Income from a Job

The amount you receive each pay period can be frustrating, because it's often less than you might expect. There's no getting around certain things that reduce your take-home pay, like FICA taxes. But you have control over other amounts taken out of each paycheck — income tax withholding, health insurance premiums, and contributions to a retirement plan. While these reductions may seem like money you're losing, in reality they help ensure your long-term financial stability.

The amount withheld from your paycheck in taxes is determined by the income tax rates set by the government, your income and filing status, and how you fill out the IRS Form W-4. When you start a new job, your employer uses that form to know how much federal income tax to withhold. The goal is to prepay what you'll owe by the end of the year — not too much, not too little.

If you are single with just one source of income, your withholding is essentially set. But if you have multiple jobs, investment income, an employed spouse, or dependents, use the instructions and calculator provided with the W-4. Always update it if your situation changes.

Health insurance is another essential benefit you may be eligible for as an employee. In most cases, you pay just a portion of the monthly cost and your employer covers the rest. Because paying for health insurance yourself can be extraordinarily expensive, it almost always makes financial sense to choose a plan available through your job — even if your share of the premium reduces your take-home pay.

Building financial stability can depend largely on how you save and invest for retirement. You may have heard of 401(k), 403(b), 457, and Thrift Savings (TSP) plans — all employer-sponsored retirement savings plans that offer tax advantages as an incentive to set money aside. Your contributions reduce your take-home pay, but your earnings (and sometimes your contributions) are tax-deferred, which can reduce your taxable income. If these plans are available to you, they're among the most effective ways of building long-term financial security.

One of the keys to wealth accumulation is maximizing available benefits — and a prime example is employer matching. Many employers match a portion of what you contribute, up to a cap. If your employer offers this, try to put in at least enough to qualify for the maximum match. Since the matching contribution is essentially free money, you don't want to miss out on it. It's sometimes called “not leaving any money on the table.”

Compounding occurs when money you earn on your investments is added to the original investment, forming a new, larger balance. Future earnings are based on that larger amount, so as it grows, the potential for growth increases. With compounding, time is money — the more years you contribute, and the more years your earnings keep growing, the larger your account has the potential to become.