Getting a regular, steady paycheck is comforting. But whether you are paid monthly or weekly and whether you’re a full-time employee or a freelancer, there are some things you should pay attention to and actions you should take to not only make the most of your earned money, but also avoid losing some.
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“History will lead you to the answers. Look at what you did the previous year to see what you can do better,” said Bobbi Rebell, CFP, founder of Financial Wellness Strategies and author of Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.
For example, she said, did you have money taken out for an optional benefit, such as commuter benefits, that you did not use because you worked from home more than expected? Or did you take out too little for a tax-deferred retirement account and not get the full company match?
While it can be easy to get into the habit of overlooking the fine lines of a paycheck, not taking a few consistent steps or paying attention to details could end up costing you a lot.
Not checking your pay stub
Very few employees check their pay stubs, yet understanding the information on the stub is important for personal finance management, said Sean Fox, president of debt resolutions at Achieve.
That information helps you understand how much money you have coming in, and what is being taken out for deductions.
“Make it a habit to review your pay stub at least once a month. It’s a good idea to check the spelling and accuracy of your name, address and Social Security number,” said Fox. “Look to see that the gross pay amount is accurate and consistent. Review how much is being deducted for insurance — health, dental, life, disability.”
This information can help you as a guide to creating and updating your budget, and in the case of health insurance, it may weigh in on the best choice of policy for you and your family, he added.
Along the same lines, another mistake is not taking the time to understand your paycheck and understand what each line item is, according to Rebell.
“It can be challenging because there are a lot of acronyms and confusing words,” she said. “Making the effort to understand them is the key to avoiding mistakes and making smarter decisions.”
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Not keeping track of how much you are bringing in
One easy mistake to make with your paycheck is failing to keep close track of not only how much you are bringing in but where that money is going. And that can really be a confusing thing to keep track of.
Indeed, depending on how you are paid, it’s easy to mix up your gross income compared to your net income or nail down exactly what money you have left over when your bills are accounted for, said Christian Simmons, certified educator in personal finance and financial writer for RetireGuide.com.
Simmons added that it can also be difficult to compare monthly expenses such as rent or bills to a biweekly paycheck.
“There are a lot of pitfalls that make truly just understanding how you spend your money easier said than done,” he said.
In turn, the issues that can pop up when someone doesn’t understand how their paycheck translates to paying their bills can be serious.
“Just a couple months spending more on discretionary expenses than you have the money for or failing to grasp how much of your paycheck actually ends up in your pocket can land you in a hole,” he said. “Budgeting is an effective and consistent way to keep up with your finances, even though it can take a lot of work.”
Not adjusting your tax withholdings
“A big oops is not adjusting your tax withholdings,” said Jeff Rose, CFP and founder of Good Financial Cents. “Some folks either owe a ton at tax time or get a big refund, which is like giving the government an interest-free loan.”
You can avoid this by checking the Internal Revenue Service Tax Withholding Estimator and updating your W-4 form accordingly to match your actual tax liability, added Rose.
Rose added that when you get your pay stub, take a moment to go over it and check the basics, such as the number of hours you worked, the rate of pay, and the math.
“Look at the deductions too — things like taxes, retirement contributions, and health insurance. If something looks off, raise the flag immediately. It’s your money, after all, so you want to make sure it’s landing in your pocket just as it should,” he said.
And as Rebell noted, with even basic savings accounts paying significant interest, that money could be working for you all year.
Not contributing enough to savings
According to Shane Adkins, CFP and financial advisor at Broadway Graham Wealth Partners, making retirement contributions a priority by setting up automatic deductions from your paycheck is key to financial well-being.
In addition, he recommended building an emergency fund with three to six months’ expenses before spending on wants, as well as creating a budget to align spending with your income and goals.
“If you’ve made some of these mistakes, the good news is you can bounce back,” said Adkins. “Boost your retirement savings rate to catch up. Trim discretionary spending to build up your emergency fund.”
Adkins also noted that if you have excessive debts, make a debt reduction plan by listing debts by interest rate and paying minimums on all while targeting extra payments to the highest rate debt.
“Stick to your budget and say no to wants for now. The key is to get clear on your priorities, make a plan, and take it one step at a time. With focus and discipline, you can get back on track financially,” he said.
Blowing extra money
You might have received a bonus, or worked extra hours, but don’t treat it like “extra” money, said Achieve’s Fox.
“While it’s not bad to occasionally treat yourself, the treat needs to be in line with your budget — so, again, you need a budget,” he said. “Most people actually find that once they are used to living on a budget — within their spending plan — they feel comfortable sticking to that plan. Saving that ‘extra’ money can be a big boon to an emergency fund or retirement savings.”
Mark Henry, founder and CEO at Alloy Wealth Management, echoed the sentiment, saying that while it can be tempting to go out and enjoy your paycheck as soon as it hits your bank account, this is one of the easiest ways to cause unnecessary financial stress.
“Before you go out for drinks or buy a new pair of shoes, pay all of your outstanding bills and make any payments on loans or credit cards. By doing this first, you assure that you will have enough money to cover your needs, and if you have money left over you can treat yourself, said Henry.
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This article originally appeared on GOBankingRates.com: Your 5 Biggest Paycheck Mistakes, According to Financial Experts
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