How to take more income home
The first place to start is with your regular income. You could seek out another job and work more hours, but why put in more effort when you might be able to take home more money just by changing a few things.
Everyone pays taxes and your employer takes out money based on the allowances on your W-4 form. The more allowances the less money that gets taken out. If you receive any refund from the IRS, your allowances are set too low. I like to try and target a refund of about $100-200 so I have some cushion and don’t wind up paying taxes to the IRS. If you get a refund of anything more than this, you should consider increasing the number of allowances on your W-4 form.
My suggestion is that you ask your manager and let them know that you want to changes the allowances on your W-4 form and the amount of taxes that you have taken out. They should be able to point you in the right direction in changing your allowances. If you’re questioned about changes such as new deductions, all they need to know is that you have too much being taken out and you want to change that. The form itself specifically states that the number on the form may be different from what is on your tax form.
The form is divided into two parts – one is the worksheet and the other is the actual form that you need to file with your employer. You can go through the worksheet and come up with a number and if it’s higher than what you currently have on record, it will reduce the amount of taxes being taken out and increase your take home pay. If the number that you come up with is the same as your current number, try increasing the number of allowances by 1 and see if that lowers the amount of taxes being taken out to an appropriate amount.
We know that the current amount you have taken out is too much so let’s say for example that you are getting a refund of $750 a year. That means that you are having about $550 more than you need to have taken out of your paycheck. Our goal is to reduce the amount that you have taken out by that amount or about $10 a week. If you are paid bi-weekly, that would be $20 a pay period and if you are paid monthly, about $40 a pay period.
So, look at your next paycheck after you change your allowances and see if it reduces your pay by the appropriate amount. Again, take the amount of your annual tax refund and divide by your number of pay periods to see what it should be reduced by. If it doesn’t, increase your allowances again until you get it just right. In my case I have 9 allowances even though we are a family of three so the number can quite different from the number of dependents that you have.
There are some other adjustments that we can make to our take home pay
but I’ll point those out as we go along.
In some cases it’s beneficial to have some money taken out before taxes
because it can save you money that you’ll already spend, but we’ll look at
those as we go through a monthly budget and see if they apply.
Now that we’re maximizing what we are taking home, we can now look at the other side of the equation, your expenses. I like to use a MS Excel spreadsheet because it makes making calculations easy but you may prefer a good old fashioned pen and paper.
I start by adding up everything I currently have in the bank. I then add my next pay check. This gives me my starting money. I then make a list of all my bills that I know I have on a monthly basis. This includes line items for things like food, gas, church, etc. I then make a note of when certain bills are due like my electric and credit card bills. This starts to give me an idea if something needs to be paid at the beginning of the month or the end of the month.
I’m paid bi-weekly so I like to just list each month and the first paycheck and the second paycheck. I know I’ll have food and gas expenses each pay period but something’s like a cell phone bill are paid by a specific day so that will not be both. One thing I do is split my debt related expenses in half and pay half with each paycheck, but I’ll talk about that in a separate chapter. So I have those line items as well.
I try to only write down those expenses that I know I’m going to have and I know that not every penny will be accounted for, but I’ll have a cushion and before my next paycheck I’ll make note of the exact dollar amount that I have. I repeat this for the next six pay periods so I can plan ahead and insert any big expenses that I know I have coming up. The beauty of doing it on a spreadsheet is that if I change the numbers one place, it’s automatically reflected later on.
So, my spreadsheet looks something like this:
Notice how in our example spreadsheet that some line items like household expenses and church and gas repeat from pay period to pay period. This is because they are on-going expenses. Other items such as the mortgage repeat as well but not because they have to but because of the benefit of paying interest bearing debts multiple times a month. Like I said, we’ll talk about that in a separate chapter.
The budget starts in the upper left and includes any monies that we currently have. We then add in our first paycheck of the month and start subtracting off of our expenses. We are then left with a certain amount of money so we know how much money we should have for any miscellaneous expenses that come up. This also helps with expenses coming up.
Notice how we’ll have a large credit card payment in the first pay period in July because of a family vacation that we took. After that pay period we’ll only have about $800 left over so we need to keep that in mind. That means that we really only have about $800 for miscellaneous expenses between the first pay period in May and then.
Now it wouldn’t be a terrible thing if we had to split that credit card payment up, but it’s good to keep low balances as we’ll learn. We can also put up to $100 in miscellaneous expenses on our credit card because we’ve already budgeted to pay that amount on the card.
So you can see that by keeping track of things we can not only see
where we are at the moment, but where we’ll be coming up.
You might be asking or wondering where savings are reflected in the budget. Savings is a very important aspect to planning and it gives you a cushion for expenses that seem to crop up out of nowhere or are seasonal.
I like to spread my savings out and I do that by having multiple accounts with multiple banks. There’s no law against having two or more checking and savings accounts and banks often offer them for free. Online banks such as USAA and Capital One 360 offer better interest rates than most banks and apps that install on a smart phone make making deposits easy so you can easily deposit checks but you can always do electronic transfers. Best of all, the banks issue debit cards so you can use them anywhere and have access to your money wherever you want.
By having your money in multiple accounts, you lessen the risk of not having any money and you are less likely to spend all your money so you wind up having an automated savings plan. Every pay period I put 10% of my pay check in one of the accounts and I switch between the accounts. I include the money that I have in the accounts with my total available funds. I’ll typically just use my local bank account as my main account but if that account starts running down, I can easily start using one of my other accounts. Another nice feature is that I can name the accounts to something that I want so I can name them after my savings goal like a vacation or maybe buying some land somewhere.
Setting up the accounts are easy and can be done online. All you need to do is enter your current account information so that you can transfer funds between the accounts. If you want to transfer money between savings accounts, you can use the same bank routing number and then use the account number for the savings account instead of the checking account.