How To Use Pay Stubs for Tracking Finances

Living within one’s means has proved more important than ever. Especially due to the increasing cases of economic hardship. The hardships of the modern world are many, including inflation and increasing costs. These make it difficult for people to sustain themselves financially. 

Most individuals now live from one paycheck to another. This economic stress is why people need ways to estimate their expenses and manage their money.

This article aims to describe how to use pay stubs for tracking finances. You’ll learn to use this tool to monitor your financial situation. That includes budgeting with pay stubs and reaching your financial goals.

What Are Pay Stubs Beyond the Numbers?

A pay stub is an itemized record of wages earned and the deductions made in a particular pay period. Many individuals often look at the most basic part of this document. They focus on the net pay and then put the pay stubs away.

However, these documents are quite useful since they contain many financial details. Details that can help people in making major financial decisions.

The information contained in a pay stub includes gross wages and tax deductions. That can be divided into mandatory payments and voluntary ones like retirement plans. The last numeral, known as net income, is what gets to your pocket.

Why Use Pay Stubs for Tracking Finances?

There are several reasons why pay stubs should act as the basis for tracking finances:

Accurate Record

Firstly, they give a clear record of one’s income. A pay stub has precise details on your remuneration. Hence, they provide you with certainty regarding your major revenue source. This is unlike bank statements, which can include deposits from many sources.

Deductions Information

Pay stubs provide information on the types of deductions that are made. The pay stub will tell you in detail what is deducted from your paycheck. Be it taxes, retirement contributions, or medical insurance. It helps you determine whether any adjustments may be beneficial.

Historical Records

Next, pay stubs help keep an account of one’s earnings throughout a certain period. So, you keep track of changes in your income over time. You can easily show trends in the money that you make over a period of time. This is useful for those with an irregular income. They may need this when applying for a loan or filing taxes.

Financial Goals Tracking

Next, they are useful in tracking the financial objectives that you have set. Maybe you’re trying to raise your retirement benefits contribution or adjust tax deductions. With this information, you can determine whether or not you’re on track to meet the targets.

Financial Capacity

Last but not least, pay stubs expose your financial capability. The net pay figure displays the amount of money that you get after all the deductions. This actually enables you to budget. You should use this figure in your budgeting, not your gross salary.

Budgeting With Pay Stubs

Budgeting with pay stubs involves a series of steps:

1. Gather Information

First, you need to collect all documents necessary for your financial planning. These include recent pay stubs, bank statements, and credit card statements. You can also gather documents on investment accounts and receipts of any cash purchase that has been made. These documents collectively give a full picture of your financial status.

2. Analyze Income and Deductions

Next, review your income and deductions based on your pay stub. Use your gross earnings and every amount deducted to see where your money goes. That’s before going to your bank account. You may have recently gone through changes in life events that impact your tax status. Examples are marriage and childbirth. If you have, check that they reflect as they should.

3. Calculate Net Income

Determine your take-home pay or the amount you receive after all the cuts. This figure is your real spending power. It has to be used as a base on which your budget will be developed.

4. Classify Expenses

Split your expenses into essential and non-essential expenditures. In other words, needs and wants. The expenses that cannot be easily cut down include shelter, utilities, food, and medical expenses. It can also include transportation, debt obligations, and child care. The less essential expenses are entertainment expenses, eating out, subscriptions, and any other leisure expenses.

5. Create Budget

Once you have all these components, you can make a budget. This will bring your spending in harmony with your actual earnings. Don’t think of budgeting as a way of restricting yourself. Instead, see it as strategic planning of the usage of resources at your disposal. It lets you have enough in the present as well as in the future.

The 50-30-20 Approach To Budgeting With Pay Stubs

Of all these budgeting techniques, the one that can greatly suit the pay stub data is the 50-30-20 rule. This approach just presents a layout of how your net income should be split. That’s mainly into three groups.

The first fifty percent of your net pay is spent on the necessities. These include housing, utilities, food, transportation, and necessary healthcare. It can also include minimum credit repayments and other essentials.

The next category is 30 percent, which can be for the wants. This is the amount that you can generally spend according to your discretion. Examples of such expenses include eating out, entertainment, recreation, and holidays. 

The last section is 20 percent of the money. It should go toward savings and payment of other debts. That’s beyond minimum payments. This part of your income goes towards saving for rainy days with emergency funds. You can also use it for retirement contributions, investments, and early payoff of debts.

For instance, let’s say your pay stub shows a monthly net income of $4,000. Here’s how it would be shared:

• $2,000 for essential expenses (50%)

• $1,200 for discretionary spending (30%)

• $800 for savings and debt repayment (20%)

Thus, it is possible to achieve both a great structure and flexibility at the same time. Your expenditure listed under the essentials can amount to more than half of your net income. If that’s the case, it is the time to either cut on the expenses or earn more. 

On the other hand, you may be below the 50% mark on essentials. Then, you should be able to allocate the remaining percentage to savings or paying an existing debt.

For the first-timers, it might be easier to go with the 80-20 rule. In this method, 20 percent of the net income is saved immediately upon receipt of the pay. Usually, they do this through auto-debit. Then, the balance of 80 percent is spent on various expenditures. It can be considered the method that implements the well-known phrase “pay yourself first.” The majority of financial advisors use this.

The Bottom Line

Using pay stubs for tracking finances can help you stay in control of your finances. As a financial planning tool, you use it to make smart decisions on spending and saving. You can also use it to work towards your financial goals. Keep in mind that it’s not a one-time procedure but a constant process. You always have to review your pay stubs and plan ahead. Over time, this practice will help you change your approach to your finances.

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