Budget-Challenge Game Mini Lesson The Paycheck High School Financial Planning Program Lesson 3-3: Pay and Taxes Budget-Challenge Game Mini Lesson The Paycheck Display this slide as you prepare to introduce this lesson. Learning About Gross Pay, Payroll Deductions, and net pay ©2012 National Endowment for Financial Education | www.hsfpp.org

The Paycheck What is the difference between gross pay and net pay? ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

Gross and Net Pay Gross Pay – is the total amount of income earned (salaries, wages, bonuses) before payroll deductions. Net Pay (or Net Income)- the payment you receive after deductions have been subtracted from your paycheck. (also called: “Take-home pay”) ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

Payroll Deductions Deductions: Amounts Subtracted from Gross Pay Taxes: “The Big 4” (Involuntary or Mandatory) Federal Income Taxes State Income Taxes Medicare Tax (public insurance for those 65 or older) Social Security (worker contribution to cover retirement benefits and other security payouts) Other Deductions (VOLUNTARY) Retirement savings (401K Plan) Health Insurance, Dental Insurance, Vision Insurance Other (Charity, Stock Purchase Plans, etc.) Gross Pay less Deductions = Net Pay or “Take Home Pay” ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

High School Financial Planning Program Lesson 3-3: Pay and Taxes Kevin’s Paycheck Kevin is a valet. How much did Kevin earn? Last month he worked 60 hours at $6.50 an hour. How does this compare with what he actually takes home? Calculating Income Kevin’s Monthly Pay Regular Pay $ 390 + Tips $ 78 = Gross Pay $ 468 - Payroll Taxes $ 101 Other Deductions $ 21 Net Pay $ 346 Calculating Income Kevin’s Monthly Pay Regular Pay + Tips = Gross Pay - Payroll Taxes $ 77 Other Deductions Net Pay Student Guide, page 24 Before showing the students Activity 3.8, tell them to calculate how much Kevin earned and compare their answers with a neighbor. Ask the students if he will receive all of that money when he cashes his paycheck. When student responds that he won’t receive all of the earnings, ask for reasons why his actual “take-home pay” is less than what he earned. Reference the responses later in the lesson as you discuss payroll deductions. Wrap up this task by having the students complete Activity 3.8: Check it Out, either individually or as a whole class. Point out that “Net Pay” is the actual “take-home pay” that Kevin has available to use as he wishes for saving, investing, or spending. ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes ©2012 National Endowment for Financial Education | www.hsfpp.org

W-4: Withholding Allowance Certificate High School Financial Planning Program Lesson 3-3: Pay and Taxes W-4: Withholding Allowance Certificate Student Guide, pages 22-23 Read through the Student Guide text (page 22) with students. Make sure they understand the choices they have to make when filling out an IRS Employee’s Withholding Allowance Certificate (Form W-4). Explain that deciding what to claim for allowances is a financial decision they will make every time they fill out the form. What they record in lines 3, 5, 6, and 7 will impact the amount of federal income tax that is deducted from their gross pay. Guide students as they complete Activity 3.7: Get the W-4 Right. Note: Info Sheet: W-4 Form is provided for reference. Ideally, a worker should claim withholding allowances in such a way that a sufficient amount of taxes should be withheld throughout the year to avoid the need to come up with a big chunk of money to pay additional income taxes owed at the end of the year. Reversely, there should not be too much withheld so a large refund is received when filing taxes—this is money a person could have had in hand for saving, investing, or spending rather than having it held by the government during the year. (This is a good time to review how the time value of money applies in this situation if you have already covered the concept in Module 4: Investing.) Explanation: Most people who are single and have no children will claim either “0,” “1,” or “2” allowances on their W-4 form. With a higher number of allowances claimed, a lower amount of income taxes will be withheld from paychecks. Someone who expects to not owe any income tax, such as a student who works short-term in the summer, might claim “exempt” on the W-4 Certificate to increase the net pay received each paycheck rather than wait for a tax refund at the end of the year. However, an employee needs to make sure to have enough money to cover any taxes owed when taxes are due on April 15. The most convenient way to plan for tax payments is to pay a little at a time from each paycheck rather than all at once at the end of the year. ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes ©2012 National Endowment for Financial Education | www.hsfpp.org

W-4 Form The Form is used to determine the amount of income tax withheld for Federal and State Income Taxes You Claim “Allowances” on the Form for Each Person that Legally Relies on Your Paycheck Money Can claim 1 allowance for Single, 2 for Married Can claim 1 for each dependent (child & certain others) The more the number of allowances claimed, the less taxes withheld (and vice versa). Those with more allowances will pay less income taxes. As a student you can claim 1 or “exempt”. Exempt means that no income taxes will be deducted. You can claim less allowances than you are entitled to but not more. Law requires employers to have you submit a W-4 at the start of a job. You can submit a new W4 as often as you like. ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

Let’s Look at Employee Benefits ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

What is an Employee Benefit? Various non wage compensation provided to employees in addition to their salary or wage. These incentives retain talented people for a company. Examples: Group insurance Dental Health Life Disability protection Retirement (401K or 403B) Day care Tuition reimbursement Sick leave /vacation Benefits comprise an average of 25% of gross pay! ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes

Financial Decisions When Starting a Job High School Financial Planning Program Lesson 3-3: Pay and Taxes Financial Decisions When Starting a Job Income Tax Withholding (W4 Allowance Choice) How much income tax will be withheld from each paycheck? Employee Benefits Which insurance plan best fits your situation? What is cost/deduction? How much will you contribute to a retirement program (401-K)? How will your Net Pay Cover your Lifestyle? Will your net pay cover your spending plan (budget) and savings plan? Paycheck Deposit Choice Do you want to have your net pay electronically deposited to checking or do you want to receive the paper check and manually deposit? Student Guide, pages 22-23 Ask students to share their experiences about what paperwork they had to fill out when they started new jobs. Fill in gaps by explaining what documentation is often required of new hires, including proof of citizenship, emergency contact information, payroll preferences (i.e. deductions, automatic deposit option), insurance applications or waivers, employee policy/handbook acknowledgement, and in some states, a youth work permit. Point out financial decisions that will need to be addressed when accepting and starting a new job. As time allows, elaborate on these decisions or share personal stories about the decisions. ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes ©2012 National Endowment for Financial Education | www.hsfpp.org

Budget-Challenge Game Mini Lesson 401-K (Saving For Retirement) High School Financial Planning Program Lesson 3-3: Pay and Taxes Budget-Challenge Game Mini Lesson 401-K (Saving For Retirement) Display this slide as you prepare to introduce this lesson. 401K: The most popular way to save for retirement in the USA today! 401k savings + social security is the likely way you will fund your retirement ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes ©2012 National Endowment for Financial Education | www.hsfpp.org

The Traditional 401(K) A retirement plan sponsored by an employer (named after tax law 401-K) Allows employees to save for retirement through payroll deductions AND lower their taxable income by the amount saved. When money is withdrawn, taxes are then paid on the amount withdrawn. It is a “tax deferred” plan

The Roth 401(K) The traditional 401-K (previous slide) was signed into law in the 1970s. In the 1990’s a new version called the Roth 401-K was added by law. When money is saved, there is NO reduction in taxable income. However, when the money is withdrawn the withdrawals are not taxed. Neither the traditional and Roth 401-K are considered better than the other.

THE 401-K EMPLOYER MATCH Employers will often “match” a portion of your savings contribution. The “match” is expressed as a percentage of your contribution (25%, 50%, 100%, etc.) Essentially, it is free money from employer! Both the traditional and Roth 401-K can be matched. A 50% match up to 6% of your annual salary is a very typical match in a 401-K plan.

401-K EMPLOYER MATCH: An Example) Let's assume the employer matches 50% of employees’ 401-K contributions up to 6% of their annual salary. Let’s assume that an employee earns $100,000 per year and contributes 10% of their gross pay to a 401-K stock mutual fund. The matching results would be: $10,000 saved by the employee through payroll deductions $3,000 matched by the employer (which is 50% of $6,000, $6,000 is the maximum employee contribution matched in this example) $13,000 total savings: $10,000 by employee + $3,000 by employer

Other Key 401-K Points Savings can be invested in savings accounts, stocks, bonds, and other investments. Have to pay 10% penalty tax on amount of early withdrawals before age 59.5 (10% is in addition to regular income tax if Traditional 401K.) Early Withdrawal Exceptions with No 10% penalty: Used as Payment on Purchase of 1st home ($10K limit) If money is “rolled over” (transferred) to another employer’s 401K Plan If money is rolled over to an IRA (Individual Retirement Account)

Budget-Challenge Game You get a point for each dollar you save in your 401K. Consider saving at least 10% of your gross pay, which is the standard recommendation for those starting out in a career. And always save at least enough to capture the full company match!

Budget-Challenge Game Mini Lesson Credit Score and Credit Cards

Steps To A Great Credit Rating Significance of Your Credit Rating >Determines the interest rate you receive on car and home loans (interest rates quoted are only for those with highest credit ratings) >Determines if you will even be approved for a loan or credit card. Credit Rating: What is a Good Rating? >850 is the highest rating possible. 690 is the US median rating. >Many lenders require 760+ to obtain the best/lowest interest rate >Manage to a 760 or higher credit rating! >Check your “FICO” rating at least once per year (FICO Participants: Equifax, Experian, TransUnion) WWW.myfico.com and www.credit.com

Steps To A Great Credit Rating: Goal 760+ Pay your bills on time and don’t miss payments. Set up payment reminders! Even a few days late bill payments can lower rating. Avoid a write-off to a collection agency on a dispute (major hit!). Pay credit cards off in full before due date. High credit card balances, even if paid off on time, hurt credit score regardless of your gross income. Aim for a favorable “utilization ratio” (actual balance on all cards / credit limit on all cards). This is 30% of your overall overall score! Consider making an extra payment after a large credit card charge to keep the ratio below 20%. Be selective in adding new credit cards (10 point hit) and canceling cards (reduces utilization ratio). To get the best score have different types of credit (credit cards, auto loan, home loan, etc.) Check your credit score twice per year to understand and manage to a 760+

Credit Card Vocabulary Credit Limit- the maximum amount a credit card company allows someone to borrow on a single card. Example: $1,000 credit limit. Finance Fees or Interest: the cost of borrowing money. Amount charged by the credit card bank to the borrower for not paying back the new charges in full by the due date. Credit card interest rates are notoriously high (average 14% today). Pay off balance in full before the due date to avoid interest charges. Late Fee: an additional fee incurred if the credit card minimum payment is received after the due date. Credit card companies only require you to pay a minimum payment but pay in full! (They tempt you!) Minimum Payment: The smallest payment that you can make per month and still be considered “current” on your account. Credit Utilization Ratio: Percentage of available credit used. Total Balance Owed/Total Credit Limit. Keep under 20% for best credit rating.

Strategies for managing a credit card: 1- Manage your account activity and balance online daily. Best way to prevent fraud. 2- Monitor your utilization rate. Keep under 20%. 3- PAY ON TIME in Full… EVERY TIME! Consider automatic payment linked to your checking account. 4. Search for a card with no annual fee and good rewards.

Credit Cards Companies are in the Business to Make $$ How does a credit card company and bank make money? If the customer does not pay the balance IN FULL on the monthly bill by the due date, the customer will pay interest on unpaid balance. Pay in full! If a customer makes a late payment- past the due date, they will incur a late fee. The card may have an annual fee. Example: $95 The merchant must pays the credit card company every time you use the card. About 2% of charge.

Budget Challenge Credit Card Fees Are incurred 3 ways: 1- Not paying your bill on time (late fee charge) 2- Interest charged on unpaid balance if your balance is not paid in full 3- In the Budget-Challenge game, you get points subtracted if your credit card utilization ratio goes above 50%. Consider making an additional payment if needed to keep it lower than 50%

During the Budget Challenge….. Pay attention to bill due dates. Your credit card company is named: SURGE CREDIT The minimum payment is $15 each billing cycle ( a bad idea! Pay in full!) You may make multiple credit card payments throughout the month. You may want to do this if your utilization ratio goes over 50% and you have extra checking money to do so.

Budget-Challenge: Overdraft Protection When you choose your bank account you may choose an account that has overdraft protection. When you have ODP if you make a payment with a check and you do not have enough money in your account to cover the payment, your credit card will be charged with the money you have borrowed to cover the bill.

Budget-Challenge Game Mini Lesson Checking Accounts High School Financial Planning Program Lesson 3-3: Pay and Taxes Budget-Challenge Game Mini Lesson Checking Accounts Display this slide as you prepare to introduce this lesson. Choosing and Utilizing a Checking Account in the Game ©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes ©2012 National Endowment for Financial Education | www.hsfpp.org

Checking Accounts Purpose of a Checking Account >To pay your bills! (alternative to cash and credit cards) >Account where you deposit your paycheck’s net pay. “Direct deposit” means your employer wires your net pay to your account. Some checking accounts pay interest, but not all do! Some checking accounts require holding a minimum balance to either get interest or avoid a fee.

Not Sufficient Funds Fee (Bounced Check) and Returned Check Fee (Charged to Depositor of check) Occurs when you make a payment with a check but there is not enough money in your account to cover the entire amount of the check. The check will not “clear” (bounces) and your bank will charge you this NSF fee! Vendor that deposits your check is charged a “returned check fee” and the vendor will bill the charge to you.

Overdraft Protection (ODP)) It is protection from “overdrafting” your checking account or “bouncing a check” It is a cash advance from bank to cover bill payments taking your account “negative” when you do not have enough money in your account. In the Budget-Challenge game, overdrafts are charged to your credit card bill.

ODP Charges in Game Overdraft Service Fixed Fee: What the bank charges monthly to provide ODP Overdraft Service Per Use Fee: What the bank charges you each time you use the ODP.

More Fees! Per Check Fee: What you pay for every check you write. In the game, some checking account choices charge you $.50 for every check you write. Minimum Balance: A balance required in your account to be continuously maintained in order to keep the free check writing/overdraft services

More Fees! Below Minimum Balance Fee: What you pay (one time only) if you go below the minimum balance. Negative Balance Fee: What the bank charges you if your account goes below zero!

Interest? Checking Account Interest rate: The annual rate (expressed as %) at which you can earn interest (money) on the balance in your account. For example, if you leave $400 in your account and it earns 2% interest, you will earn $8 in interest per year or $.67 per month.

Budget Challenge Game: Checking Account Options