What Do You Really Take Home?
An Introduction to Financial Literacy Month
With Halloween over and done, many households are now focusing all of their energy preparing for Christmas. I noticed the Christmas decorations already being displayed at my neighbourhood Costco three weeks ago. THREE WEEKS AGO!!!!! Halloween may or may not be a costly holiday; however, it can be an exhausting holiday. For me, it is a time to get dressed up and hit the pub to join other adults pretending to be kids again.
I truly believe any DJ that doesn’t play Thriller by Michael Jackson and Monster Mash by Bobby Pickett should be fined $1,000.
This year I dressed up as a blind ref in honour of the poor handball call during the post season Vancouver Whitecaps match (which cost them their chance to enter the playoffs). Today being the first day of November, it is the official start of Financial Literacy Month. Our goal this year is to provide content throughout the month of November. Unfortunately, there are larger organizations with far greater resources that could do more during this time; therefore, we feel we need to set the standard moving foreword.
The landscape of personal finance is constantly evolving with the continuous integration of technology and the introduction of new dynamic financial products. The decision process to make everyday purchases is slowly becoming subconscious. The unfortunate reality for many is that it is almost impossible to determine one’s purchasing power. By purchasing power, I mean one’s preceived flexibility with their discretionary spending. Whether you are employed or self-employed, knowing your take home pay is crucial.
Where does someone begin concluding his or her current purchasing power?
It all starts from your primary source of income. One roadblock I often come across, in helping others, is dealing with an individual’s inability to determine the difference between their Gross Income and Net Income. An example would be someone who earns $36,000 per year and they assume they are able to spend $3,000 per month (they simply divided $36,000 by 12 months). In the days before Lines of Credits and Credit Cards, this problem wouldn’t exist.
Because households would know exactly what entered their bank account and that was all they had to survive month to month. We live in an age where many use their credit cards more than their debit cards and/or cash for daily purchases. For those who don’t review their balances owing on their monthly statement(s) (or view their online statements), consumer debt can escalate to the point of no return. Therefore, it is important to know how much you take home (the amount that gets deposited into your bank).
The average employee is deducted 15.51% to 22.03% in income taxes (depending which Province you live in), on top of that there are CPP & Employment Insurance premiums. These amounts are being deducted from our Gross Income, which becomes our Net Income (take home pay). So when asked how much we make, why are we quick to say our Gross Income and not our Net Income? Sure, there are tax benefits that can lead to taxable income being recovered at year-end; however, the income recaptured through tax refunds should be secondary especially when creating a budget and managing one’s finances.
I created a comic to illustrate the difference between Gross Income and Net Income in the perspective of a fisherman. As an accountant, you can already assume that my sense of humour is pretty dry; however, this is an effective trick to determine the difference between gross and net.
Start acknowledging what you bring home versus creating budgets based on your Gross Income. The past few weeks have been very unfortunate for a few friends of mine, as they were recently let go from their jobs. Each of them did not foresee their termination (all without cause), now they are aggressively looking for new jobs living off whatever savings they have accumulated.
A solid financial plan in today’s world could be dire for your well-being.
The average income taxes was calculated based on the 2014 average employee salary ($48,250) that originated in an article posted on Workopolis (READ MORE), which is based on the weekly earnings generated by Stats Canada (VIEW HERE). To get the average tax rates by province, Ernst & Young has a great tax calculator, enter the average salary to see the range of taxes payable by Province (VIEW HERE). Also enter your salary to see how much you should be paying in income taxes.