Whether you're a gig worker or considering a corporate job, your early career choices and money management decisions create a foundation for your financial future. Here's why both paths have their merits.

What to Know:

Benefits Of A Company Job: Working for a corporation can be a solid foundation for your career, even if it's not your ultimate dream. Here are some benefits:

Resume Credibility: It adds weight to your resume, boosting your credibility throughout your career.

Financial Discipline: A consistent paycheck teaches you how to budget and manage money, forming lifelong habits.

401k Savings: Participating in a 401k plan offers early savings opportunities that grow over time and nurture valuable saving habits.

Tax Routine: You'll become familiar with the annual rhythm of tax filings, making taxes less intimidating.

Benefits Package: You'll gain a comprehensive understanding of health, dental, vision, and life insurance plans.

Skill Development: Working in a structured environment can help you develop transferable skills.

Networking: Stable employment often provides better networking opportunities crucial for career growth.

Remember, approach your job with intention, even if it's not your dream job. It's a chance to build financial literacy, establish critical money skills and support yourself. P.S. Try and have fun!

Gig Workers: If a full-time job isn't your path, that's great. Gig work offers flexibility and new opportunities! However, it comes with unique money challenges: inconsistent income and schedule.  Here is a tip to help.

Income Smoothing: To navigate the irregular income of gig work, consider setting a baseline "salary" for yourself. Deposit all earnings into a separate business account, then transfer your self-imposed "salary" to your account monthly. This approach can simulate a consistent income and make budgeting easier. Additionally, by setting up a direct deposit for savings from your business account, you can more easily keep records for tax purposes.

Paycheck Breakdown: Your first step toward financial growth is understanding how your paycheck is divided. This knowledge empowers you to decipher what a salary offer truly means for your day-to-day finances. Understanding how a traditional paycheck breaks down will help you know what to set aside for these deductions.

Here we go, stay with me. Let's break down a hypothetical paycheck for someone earning $75,000 a year.

‍Caveat: This breakdown is a foundational representation. In the U.S., employees often complete a Form W-4, adjusting tax withholdings based on individual claims. In the U.S., deductions from a paycheck can vary widely based on individual choices, legal obligations, and employer offerings. Beyond federal and state taxes, Medicare, and 401K contributions, other factors like health insurance premiums, garnishments, and optional benefits such as stock purchase plans or union dues can influence take-home pay.

What is a W4?
‍A W4 is a U.S. tax form that employees fill out to let their employer know how much federal income tax to withhold from their paycheck. By indicating certain deductions or credits on the W4, an individual can adjust the amount of tax taken out, either increasing or decreasing it based on their personal and financial situation.We'll consider the standard deductions, including federal income tax, state income tax (if applicable), Social Security tax, and Medicare tax. Remember that tax rates can vary based on your specific circumstances and location, but I'll provide a general overview.  *I have a more detailed section on taxes coming up.
Let’s say you start a job, and the pay is 75,000 dollars a year. Yeah!
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Gross Income: $75,000 per year.  

Definition: Gross Income is the total money you earn before any deductions or taxes are removed. It's your income before any expenses or reductions.Now, let's calculate the four buckets of deductions:

1. Federal Income Tax: This is the tax you pay to the federal government based on your income. The amount withheld depends on your filing status (single or married), deductions, and exemptions. For our example, let's assume a federal tax rate of 22% (which is just an approximation, as tax brackets can change).
Federal Income Tax = $75,000 x 0.22 = $16,500 per year

2. State Income Tax: This is what you pay to the state you live in. The amount varies depending on your state of residence. Let's assume 5% for this example.
State Income Tax = $75,000 x 0.05 = $3,750 per year (if applicable)

3. Social Security Tax: This federal tax funds the Social Security program. In 2023, the Social Security tax rate was 6.2% on the first $147,000 of income, however, this does not apply to our example we are working with $75,000.
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Social Security Tax = $75,000 x 0.062 = $4,650 per year

Definition: Social Security provides financial support to people when they retire or become disabled. It gives them a monthly income to help cover living expenses in the future. Not everyone gets Social Security. It's typically for people who have paid into the system through their work history.

4. Medicare Tax: This federal tax funds the Medicare program. The Medicare tax rate is 1.45% of your entire income.
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Medicare Tax = $75,000 x 0.0145 = $1,087.50 per year.

Definition: Medicare is a federal health insurance program primarily for people aged 65 and older and for certain individuals with disabilities. It helps cover medical expenses.

Now, let's calculate the total deductions:
Total Federal Income Tax: $16,500Total State Income Tax (if applicable): $3,750
Total Social Security Tax: $4,650
Total Medicare Tax: $1,087.50= Total Deductions
$16,500 (Federal Income Tax) + $3,750 (State Income Tax) + $4,650 (Social Security Tax) + $1,087.50 (Medicare Tax) = $25,987.50 per year‍
To find your net income (take-home pay), subtract the total deductions from your gross income:‍

Definition: Net Income is the money you take home from your job or business after all deductions, such as taxes and other expenses, have been subtracted. It's your actual earnings.

Gross Income ($75,000) - Total Deductions ($25,987.50) = Net Income $49,012.50 per year.

So, for someone earning $75,000 a year, their net take-home pay after all the deductions in this example would be $49,012.50. Remember that this is a simplified example, and actual deductions can vary based on factors such as deductions, credits, and specific tax laws in your location.

To calculate your monthly spending plan or budget from an annual income of $49,012.50, you would divide by 12 (the number of months in a year):
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$49,012.50 ÷ 12 = $4,084.38 per month.

So, someone with an annual net income of $49,012.50 has a monthly budget of approximately $4,084.38. I’m sure you’re feeling discouraged, but here’s a trick: do not consider pretax dollars (Gross Income) your own. As Benjamin Franklin said, “Nothing is certain except death and taxes”.

401K Impact On Your Paycheck: A 401(k) plan allows you to save for retirement on a tax-advantaged basis, and your contributions are typically deducted directly from your paycheck before taxes are calculated.  This is optional, not a requirement.

Here's how it affects your paycheck based on your $75,000 annual income:

1. 401(k) Contribution: You decide how much of your income to contribute to your 401(k) plan. Let's assume you choose to contribute 10% of your salary, which is $7,500 per year.

2. Pre-Tax Contributions: 401(k) contributions are deducted from your paycheck before calculating income taxes, which means that the $7,500 you contribute to your 401(k) reduces your taxable income.

3. Tax Savings: By contributing to your 401(k), you'll pay less in income taxes. The exact amount you save depends on your tax bracket. In our example, we assumed your federal tax rate is 22%.

Tax Savings = $7,500 (401(k) contribution) * 0.22 (tax rate) = $1,650 per year

4. Adjusted Gross Income (AGI): Your 401(k) contribution reduces your AGI. In this case, your AGI will be $75,000 - $7,500 = $67,500.

Definition Adjusted Gross Income (AGI): Income after specific deductions allowed by the IRS, used to calculate taxes.

Let's calculate your new take-home pay with a 10% 401K contribution. :

Gross Income ($75,000) - 401(k) Contribution ($7,500) = $67,500 (Adjusted Gross Income)

Federal Income Tax (22% of $67,500) = $14,850

Total Deductions (Federal Tax + State Tax, if applicable + Social Security + Medicare) = $25,987.50 (as calculated in the previous example)

Net Income (Take-Home Pay): $67,500 - $25,987.50 = $41,512.50 per year

So in the end, by contributing $7,500 to your 401(k) plan, your take-home pay would be approximately $41,512.50 per year.

The primary benefit of a 401(k) is long-term retirement savings and tax advantages, not an immediate increase in your take-home pay. On a short-term basis, contributing to a 401(k) does not result in more money in your pocket on a per-paycheck basis. It reduces your take-home pay (net income) for the current pay period; however, you are actively setting aside money for your future. However, it can lead to tax savings when you file your annual tax return, which means you may owe less in income taxes or even receive a tax refund.

GOOD NEWS ALERT: If you start contributing $7,500 per year to your 401(k) in your 20s while earning $75,000 annually, with an average annual return of 7%, by the time you're 65, you could have over $1.2 million saved for retirement. Starting to save early on can make a world of difference in your financial future.

If your employer matches your 401(k) contributions, it can significantly boost your retirement savings. Employer matches vary, but let's assume a typical scenario where your employer matches 50% of your contributions up to 6% of your salary:

Your annual contribution:$7,500.
Employer match (50% of your contribution): $3,750.
Total yearly contribution: $7,500 + $3,750 = $11,250.

With this employer match, your yearly contributions effectively become $11,250. Using the same average annual return of 7%, here's how your savings could grow:

By age 65, you could have over $1.8 million for retirement.

FYI:  If you only save the money,  and assume no interest, then the $625 (monthly contribution) x 12 (months in a year) x 45 (years) = $337,500.

Questions To Consider:
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‍Gig Workers:
1. How can I determine my baseline "salary" as a gig worker?
2. What kind of system do I need to set aside and pay taxes and fees accurately as a gig worker?
3. What percentage of my gig income should I allocate to savings?

‍Employees:
1. How do I break down my paycheck to understand deductions?
2. What percentage of my income should I allocate to retirement savings, such as a 401(k)?

Next Steps:‍

Gig Workers:
- Research the average income in your gig industry to set an appropriate baseline salary.
- Create a budget that accommodates both your baseline salary and irregular income.
- Consult a tax professional to ensure you're managing taxes correctly as a gig worker.
- Gig workers spend time researching tax advantage long-term savings plans (to be discussed in later sections).

Employees:
- Find out what your employer will match in a 401k and decide how much you will contribute.
- If your employer does not match, consider and research tax advantage long-term savings plans (to be discussed in later sections).
- Sign up for your company 401K, especially if they match the funds.

Completed:‍

Gig workers:
- Set a baseline salary for yourself.
- Open a separate business account.
- Begin transferring your self-imposed "salary" to your personal account monthly.
- Signed up for a long-term tax-advantaged savings account
- Created a system to set aside money for taxes and deductions

‍Employees:
- Signed up for company 401K
- Understand my Gross VS Net Pay
- Understand all my paycheck deductions