Financial Literacy In The Bay Area: Tax Inclusive Budgeting

Financial Literacy In The Bay Area: Tax Inclusive Budgeting

Do you know the difference between gross income and net income? 

Gross income is the amount of money you make before taxes, and net income is the amount of money you make after taxes. For budgeting and personal finance purposes, net income is all that matters: it’s the amount of money you may have to save, spend, and invest. For this reason, you may also refer to your net income as your take-home pay.

If you’re like most people, your employer will withhold funds for taxes on your behalf before giving you your paycheck, meaning you only ever see the net amount. It may feel like you’re living on way less than the salary amount you agreed to when you signed your employment papers.

So, how can you plan and budget for taxes? Start right away with this Tax Planning Worksheet or this Budget Worksheet.

Providing affordable financial planning in the Bay Area, here’s what I believe you should know about tax-inclusive budgeting.

What is Tax-Inclusive Budgeting?

Tax-inclusive budgeting is subtracting the amount you will pay in taxes from your gross income, so you know how much money you may have to spend. This resulting figure is the amount of money you may have to work with—your take-home pay.

To find your take-home pay, the equation looks like this:

Gross income (salary) – Taxes (state and federal) = Net income (take-home pay)

So, if you earn $100,000 per year and pay 20% in taxes, your net income is $80,000 ($100,000 – $20,000).

Depending on your income level, your combined state and federal tax rate could reach as high as 50%. While this is only the case for the very highest earners in certain states, the average American still pays an effective tax rate of around 15% each year, according to WhiteHouse.Gov

Over the course of your lifetime, there will likely only be a few things on which you spend more money than taxes.

Once you know your net income, you can budget appropriately, dividing your take-home pay between fixed costs (housing, transportation, food, etc.), savings, investing, and discretionary spending (clothes, shoes, entertainment, etc.).

Remember, your employer is likely withholding taxes on your behalf, so your paycheck amounts to less than your monthly salary. On top of tax withholdings, your employer may be automatically deducting health insurance premiums, retirement contributions, and/or other benefits from your paycheck. 

Check with your HR department to set the amount of all of your deductions, including tax withholdings.

What does Tax-Inclusive Budgeting Look Like?

Enjoying city life. Handsome young man having coffee to go. NewFailing to account for taxes is a common mistake to make, but it is not without consequence. Spending a few hundred dollars more per month than you make can add up to thousands of dollars over the course of a year. To make matters worse, overspending is often funded by credit with high-interest rates, creating an ever-increasing debt snowball.

Follow a simple budgeting process:

  1. Figure out your after-tax income
  2. Choose a budgeting plan
  3. Track your progress
  4. Automate your savings
  5. Practice budget management

As a rule of thumb for a simple budgeting plan, you can try the 50/30/20 method:

  • Save up to 50% of your income for basic needs
  • Save 30% of your income for wants
  • Save 20% of your income for savings and debt repayment

Over time, if you follow this framework, “it may be possible to have manageable debt, the ability to indulge on occasion, and savings to pay unexpected expenses and enjoy a comfortable retirement.

3 Tips for Tax-Inclusive Budgeting

As an independent financial advisor in Newark, CA, here are three tips I offer to get you started with tax-inclusive budgeting:

1. Find your state and federal tax brackets

Fortunately, the IRS makes it easy for us to determine how much we’ll owe them—how generous of them, right?

  • Are you single, married, filing jointly, or the head of household? 
  • How much is your annual income? 
  • What state do you live in? 

To find your state and federal tax brackets, that’s all you need to know.

  • For 2021 and 2022, find your federal income tax bracket here
  • For your state, Google “(State) income tax brackets (2021 or 2022).”
  • For Californians, here are your California tax brackets.

2. Plan ahead

You may end up with a tax bill you can’t afford if you wait until April to find out how much you owe for the prior year.

Instead, estimate how much you’ll need to pay at the beginning of the year and withhold accordingly throughout the year. You may need to set aside money to cover what you’ll owe. If you’re self-employed, own a business, or have a side hustle, this step is crucial as you won’t have an employer withholding on your behalf.

The IRS doesn’t give much leniency to those unable to pay and has various tools to enforce and collect payment – don’t put yourself in that situation.

3. Hire an affordable financial planner

Gone are the days when financial planners only work with retirees with millions of dollars in investable assets. Today, you can schedule a personal, full-service consultation with your own financial advisor, regardless of your financial situation.

Take the guesswork out of your financial planning and budgeting. Let a professional create a plan that guides you toward where you want to go. Discover some best practices and how you should be implementing them in your own life. 

Establish a relationship with your very own go-to money professional. If you live in the Bay Area (or happen to be in Fremont, California), schedule a meeting with us today.

The Bottom Line

Tax income concept. Accountant filling formWhether you budget for taxes or don’t, you will pay them—the IRS will make sure of that.

Not including taxes in your budgeting is a mistake that has the potential to snowball into thousands of dollars of debt. Having a proper understanding of your tax rates and budgeting accordingly is crucial to pursuing health in your finances.

If you decide to take your financial situation to the next level, booking a meeting with a financial planner to create a tailored plan to help you meet your money goals can be a shortcut to the stress-free life you’ve been dreaming about.

Tax-inclusive budgeting isn’t optional—it’s a necessity. 

Humanity Wealth Advisors conveniently offers financial literacy in the Bay area for financial literacy month and beyond.

Humanity Wealth Advisors and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.

At Humanity Wealth, we cater to the underserved population. I’m honored to provide this financial advice to the masses. Here, you have access to professional resources, videos, eBooks, and educational material needed to pursue your money goals, no matter where you stand financially.

Use this Budget Worksheet to get better organized with your finances.

Call us and ask all the questions! Our team looks forward to supporting you well into the future.

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More about the author: Harry Sherdil

As a fiduciary financial advisor at an independent firm, Harry strives to offer the same resources, tools, and research as bigger firms while serving new and existing clients' best interests.