on your net pay, what you actually take home, not your gross pay. Your expenses are either fixed (expenses like rent do not change) or variable (maybe you ordered takeout more than usual this month). You need to make sure your income is greater than your expenses. If your expenses are greater than your income, you need to cut down on your variable expenses. Do not forget to pay yourself first! What does it mean to pay yourself? It means save some money that you can use later for a short-term goal (vacation) or long-term goal (retirement). Set up an individual retirement account (IRA) as soon as you get your first job in order to build up your net worth (all of your cash and assets minus your debts). By age 30, your goal is to have an amount equal to half of your salary in your retirement account. If you budget correctly, you should be able to save money and still end up with a surplus at the end of the week, month, or year!
Classic Checking Account Skills
Hopefully, your paycheck is being directly deposited into a checking account. If so, you need to be able to reconcile it online or on paper. Be sure to account for transactions that have not been posted (i.e. checks, weekend debit card transactions, or monthly auto-pay transactions) in order to avoid overdraft fees.
Checking Account Register:
Banking Statement:
|
MEMBER STATEMENT:
PREMIUM SHARE DRAFT ACCOUNT
|
| Trans | Description | Debits | Credits | New Balance |
| 6/30 | Beginning Balance | 800.00 | ||
| 7/5 | Check No. 5103 | 59.99 | 740.01 | |
| 7/8 | ACH: Payroll | 500.00 | 1240.01 | |
| 7/15 | Check No. 5105 | 50.00 | 1190.01 | |
| 7/19 | ATM: Withdrawal S51491 6 | 43.00 | 1147.01 | |
| 7/21 | ACH: Payroll | 600.00 | 1747.01 | |
| 7/22 | ATM: Withdrawal S98754 2 | 20.00 | 1727.01 | |
| 7/22 | ACH: Internet Company | 56.73 | 1670.28 | |
| 7/31 | Closing Balance | 1670.28 |
How to Reconcile Your Checking Practice
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