Episode 3 – Analyzing your income
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. This week we’re talking about analyzing your income and kind of looking at your paystubs, which is always something good to do from time to time.
I think a lot of us don’t typically look at our paystubs until something happens where you notice that your paycheck is maybe a little less or a little more than it used to be, or your marriage status changed and you think, “oh, I have to… I need to change my tax status.”
But it’s good to look at it every once in a while, right?
Seth
Yeah. I think especially I know folks that I’ve worked with who will look at it when they work overtime or they’ll work at look at it, you know, at the end of the year because they’re trying to figure out some, you know, total they’re trying to preview their taxes or something like that. So they’ll look at the pay stub and see everything that happened over the course of the year.
There’s a lot of relevant information there, but I think a lot of it doesn’t change month to month for a lot of people. And if you’re if you’re working a salaried position and it seems pretty steady and then you remember, “oh yeah, I got a pay raise” or “I hit a step increase after a year” or however long
Jenny
Yeah.
Seth
And you forget those things unless you actually go and look at the actual pay stub. I know I almost only look at it to see how much vacation I’m accruing. I don’t know why. It’s like I’m always just curious, trying to remember and I never remember how many hours of vacation I’ve accrued, but I feel like that’s the only place I can find that information.
Jenny
I had gotten married a couple of years ago and so obviously that was a decision whether I wanted to you know, it’s always a question of like, “are we going to file jointly or separately?” And, uh. Yeah. So just kind of making some of those, those tax decisions. So, then I was in there and looking at some of the donations that I was making the combined fund drive and then realized, “Oh yeah, that’s right.” “I’m still doing that.” I’m still making a monthly donation there. You know, it’s like $5 or $10. But I was like, Oh, that’s right.
Seth
It’s a lot of information like that. And I know we’ve recently at least state employees have recently had a number of different I can I guess that really applies to all public employees having, different mandatory sort of programs that have been added on as far as what it was that called, like the, the paid family medical leave, additional reductions and things like that …features benefits that we’re paying for and so our pay may fluctuate when, you know additional features come into play like that.
Jenny
I think I had this moment too last year where I was looking at it and going, Gosh, maybe I want to change my withholdings for the taxes at the end of the year because we always end up getting a pretty good chunk of change towards our taxes. And I was going through my budget and kind of doing some reassessing and maybe I could actually put that money away towards paying off some credit cards right now. So I kind of went in and, and changed my tax withholdings. So it was a little bit less.
Seth
Yeah, that’s interesting. I read a book…Oh, gosh. What was that called? The Financial Diaries or something like that. And it was talking about how it was a lot of things. But one of the things that they recognized is they were interviewing and following people for a number of years and all of their spending and some people were using their refund as a forced savings mechanism.
Their tax refund as a forced savings mechanism. Like if I had that extra $50 in my check every month, I’d probably just spend it. But if I let the government hold on to it and then I get it, then I’ll pay off a bill at the time or something like that. An interesting strategy. I think everybody approaches that differently, but it is something that you need to think about, if you…
In your example, if you get a refund of a couple hundred thousand dollars every year, that’s income that you should be making sure you’re taking into consideration in your budget.
Jenny
Yeah, exactly. I was like, well, you know that an extra like $200 a month could actually make a big difference that I could put towards credit card debt, things like that.
Seth
Especially public employees who are salaried employees. We just think about our pay being very steady. You know, I get the same pay every two weeks or same pay every twice a month or once a month, depending on what your pay cycle is. But you forget about those other sort of, more one off payments, tax returns, are a great one.
Seth
But they’re, you know, all sorts of random windfalls that people might get or, um, you know, over, we talked about working overtime and then there’s a lot of public employees I think about like folks who work at Department of Corrections or folks who work in Parks and Rec, where their work is actually much more seasonal and they might be getting a significant amount of pay in the summer or winter or during certain peak times and trying to figure out how to apply that to your budget over the course of the entire year.
Jenny
You were talking about earlier. That can be true for obviously park employees, but as well as teachers, that’s a huge part of being a teacher. Working in the public school system is having to plan for that little bit of extra time in the summer where you may not be making the same amount of income.
Seth
Yeah, that’s… my wife works in the public school system and I joke with her often about like she has no idea how much she gets paid. Like, because it’s just a set amount every month, but it’s like there’s not necessarily a correlation to, “well, you only worked a week or two in December, but you still get the same amount of pay.”
And a lot of folks still have…even, even within the school system they work, they might work as a coach or you know, extra assistant or pick up an extra assignment. You know, they might volunteer …not volunteer because they’re getting paid. Obviously they’re getting paid for it. But things like the science fair and things like that, they pick up some extra hours.
I ran into an old high school teacher last summer and we were talking about retirement because everybody, as soon as they find out that I work at the DRS, they want to start talking about retirement. But he was telling me about how he was the driver’s ed teacher for the school for decades. I mean, he is still the driver’s ed teacher, but he was when I was in school as well.
So he knows almost every student and I always thought, “man, that would be a rough job.” Like very scary, I imagine. But he did it because it was putting extra money in his pocket, allowed him to go on bigger vacations or, you know, put more towards his retirement or pay off debt. And he was looking for opportunities to, you know, make additional money within the environment that he was already working.
Jenny
And you had a personal example, right, where you were working a contract position.
Seth
Yeah. So I worked at Central Washington University for a couple of years and the contract was only a ten month contract every year, so it was great. I loved that I had July and August off every year, but my pay wasn’t spread out through the year. I didn’t get paid in July and August as well. And so I had to be really conscious of that setting money aside, saving money throughout the year so that I would have money to go on vacation in the summer when I had time.
I wasn’t just you know, stuck at home. I could still pay my bills. Um, and I think for some people that was a real, some people that I worked with, it was a real challenge. The first year going through that process of knowing, “Oh, it’s June, and my bank account is almost empty and I’m not going to get a check for a couple of months.”
And you know, you can find other opportunities possibly in the summer as well. Um, for, for picking up other work. I mean, that was something I didn’t take advantage of. I had all that time on my hands and I could have picked up another job during that time period. I would just go play.
Jenny
But yeah, it kind of works into what we were going to talk about, which was side hustles. Yeah, I think a lot of people now are looking at side hustles or either things on the Internet. Obviously, things like Lyft and Uber have become a huge side hustle for people to make a little bit of extra income. And I think it’s definitely worth looking into if you feel like you have a little bit of extra time or you feel like you’ve cut back on your budget as much as you can and you’ve asked for that extra raise and you’re still trying to figure out how to meet your goals.
It’s good to kind of consider what else you can do. Like I said, either online or in person.
Seth
I heard someone talk about this once. Uh, when people are sort analyzing their budget, oftentimes people just think about having a spending problem that they’re spending too much. But, this author she was talking about, sometimes you have an income problem, which is tough to acknowledge I think sometimes. Because your job is your job and like you said, you can look for opportunities for raises or promotional opportunities and sometimes looking for brand new jobs or looking for additional opportunities to increase your income is what people have to end up doing.
And that can be tough, as you said. I think the thing that’s really challenging is figure out the time piece “Is this is this worth my time?” You know, to find this other income. Maybe it is, maybe it isn’t. I think, sometimes we don’t realize. It’s hard to know how much our time is worth, and maybe that extra ten or $20 is worth it if you have credit card debt and you want to pay that down. But if you’re in a position that might be a little more financially stable, maybe it doesn’t feel like it, it isn’t worth it.
I don’t know. I think that’s a personal decision people have to think about.
Jenny
You had called it was an income problem. Yeah. Sometimes you look at your budget and go, “oh my gosh, I’ve cut back as much as I can, but I’m still not able to meet those particular goals.” And sometimes, you know, there’s obviously societal factors at hand. But yeah, I think it’s just kind of good to examine and being like, okay, “what are, what are some of the things I can do?” And side hustles are a great way to do that.
Seth
Yeah, I think it’s really about what other, what are all the different levers I can pull. Yeah. You know, we talked previously about the spending side of it and looking at, you know, opportunities to lower your spending sometimes is also directly tied to income. We have a colleague I don’t know if you’ve ever talked to her about this, but, she has a house and she rents out rooms in her house.
And in some ways you could say, well, that’s reducing your spending. She’s cutting down on her mortgage that way. But an alternative way to look at it is that she’s increasing her income by having this rental income. And so sometimes it’s the same, you know, it’s two sides of the same coin, really. And I think that’s one thing that, is worth thinking about.
Jenny
At least part of it is analyzing future income. In terms of the bigger picture, of course, you know what our job focuses on, which is retirement. Yeah. Which is, you know, again, starting to think about your income for retirement and how important that is to be able to put some money aside now so that you have that income later on down the road.
I always like to think of it, you know, like getting yourself a gift for your future self. I’m always thinking of like, you know “what’s going to help out future Jenny here.” You know?
Seth
That’s funny you say that that way. I was, I was just reading a book about, uh, I read a lot of personal finance, but right now because, because of the work we do. But the author is talking about like giving your future self a different name and picturing the person, because you are going to be a different person when you’re older and thinking about…Yeah, exactly… “what can I do to take care of that person?” and, “how are they going to feel about the decisions I’m making right now as well?”
I mean, it kind of goes both ways there. And I think one of the reasons that it’s, good to think about both your income and your spending, not just now, but also in retirement. It helps you think about what your retirement budget is going to be and what’s my retirement income going to be. Those are those are pieces that help with those life transitions because we have another colleague who oftentimes says that, “it’s all just a math equation and it’s just, you know, income minus expenses equals your savings.”
And it can really be that simple. But you have to know each part of that equation. And I know a lot of folks are afraid of math, but it is relatively straightforward.
Jenny
I was reading a book recently, too, that was also talking about those sort of simple equations. But just because it’s simple… I mean, it’s the same thing with diet and exercise, too. Even though we know we’re supposed to eat healthy and exercise, people don’t necessarily do it. So it’s simple in concept, but it’s another thing to actually take those little steps.
And so this book that I was reading that’s called The Slight Edge is about kind of doing those very small things everyday, like contributing to your retirement savings or going for a five minute walk that are going to make a difference for your, for your future self. And, to just increase your…how you experience life.
Seth
That’s a super good analogy because I think oftentimes when.. One of the reasons I think we both want to do this podcast is because oftentimes when people think about spending and income and budget, it feels restrictive in the same way that talking about a diet. And really oftentimes people who are… we’ve talked about people being successful with dieting.
It’s not dieting. It’s a lifestyle change…change your lifestyle design.
Jenny
Like your frame of reference, if you will.
Seth
Yeah. What habits are you going to set up that just become part of your normal life? Whether it’s, you know, walking 10 minutes a day or whether it’s putting 1% of your salary into DCP or whatever, those things that you can on some level automate. But then they become things that you’re… That you’re doing for your future self.
I really love that. I really, I think that’s a great way to think about… one of the things that I’ve been thinking about, the conversations we’ve been having and something that we haven’t talked about, we’ve kind of danced around is this sort of idea of deferred gratification and how that’s really because it goes back to restriction, it goes back to that diet of self control and not necessarily in a judgmental way.
I think oftentimes with these things we’re talking about, people want to do something different or they know the path they want to go on. And it’s they don’t quite know how to get there or there’s some sometimes derailed, you know. I know we talked a little bit about this on the spending conversation as well. Like if I’m bored or angry or frustrated, I oftentimes end up spending and some people end up eating.
And, you know, those things can end up being… not what you actually want to do. But in the moment, they end up being what you do. And so the more you can automate and put those things in place that don’t allow you to, make those poor decisions or the poor decisions might not have as much of an impact.
Jenny
Yeah. Like you really touched on automation and while we’re looking at …income and paystubs, like automating your savings … is great to but a lot of people talk about, which is basically you take the beauty of the Internet and the online banking and everything is: now I can set up a direct deposit from my checking account that takes out, you know, 100 and $200 and puts it over here into my savings account.
And it just happens automatically. And it is so amazing….And yeah, you can do that with your paycheck and I just do it through my bank account. But I’ve kind of gone through the last year now and gone from just having one checking account and one savings account to now having two other savings accounts that I’ve kind of put one aside for home improvement projects, and then one is just more for other sort of one for vacation and fun things and then one as an emergency savings kind of account.
And so I have all of my automatic deposits or whatever transfers, if you will, that go to those accounts every month. So then, then you don’t have to think about the savings. Yeah. And it’s automatically taken out of your…checking account. And so it’s, it’s just a really easy way for people to save.
Seth
So when you do that, do you see that initially as savings? Or do you see it as spending…see as future spending?
Jenny
That’s a good question…and I think of it more as savings.
Seth
Yes, I think that makes sense. It goes a little bit back to what we were talking about with income being lumpy, but spending is also lumpy. Like my, spending, when we’re talking about budgeting or we’re talking about what we spend money on, our savings can be inconsistent as well. That’s not necessarily a bad thing.
That, we’re saving and then we’re going to spend out of that savings. But I know sometimes people ask: “I just like I got my refund check or I got, you know, this windfall. What should I do with it? And how do I save it you know, versus spending it?” I’ve heard a lot of people who’ve had really good success with that sort of either multiple bank accounts or like sub accounts.
Like once again, with online banking, you have these options to set up a savings account: “that’s just going to be my emergency savings and I’m going to fill that bucket and I’m going to put, you know, a couple of hundred dollars there or a couple thousand dollars there and I’m going to get to a level and then I’m going to move on.”
And once that bucket is full, then I’ll do something else.
Jenny
Like you could either continue contributing… 50 to 100 dollars a month or you could say, “okay, now that I’ve reached my emergency savings goal, I’m going to put this money elsewhere.”
Seth
We’re probably getting ahead of topic this is probably something we’re going to talk about weeks from now, but it’s all connected too.
Jenny
Yeah, totally. I mean, I guess we can kind of circle back to…DCP is obviously a great way to save through the through the state. We could kind of talk about some of the sort of tax benefits of it, being able to save more and to put towards retirement.
Because I think a lot of people think: “I work for the state. I’m when I retire at 65, I’m going to give up my pension and then I’ll be set for life.” But one of the things we’ve started talking about at retirement and things like that is being able to look at…DRS has this great tool online.
That’s a Benefit Estimator where you can go in… And even for someone like myself who’s like in my mid thirties, I can go in and see kind of an estimate of what my retirement income will look like. And I didn’t really do that before I started working here even though I worked for the state for a couple of years before this and it was lower than I expected it would be.
Yeah. So it was kind of that moment of like, oh shoot, I need to… you know, I already had a Roth IRA, but it’s like, “okay, maybe I should actually put a little bit more into a Roth IRA or my DCP account.”
Seth
I love that tool for a number of different reasons. One, it’s just pretty straightforward. It’s using all your own data and it’s just…you can pick the dates, you can pick all the dates and kind of play around with them. But when I’ve talked to people who are thinking about retirement, one of my favorite things to do is use that tool.
“What if you quit today?” And I actually think that’s a great thing for a person in their thirties or forties to think about. What if I what if I just stopped working in public employment? What’s my pension going to be at 65? How much money can I count on from this bucket of savings that I’ve been doing for the last five or ten or 15 years?
Seth
“What is that going to look like going forward?” My wife and I actually just recently did this. I’m much geekier about retirement stuff, but it was like, let’s just look sign in to your online account and see what would what would your pension be now? What would it be if you worked another five years or ten years?
And for her, it was just a big eye opening moment of like, I don’t think I want to work more than 20 years. That’s the… beyond that it wasn’t going to have a huge impact on her pension. And it was just… not that we make all of our decisions…(though I sometimes feel like people at DRS do) we make all of our decisions based on what our pensions are going to be.
But I think those are things to consider. And oftentimes, if you haven’t used that tool, people just don’t have a way to know what is my income going to be? Yeah, what’s what’s that new income going to be in retirement… I think that’s like you said, it can be a little bit eye opening that it’s not maybe as much as you expected.
Jenny
Definitely.
Seth
It’s funny, I actually sort of over the last day or two was thinking about…like I sort of wanted to skip this topic because, I mean, income is (we talked about this earlier, not today, but previously) about how income… money in general is a taboo subject. But I feel like income is even more taboo or like…it’s a big part of that.
Seth
I talk to a lot of my friends about retirement savings and investments just because of what I do and what they do. It’s just becomes a pretty common conversation. But I don’t think we’ve ever talked about how much we make.
Jenny
Like specific dollar numbers, right. Like, yeah.
Seth
And in some ways.
Jenny
Which is probably okay.
Seth
I think it is okay. But it can be helpful to provide context. If somebody is talking about how much money they’re investing in…well, yeah, maybe they’re making three or four times as much as you. And that’s… you shouldn’t be beating yourself up about it. Like, are you still making percentage donations?
Jenny
Yeah, I think that’s a huge part of it is perspective. And luckily they have a lot of tools online now. Like I think there’s this one called Glassdoor or something where you can look to see: “okay, my, this is my particular career. What are other people in my…in Washington State or in western Washington making for this particular job?”
And good to see…where you’re at. And I think that’s what can be kind of a downfall once people start looking into these like, you know, finance books and people are putting away, you know, X amount of dollars towards their retirement savings. And you might look at your budget and going, “oh, well, I that’s a lot.”
“That would be like a third of my budget,” or something. But, you know, it’s just it’s just about starting small and I think just kind of making those small little steps. Yeah. You kind of touched on percentage increase and I think that’s something we we talk a lot about with the DCP account where it’s like, okay, you can go in and say, “Yeah, I want to contribute like $120 a month” and you can just keep it steady.
Or what we recommend to a lot of people is, hey, you can go in and say, “I want to contribute 2% of my income or 3% of my income.” And THEN when you do end up getting that pay raise, then that automatically goes into your DCP account. It’s like the set it and forget it method.
Seth
Yeah. Well and that’s… I really like this strategy of starting with a percentage and then also thinking about like, oh, “I’m getting a 5% raise this year because I’ve got a promotion or I’m going up on the teacher pay scale” or whatever. Well, I’m at a 5% raise, but I’m going to put 2% of that into my DCP and then I’m going to save.
Jenny
That’s a good way to think about it. So if you’re getting a 5% raise, you’re putting 2% of that or more towards… maybe you increase your DCP contribution from, you know, 2% to 4% and then you just take whatever extra money to put towards, you know, vacation home improvement projects, your kids, whatever. Yeah.
Seth
It’s like it’s like you were talking about earlier. It’s like paying your future self that 2% you’re giving your future self that [money].
Sometimes I feel like our public employees…our pay raises (at least maybe I just don’t realize this). I know some people know when their anniversary date is, they know when those increases are happening. But because we don’t get paystubs mailed to us, we’re not …looking at it and seeing it all the time because our lives are so automated.
Now, sometimes I think we miss those opportunities. And…you set a reminder on your calendar every year. I heard this technique that somebody was using where it was like every month they were increasing their DCP 1%. It was just “I’m going to increase it 1% until I really notice it, until I’m really like, okay, that’s too much.”
“I need to back off of it.” And I think, yeah, those percentages… I like thinking about finances in general in terms of percentages: what percentage of my salary am I paying towards my car or my house? Because it helps put that a little bit more in context of instead of well, yeah, that person can afford something much more expensive.
Well they have a bigger salary. They’re putting the same percentage. I’m not necessarily falling behind. I guess it’s kind of that “keeping up with the Joneses” mentality, trying to get away from that in terms of absolute dollar amount.
Jenny
Yeah, I think it’s kind of like focusing on those goals. So I’ve actually started to do that now with my Roth IRA account. And so, I mean, I have a goal of I would eventually like to contribute like $500 a month, but I can’t afford that right now. So, you know, I started at a certain amount and I from something I saw online, but it was like, you know, you can just increase it by $10 a month.
So that’s what I’ve [done] it does take me a little bit more time to go into the account and change my … set it up as a reoccurring contribution. I have to change it from, you know, increase the dollar amount $10 every month. But at the same time, it’s that small little step that it’s “okay, I’m going to start here and I’m going to focus on this bigger goal by start making these small increases so that hopefully I won’t notice it too much over time.
Jenny
And then kind of yeah, like you said, sometimes you can get to that point of being like, okay, now I’m, I’m really at this point, okay, maybe I need to start a side hustle if I want to contribute more.
Seth
I love that though, because it also feels like a win every time.
Jenny
Okay, that’s the small win. I’m proud of myself for putting a little bit more towards my retirement savings, even if it’s only $10 more a month. Yeah, but I know that, further down the line, if I get a promotion or something, I can obviously put more in.
Seth
Well and it builds those habits like we were talking about earlier as well. It sort of helps change your mindset from: “what am I going to do with this money? [To] I have a strategy, I have a plan.”
Jenny
And I have a goal that I’m trying to get to. And I’m going to start with this little bottom stair down here and work my way up.
Seth
Yeah, that’s…I love the bottom stair. The first step on the ladder, you have to take that first step before you can take the next one. And if you try to jump four stairs at a time, you might smack your face really hard and then never want to do it again. [laughter]
Seth
And I think that can be what’s really tough about it.
[music outro]
Disclaimer
The Department of Retirement Systems provides this podcast as a public service, but it is neither a legal interpretation nor a statement of DRS policy. Reference to any specific product or entity does not constitute an endorsement or recommendation. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the views of DRS or any of its officials.
