What is My
Take Home Pay?

If there’s one thing we love about our jobs, it’s the paycheck after a few weeks’ work.

The least fun thing about that paycheck is the taxes and federal withholdings that take a bite out of our income.

When thinking about your finances, numbers like your gross income and take home pay are crazy important.

These numbers will determine your ability to spend on necessities, save for the future, and invest for long-term financial wealth.

Let’s take a look at your take home pay, and why it matters in your wealth plan.

What is Take Home Pay?

Your “take home pay” is the net amount of money you receive each month after your taxes and Social Security contributions are deducted from your salary.

If you contribute to a 401K/403b plan, that amount is still considered “take home” money; you’re just diverting it to a savings plan before your pay is taxed.

The Take Home Pay Formula

Salary – Withholdings (f + s + ss + m)  = Take Home Pay

Your gross income is important, but don’t let that amount fool you.

Once your salary or hourly pay is calculated, several required withholdings are subtracted.

The most common are federal taxes (f), state taxes (s), Social Security (ss) and Medicare (m). Social Security and Medicare are the FICA deduction you see on your paystub.

Your retirement contributions and health insurance premium are also deducted pre-tax, so your pay will take a dip for those, too.

What you do with what’s left over after Uncle Sam gets his cut is what’s going to determine how quickly you reach your financial goals.

Why Your Take Home Pay Matters

Your available income affects every part of your life.

If you base your spending on your gross salary, you’ll find yourself in the red pretty quickly!

Your net income  – the take home pay you walk away with – is what you should use to make your financial choices.

All your money moves – including taking care of bills, saving, and investing must be made with this in mind.

A Word About Saving Your Take Home Pay

Once you’ve got that money in hand and all the bills are paid, it can be really tempting to hit the streets with what’s left.

Nah sis. Don’t do that!

Your 401k/403b is just the minimum. If you want to ensure your net worth grows and you’re able to live a lifestyle you’ll enjoy, you need to put more of your money to work for you.

If you’re new to saving, try saving 20% of your take home pay for the next 90 days.

If you’re overspending (this is for you, Ballers and Bohemians), and there’s no way you can hit that target, start with 1%, and double the amount you save each month until you hit 20%.

If you’re a Banker and already have the saving habit, bump it up to 20% of your gross income.

From there, you’ll build a nice nest egg to get your portfolio going.

Wrapping Up

Are you maximizing the power of your take home pay yet?

What strategies are you using to live well and invest for success?

Please share in the comments!