During the winter, many
young adults get jobs to help fund their holiday shopping. Getting a part-time
job can be a great, not only for buying gifts, but also for experiencing what
it is like to earn a living. One of the first things people learn from their
first jobs is that not all of their hourly wages finds its way into their
paychecks. Paychecks are reduced by taxes and other required expenses, which
are deducted before you ever get your pay. What is left over is known as disposable income. This is money that
you are free to spend as needed for bills, paying off debts, or buying gifts.
Young workers must anticipate that their disposable income will be
significantly less than what they earn.
Disposable
income: Disposable
income is equal to your earned salary (or gross pay) minus federal and state
taxes, Social Security withholdings, and Medicare withholdings. To find out
what percentage of your gross pay you will predictably keep each pay period,
look at your first paycheck. It will list all the standard withholdings that
will occur. Follow this formula: Divide the sum of all the withholdings by your
gross pay. Multiply the result by 100, subtract that result from 100.
100 – [(withholdings ÷ gross pay) x 100]
This is the percentage of your salary that you will receive as
disposable income. By calculating this figure ahead of time, you will know how
much income to expect each month.
Discretionary
income: Discretionary income is what is left
over from your disposable income after all your bills are paid. Since most bills
such as car insurance premiums or rent tend to cost the same amount each month,
you can calculate your expected discretionary income so you know what to
expect. To calculate discretionary income, subtract all your regular monthly
bills and expenses from your monthly disposable income.
Discretionary
income = disposable income – monthly expenses
You should base your
shopping budget on your discretionary income, not your disposable income. This
way you can be aware of exactly how much money you have free and avoid
overspending.
READERS, what do you
think?
Did you know about all
the tax withholdings from your paycheck? What do you think they go to pay?
