Calculating Household Income FINANCIAL AWARENESS Budgeting Calculating Household Income Instructor PowerPoint Copyright © 2009, Thinking Media, a division of SAI Interactive, Inc. All rights reserved. The Career Ready 101 logo is a registered trademark and Career Ready 101 is a trademark of SAI Interactive, Inc.

Calculating Household Income First step in creating a budget - figuring out your household income. You need to know how much money you have coming in each month before you can plan what to spend it on and how much to spend. Calculating for one person is pretty easy. If more than one is in your home, calculate all of sources of income when developing a household budget.

Learning Objectives In this lesson, we will learn: sources of income to include in a budget, the difference between salaries and wages, the difference between gross earnings and net pay, how to read and interpret a payroll statement and how to calculate the total income for a household budget.

Sources of Household Income What income sources should be in your budget? When developing a budget: Identify sources of regular, monthly income that you can count on. Do not include income you’re not sure about. an end-of-year bonus sales commission overtime money from a yard sale.

Sources of Household Income Income you cannot count on: Bonus – company may decide to give no bonus. Commission payments - the big sale you are counting on may not materialize. Overtime - company may reduce or eliminate overtime hours. Yard sale - what if it rains and no one shows up? Although they may not be part of your budget, consider how to best use unplanned income.

Sources of Income Salaries or wages are the most common type of household income. Other sources of regular income could include: Interest income from bank accounts or investments, Social Security or other retirement payments, Rental income from property, Mileage reimbursements for use of your car for work, Child support payments, Disability payments for a household member or Unemployment benefits.

Employment Income: Salary & Wages Employment income is usually in the form of a salary or an hourly wage. Employee pay is based on either a salary or an hourly wage. Workers who are paid salaries are said to be exempt employees - they are exempt from minimum wage and overtime rules set by the Fair Labor Standards Act of 1938.

Employment Income: Salary & Wages Hourly workers are non-exempt – they must be paid:   at least the prevailing minimum hourly wage and for overtime work In the U.S., anything over 40 hours per week is considered overtime. Salaried workers: no minimum wage & no pay for overtime work.

Employment Income: Salary & Wages Salary - a periodic payment made to an employee usually a monthly salary or yearly salary. Example: a monthly salary may be $3,565.25 paid once per month, every two weeks or twice a month. If paid once per month, the yearly salary is the monthly amount multiplied by 12 months: $3,565.25 x 12 = $42,783.00. This amount is the gross salary, the amount earned before any deductions.

Employment Income: Salary & Wages Wage - compensation paid by the hour, half-day or full-day of work, but usually by the hour. Example - a welder earns $15.51 per hour. Other types of compensation: Paid by the number of pieces produced Paid a commission on a % of total sales made Salary plus commission. Example – garment worker paid by piece-rate.

Employment Income: Salary & Wages Calculate the yearly wage: Tony works as a welder for a construction company. His hourly wage is $15.51 and he works 40 hours per week. Tony gets a paid vacation each year. Tony expects to work the entire year.

Employment Income: Salary & Wages Use a calculator or pencil and paper. Question: What is Tony’s gross yearly wage? $16,130.40 $30,300 $32,260.80 D. $33,873.84 The correct answer is C - $32,260.80.

Employment Income: Salary & Wages Calculate Tony’s gross yearly wage: multiply his hourly wage times the number of hours per week he works then by the number of weeks in the year he is paid. Since Tony gets a paid vacation, he is paid for 52 weeks. $15.51 x 40 hours/week x 52 weeks = $32,260.80. Is this the amount Tony should use for his spending budget?

Payroll Deductions Knowing your yearly gross wage or salary is important, but how much of your earnings are deducted from your pay? The amount of money you earn after deductions is your net income. This is the income amount you need to base your budget on. To figure out your net monthly or yearly income, you need to know how to read your pay statement.

Payroll Statements Many employers use direct deposit to pay employees instead of printed checks. Direct deposit is an electronic transfer of money into a bank account. Employees who don’t have a bank account may be issued a payroll debit card instead of a check. Whether direct deposit or a printed check, you need to be able to read your payroll statement.

Payroll Statements Payroll statement is a form that: details your earnings, deductions and net income for a pay period is also called pay slip, pay stub or check stub. Payroll statements include: gross wages or salary paid for the pay period Federal, state and local taxes withheld Social Security and Medicare taxes medical, dental, disability or life insurance payments

Payroll Statement Payroll statements also include: union dues retirement contributions other deductions – parking uniform fees charitable giving year-to-date totals of earnings and deductions.

How to Read a Pay Statement Here are sections of a sample pay statement: Top section shows: Net Pay - $783.57 Begin/End date Date pay was issued General section shows: Employee information Job Title Pay Rate - $15.57 per hour

How to Read a Pay Statement The Paycheck Summary section includes: Gross and taxable gross earnings Total taxes deducted Total deductions Net Pay Year-to-Date (YTD) amounts

How to Read a Pay Statement Gross Earnings - the total amount of wages or salary earned during the pay period ($1,245.60). To calculate gross earnings – hourly wage x # hours worked (wage earners) or portion of annual salary earned during the pay period (salaried employees). Federal Taxable Gross - is the amount of gross earnings subject to federal taxes ($1,121.03).

How to Read a Pay Statement The next section details Pre-Tax Deductions – deductions from earnings before they are taxed. For example - employee parking, health insurance payments and 401(k) (retirement) are pre-tax deductions. Earnings paid for these are not included in federal taxes, but were deducted from Jane’s gross earnings. Jane & her employer do not have to pay withholding, Medicare or Soc. Sec. taxes on $124.57.

How to Read a Pay Statement After-Tax Deductions – deductions made from taxable gross earnings: credit union payment company retirement payment life insurance Money for these deductions is subject to federal taxes. Jane & her employer have to pay withholding, Medicare and Social Security on $174.76.

Pre-Tax Deductions Pre-tax deductions save you money! Jane’s 401(k) pre-tax deduction is an example of deferred compensation – earnings that are not taxed until she retires. A 401(k) is: a type of retirement account employers may match employee contributions Jane contributes $25 per pay period and the company matches 50% - $25 + $12.50 = $37.50

How to Read a Pay Statement Employer-Paid Benefits are things the company pays for you: FICA – Social Security tax health insurance 401(k) retirement life insurance Benefits can be as important as how much you are paid. Jane’s employer paid $324.49 in benefits!

How to Read a Pay Statement Earnings section shows detailed information on the money earned: # of hours worked during the pay period (regular hours and overtime), the pay rate, the amount earned for the pay period and year-to-date (YTD) amount earned. Jane worked 80 hours and had no overtime. Her overtime pay rate is $23.36 per hour. Her gross pay was $1,245.60.

How to Read a Pay Statement Taxes - shows details of federal FED Withholding – income taxes FED MED/ - Medicare tax FED OASD – Old Age, Survivors & Disability (Social Security tax). Jane paid $162.70 in federal taxes.

How to Read a Pay Statement Pay Distribution – information about how and what amount of pay was given to the employee. We can see that $783.57 (her net pay) was transferred by direct deposit into Jane’s checking account.

Use the Pay Statement to answer the question Use the Pay Statement to answer the question. Question How much net pay has Jane earned this year? $783.57 $1,567.14 $2,242.06 $2,491.20

How to Read a Pay Statement To solve: Find the section that has a heading for Net Pay. Find the row for the year-to-date (YTD) amount. Jane’s total net pay so far = $1,567.14, Answer B.

Calculating Household Income Jane’s net pay is the amount of money from her job that she has to spend on housing, transportation, food, utilities, clothing, entertainment and other expenses. If there are no other sources of income, Jane’s monthly budget should be based on the net pay she can expect each month.

Calculating Household Income Before you can create a household budget, you need to estimate your monthly household income. Household income is the total amount of money that members of the household can contribute towards paying monthly household expenses. Sources include: employment, rental income, unemployment insurance payments, social security or other retirement income, disability payments, etc.

Calculating Household Income Exercise Read the scenario: The Jackson family has decided to create a household budget to get a better handle on where their money is going. Mr. Jackson was recently laid off and is receiving unemployment benefits of $267.00 per week for the next 26 weeks. Mrs. Jackson works as a claims clerk for an insurance company. She is paid twice a month. Her gross pay is $1,172 and her net pay is $848 each pay period. Mrs. Jackson’s mother is retired and lives with the family. She receives $1,028 each month in social security benefits and a small pension of $256 each month. She contributes $400 each month to help with expenses in exchange for living with her daughter and son-in-law.

Calculating Household Income Exercise Use paper/pencil or a calculator to answer the question. Mr. Jackson was recently laid off. He will receive $267 per week in unemployment benefits for the next 26 weeks. Question What will Mr. Jackson’s total income be for the next 6 months? A. $1,602 B. $3,471 C. $6,942 D. $13,884

Calculating Household Income Exercise What information do we know? Mr. Jackson’s gets $267 per week in unemployment. He is eligible for 26 weeks. There are 26 weeks in six months (52 ÷ 2 = 26). To calculate his income, multiply his weekly unemployment amount by 26 weeks. $267 x 26 = $6,942

Calculating Household Income Exercise Mrs. Jackson works as a claims clerk for an insurance company. She is paid twice a month. Her gross pay is $1,172 and her net pay is $848 each pay period. Question How much income will Mrs. Jackson contribute to the household during the next 6 months? A. $10,176 B. $11,024 C. $14,064 D. $20,352

Calculating Household Income Exercise What information do we know? Mrs. Jackson is paid $1,172 in gross wages each pay period. Her net income is $848 each pay period. She is paid twice each month, so she has 12 pay To calculate his income, multiply her net pay by the number of pay periods in 6 months. $848 x 12 = $10,176

Calculating Household Income Exercise When calculating income, remember to use the net pay multiplied by the number of pay periods. Always use net income for budgeting purposes – this is the amount that is available to spend.

Calculating Household Income Exercise So far, we know that: Mr. Jackson’s income for the next 6 months is $6,942. Mrs. Jackson’s income for the next 6 months is $10,176.

Calculating Household Income Exercise Mrs. Jackson’s mother is retired and lives with the family. She receives $1,028 a month in social security and a monthly pension of $256. She contributes $400 a month to help with household expenses. Question What is the total household income available to the Jacksons to budget with? A. $17,118 B. $19,518 C. $21,006 D. $24,822

Calculating Household Income Exercise To solve, add up all of the income sources: Mr. Jackson’s unemployment = $6,942 Mrs. Jackson wages = $10,172 Contribution from mother-in-law = $400/mo. $6,942 + $10,172 + $2,400 = $19,518. Note: Unless they agree on a different amount, they should only include the $400 Mrs. Jackson’s mother contributes towards their budget.

Calculating Household Income Tips The first step in creating a budget is to determine how much money is coming into the household each month. Only include income you can count on receiving from month to month. Don’t include occasional income such as tax refunds or proceeds from a yard sale. If you do receive money you haven’t planned on getting, put it aside for emergencies.

Calculating Household Income Summary In this lesson, we learned: the sources of income to include in a budget, the difference between salaries and wages, the difference between gross earnings and net pay, how to read and interpret a payroll statement and how to calculate the total income to include in a household budget.

Calculating Household Income Topic Quiz Let see what you learned about calculating household income for a budget! You may want to have some paper and a pencil and/or a calculator available to figure your answers to the next 5 questions. Five Topic Quiz questions are shown in the next screens. The instructor may hand out a paper/pencil version of the quiz for students to record their answers on.

Calculating Household Income Quiz Question 1 The major difference between a salary and a wage is: A. Federal minimum wage and overtime laws that protect hourly workers do not apply to salaried workers. B. As a general rule, workers paid a salary earn more money than workers who are paid an hourly wage. C. Wage earners are exempt from the federal laws that govern minimum wage and overtime work. D. Hourly wage earners are not eligible for pre-tax deductions from their earnings, but salaried workers are. Correct answer is A.

Calculating Household Income Quiz Roderick works as an architectural draftsman for an engineering firm. His monthly salary is $3,204.17. After taxes and other deductions, he takes home $2,317.56. Question 2 The amount of money Roderick takes home each month is: A. gross earnings B. taxable gross earnings C. pre-tax earnings D. net pay Correct answer is D – net pay.

Calculating Household Income Quiz Roderick works as an architectural draftsman for an engineering firm. His monthly salary is $3,204.17. After taxes and other deductions, he takes home $2,317.56. His wife works as an electronics technician and earns $25.07 per hour. She works 37.5 hours each week and is paid every other week. Question 3 What is their gross income for 6 months? A. $31,446.64 B. $32,261.42 C. $43,668.27 D. $45,297.82 Correct answer is C – $43,668.27.

Calculating Household Income Quiz Use the pay statement to answer the question. Question 4 What is the total amount of taxes Jane paid so far this year? A. $162.70 B. $249.14 C. $325.40 D. $488.10 Correct answer is C – $325.40

Calculating Household Income Quiz LaTonya works two part-time jobs while attending college. She works 12 hours per week as a work-study student and is paid once a month. Her net pay is $289. On her second job, she works 16 hours each week at $7.25 per hour. Deductions from her weekly check total $22.10. Her husband works full-time and is paid every two weeks. His take home pay is $1,108. Question 5 What is the total household income they should include in a budget for the next 6 months? Correct answer is B – $18,579.40. A. $17,471.40 B. $18,579.40 C. $19,154.60 D. $19,579.40

Calculating Household Income FINANCIAL AWARENESS Budgeting Calculating Household Income END OF LESSON