Intro to Earning
Your Benefits & Your Paycheck
OK, you mentioned earlier that money also comes out of my check to help pay for my benefits. What benefits were you talking about?
The benefits that may be available to you vary widely from company to company—everything from health and dental insurance to retirement contributions to reduced gym memberships.
So I have to foot the bill for all of these benefits? I thought my employer paid for them.
Oftentimes, the company you work for pays for a significant portion of your benefits, and you pay the rest. When this happens, your share of the costs is typically deducted from your paycheck throughout the year.
You mentioned retirement contributions a minute ago. My plan was to start saving for retirement later. Why should I worry about that now?
There are a number of companies and organizations that still help fund their employees’ retirement, but the responsibility for managing retirement savings is falling more and more on the individual.
But you said the government takes money out of my check to pay for Social Security. That means I’m already funding my own retirement!
Yes, you’ll collect Social Security when you retire, but that won’t be enough for most people—and it’s up to you to figure out how to fill in the gaps.
You mean I’m on my own?
In a sense, yes. That’s why it’s so important to start saving early. The sooner you begin saving, the more time your money has to grow. And the good news is that the government offers powerful incentives to help you.
What kind of incentives are you talking about?
Well, every dollar you put into a qualified retirement plan reduces the amount of taxes you have to pay. Let’s say you make $40,000 a year and save 10 percent of it for retirement. Instead of taxing you on your full $40,000 salary, the government taxes you on $36,000—your salary minus the 10 percent, or $4,000, that you put into your retirement savings.
You know, it sounds like you’re saying that the money I put away for retirement doesn’t get taxed.
That’s almost exactly right. You don’t pay any taxes on what you contribute until you start withdrawing from your retirement account. That’s a great deal, but every year you wait to start saving is lost forever.
OK, my paycheck now seems like less of a mystery!
Understanding the basics of your paycheck is an important first step to mastering personal finance. From building a secure retirement to buying a home to paying for an education, every financial event in your life flows from your paycheck.