Paychecks & Debt

By Gwendolyn Beck April 8, 2013 06:00 AM
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Paychecks & Debt

Do you ever wonder where your money goes? Seems like salaries are so much higher than take home pay and it’s such a tragedy. The following is excerpt from the novel,“Flirting with Finance,” which explains (in a very fun way) what is really going on with your paycheck and more…

My first paycheck shocked me. My humongous salary had been reduced to a pittance. Sure, everyone said New York City taxes were high, but without so much as a wham-bam-thank you-ma’am, 40 percent of my income had been nipped.   How would I pay rent and buy that gorgeous dress and shoes for my date with Alan tomorrow night?
I had no choice. I would simply have to open a Bloomingdale’s account and charge the outfit. After all, Alan mentioned meeting his parents for the Thanksgiving holiday. I sensed commitment on the horizon. I had to take drastic measures.
Have you ever noticed when you’re making a wrong decision, some little voice pops into your head as warning? The voice of reason for me became Grandpa Wallace. His voice echoed, “No debt! Only live off what you earn!”
Of course, his sage advice conflicted with my raw desire to look beautiful for Alan. I slapped an imaginary hand over Grandpa Wallace’s mouth. Alan was far more important than accruing a smidgeon of debt.
I tossed my paycheck into the drawer. A girl had to do what a girl had to do. Mistake number two.
Each time I opened the drawer those little details along the bottom of my paycheck harassed me. I finally took the paltry stipend from the drawer and examined it closer. What did FICA mean, anyway? Why did they take $80.42 for city tax and $185.52 for state tax? And, $677.08 for Federal tax—were they kidding? Medicare, I understood, only $39.27, but Social Security irritated like a bad thong: $167.97! I am only twenty two years old for heaven’s sake! That left me with $1558.07 net and rent alone costs me $1050 per month. Did the government really get almost half my money for taxes?
So, let’s see . . .

• Earning, Regular Earnings or Gross Pay all mean the same thing: how much you made in that pay period.
• Federal Tax or Federal Withholding is the amount that goes to the Federal Government and is used for services such as the armed forces, highways, FBI, CIA, etc. This amount is determined as a percentage of your total expected yearly earnings and the number of deductions you claimed on your W-4 form.
• Social Security Tax, or in some cases OASDI Tax (Old Age, Survivors and Disability Insurance), is a government fund used to help people during their retirement. The good news is: our time will come and you can collect too.
• Medicare is a federal health program for people over 65; everyone pays in when they are young and reaps the benefits when they’re older.
• FICA, Federal Insurance Contributions Act tax (okay, pay attention here) is a combination of a 6.2% social security tax and a 1.45% Medicare tax. The social security tax is assessed on wages up to $87,000; the Medicare tax is assessed on all wages.
• State and City Taxes can be steep depending on where you live, and, are used to pay for infrastructure such as water and sewer, schools, roads and the ever helpful State Troopers.
• Net Pay: you get to keep this. Remember. Don’t spend it all in once place.

And, next month, I’ll have to pay $138.03 for medical and dental insurance. I needed a latte. A hot bath. Anything to relieve the knot rising in my chest. I wished my tiny salary would stop staring back at me. So, what if that Stella McCartney dress and Jimmy Choo shoes cost $1269 of my $1558.07 income? My career promised plenty of paychecks ahead. The money would come. I was sure of it.
I burst into the apartment, new outfit in tow. Parker’s eyes lit up when they fell on the clothes. She gushed over my hot dress, and then said I’d look good in a burlap bag and didn’t need to spend a lot of money on clothes. In the same heartbeat, she motioned to a stack of envelopes on my bed.
“I hope there’s enough left in your paycheck. I need the money for those bills.”
Guilt burst my bubble like a stiletto heel. I slapped my forehead. All of this cash juggling was proving to be a major hassle. Common sense urged I ask Parker for help to put my financial situation in order, but the thought died before reaching my mouth. I just needed this one date to be spectacular. I’d work out the costs later.
The next day at lunch I barreled into my bank’s local branch determined to do what I promised myself not to do: obtain a major credit card. Much more confident with the process, I sought out an account manager. A lovely woman helped me.
I said, “I need a credit card.”
She typed my account information into the computer.
“Well, Miss Davis, with your account, if you want a credit card, we have one with zero percent interest for the first year, no annual fee, and you can earn mileage.”

TIP: Before you get a credit card, check out the applications on the internet, it’s worth your time to be clear on the small print. Most credit card companies reserve the right to change the interest rate at any time, and change the contract if your payment doesn’t arrive in time. Pay off the balance each month if you can…credit cards are not a smart way to utilize your money.

Okay, it only had zero percent interest for the first twelve billing cycles (one year), and then, holy smokes. Did it say they would charge 21.24% on purchases depending on my credit rating?! With Grandpa Wallace’s advice ringing in my head “don’t go into debt,” I knew this was a major mistake. But, what else could I do? I promised myself to stick with my ATM debit card as much as possible and avoid going into debt.
I would only use the credit card for emergencies. I had a full year of no interest – so I have to keep up with my purchases. But, did I want to incur 21.24% on outstanding purchases? Heavens, no! I’d pay the balance each month and then get rid of the card after the first year. Period. I prided myself that I thought to ask, “Do you have a credit card that charges less interest after the first twelve months?”
She shook her head. “With your credit rating and deposit amount, I’m afraid not.”
“What is my credit rating?” I wondered aloud.
“Looks like 723.”
“How is that determined and can I check my report to see if it’s accurate?”
“Sure” She nodded, and took a brochure out of her drawer. “The Fair Credit Reporting Act requires the three consumer credit reporting agencies, Experian, Equifax and TransUnion to provide you with a free credit report, at your request, every 12 months. There’s a central website or you can call (877) 322-8228 and go from there. If you want more information just go to and the website outlines all the ‘facts for consumers’. No need to spend your hard earned dollars for a credit report – this information is free! And, FICO scores come from this information.
I said, “Thanks so much for the help. And, I will take the Visa.”
Ah, the price of freedom. The ultimate test of self-discipline.

Gwendolyn Beck started her finance career on the bond trading floor. She then moved to stocks and IPO with Morgan Stanley and personal financial planning with Wachovia. She wrote “Flirting with Finance”, a fictional novel, for a fun way for women to learn about finance through all the relationships and events we may have in our lives. “Flirting with Finance” is available through Barnes & Noble. You can contact Gwendolyn at