What Your Pay Check Can Teach You About Money

I heard a very interesting story of a young person who deposited their first pay check and went home thinking there was an error because there was more money than she was expecting. When she first looked at the information, she interpreted the section on deductions to be the money that was to be deposited rather than the amount that was subtracted from the full or gross amount of the pay.

Of course, she was pleasantly surprised to find that the larger amount was hers to keep.  However, this story is so significant to me because I frequently hear of companies wanting to have financial professionals come to help their young employees make investment decisions. The reality is that what they need is the simple, day-to-day education on simple basics – like how to interpret a pay check, how to set up bank accounts, how to spend money and how to track money coming in and money going out (income and expenses).

When you assume that a young person needs help picking mutual funds for their retirement, you also miss the key aspect of their more immediate needs – like housing, food, transportation and understanding of basic finances.

Reading a pay check is one of those things that is assumed, and one that can have a significant impact on current and long-term finances.  I know another story where the medical deduction was missed from a pay check and rather than it being listed than left blank it simply did not appear anywhere on the pay stub. You can imagine the implications of expecting that you have your medical insurance covered because it has been deducted from your pay check in the past only to find out that it hadn’t been paid.

The employer told the employee that it was his responsibility to know that the medical insurance premium was not being deducted.  Fortunately for this employee, his wife had a solid financial background and was able to find the right person in the organization to help straighten the situation around with only minor complications.  However, if you don’t know what you don’t know, you won’t know until it’s too late that there has been an error, or that you’ve missed an opportunity, were misunderstood or are completely out of luck!


Focus on Income

Are you focused on your net worth or your income and expenses? If you are focused on income producing assets, your net worth will take care of itself if you also keep an eye on expenses. Your plan is to develop assets that provide income; to leverage any debt to increase your income producing assets; to maintain control over your expenses so you can build these income-producing assets. Your plan is not to build a net worth that needs to be supported by your income. Your plan is not to focus on the difference between your income and expenses. Your plan is to build a net worth that produces ongoing income.

Why? Increasing your income will increase your net worth, which will increase your income, which will increase your net worth, etc. Income and net worth are connected and if you miss this connection, then there will be a disconnect between current spending and overall financial well-being and between accumulated assets, net worth and day-to-day living.

What Are Your Sources of Income?

Within a household, you need to have multiple sources of income as well as multiple assets to build true financial security. If both income earners work for the same company or in the same industry, there is very little security in that.

How can you minimize this risk? Like investing, where one risk minimization strategy is to diversify among industries, type of investment, return, etc., the same is true for income within a family. For planning purposes, it’s best to have income into your home from different industries, different types of income (such as employment, self-employed, business, or investment), different payment frequency, etc. This way you cover your risk of income loss. Ideally you will want to ensure you have income that will continue regardless of whether or not you work to receive it. For example: investment income, royalty income, disability insurance, etc.