When you earn a salary, your take-home pay feels largely out of your control. However well you perform, your boss has already decided what you’ll receive for the year. All you have to look forward to is your annual raise and maybe a year-end bonus… which was just a $50 gift card to Starbucks last year.
Fortunately, there are lots of ways to save more money with your salary that don’t depend on kissing up to your boss. Here are some powerful strategies that you can use to boost your savings, even if your salary is set in stone.
Optimize Your Tax Strategy
If someone asked you to describe your tax avoidance (not evasion) strategy, would you be able to give them an answer?
Many employees have a bad habit of turning a blind eye to taxes. After all, it’s automatically taken out of your paycheck, so you usually don’t feel the same pain that independent contractors do at tax deadlines. But, like most conveniences, that nonchalance is probably costing you money.
Reassess Your Withholding
When you filled out your paperwork as a new hire, your employer had you decide how much should be withheld from your paycheck. If you’re getting a tax refund each year, you may be withholding too much.
A refund is the equivalent of a loan that you gave to the government for the tax year. But (except in 2020) you get zero interest on that money when they return it to you.
The average federal tax refund was almost $3,000 in 2018. When you add in an additional state refund, that’s a lot of money every year that you should be using to reduce your debts or earn interest income.
Contribute to Tax-Advantaged Accounts
If you’re having difficulty staying disciplined with your spending, consider setting up an automatic split of your paycheck to help you contribute to tax-advantaged accounts.
You can work with your employer to put part of your monthly earnings into a 401(k), another part into a savings account, and then send the rest to your checking account for spending.
When choosing a tax-advantaged account, try to prioritize these four:
- Individual Retirement Account (IRA)
- Health Savings Account (HSA)
- 529 Plan (Education plans)
Each of these accounts lets you lower your adjusted gross income and defer paying taxes until you make withdrawals for retirement, medical expenses, or education costs.
Note: Your 401(k) and IRA function similarly, and your income and filing status will determine whether you can claim a deduction for both. While it’s still beneficial to let your investments grow tax-free, there’s a lot to consider regarding IRA contributions when you or your spouse are already covered by an employer-sponsored plan.
Take Advantage of Tax Credits and Deductions
Credits are an often underappreciated tax opportunity. If you’re earning a salary, you may be entitled to take tax credits that can save you thousands of dollars each year. Some of them can even earn you money if they reduce your tax liability below zero.
If you qualify for the full amount of the Earned Income Tax Credit and the Retirement Savings Contribution Credit, you’d save a combined $7,660 on your tax bill each year.
As for deductions, don’t make the mistake of thinking you can itemize and then fail to meet or exceed the standard deduction threshold.
We definitely don’t mean to discourage contributing to charities, but the potential tax break is probably not a good reason to donate your old t-shirts to Goodwill. If your itemized deductions don’t reach $12,400 in 2020, it won’t do you any good.
Leverage Your Employee Benefits
It usually costs employers somewhere between 25 and 40% more to employ their staff than the employee’s base salary, largely because of employee benefits.
While you’ll probably subscribe to some benefits automatically (like healthcare), there are a few that you might be missing out on.
Get the Company Match
Remember when we mentioned how powerful a 401(k) can be in reducing your tax bill? It gets better. Employers will often also match all or part of your contributions to your 401(k) up to something like 6% of your salary.
If you’re spreading out your retirement savings between different accounts, make sure that you consolidate at least enough in your 401(k) to get the full match. It’s literally free money. And it’s often equivalent to receiving an additional raise each year.
Take Advantage of any Equity Compensation
Equity compensation has become an increasingly popular trend lately, especially in startup companies. There are a few different variations. Some are negotiated individually during the hiring process, but others are often available to the whole company.
For example, many companies allow you to purchase company stock at a discount (something like 15%) on a quarterly or annual schedule. Even if you were to buy company stock using the discount and then sell it immediately, that would be like getting a guaranteed 15% return, when the stock market averages only roughly 10% over time.
Get Your Reimbursements
Every company handbook includes a section for an expense reimbursement policy. Sometimes this might be just for standard expenses you incur while doing business, but there are often opportunities that you may not have noticed.
Find out what provisions your company has for things like:
- Late-night meals at the office during busy periods
- MBA or graduate school support
- Home office equipment stipends
And if your line of work requires special certifications, your company will probably offer to help you with things like licensing fees and continuing education.
How’d We Do?
We understand how difficult it can be to save money from your salary sometimes, but hopefully, you now have a few more strategies you can implement.
Did we miss anything? Are you going to reassess your tax planning or start looking for your employer’s education stipend?
Let us know in the comments below!