I’ve worked in payroll or HR for the past four years and during that time I’ve seen a lot poor financial decisions. Although I’m not supposed to give personal finance advice to employees, I have no such restrictions for you, lucky blog-reader. Below are some of the most common personal finance mistakes I see employees making with their paychecks.
Take Your Employer 401 (k) Match
Most employers will offer to match your 401 (k) contributions up to a certain point, but many employees will turn down the offer. This would be like your boss saying, “If you pay Future You 4% of your salary, we’ll give Future You the same amount of money,” and then you saying, “No thank you, I’d prefer to work into my late eighties.”
This makes zero sense, and yet people do it all the time. If your employer wants to give you money for your retirement, you should let them. Always contribute enough to your 401 (k) to receive the employer match.
[Pro Tip: If you don’t plan to stay at your current employer for very long, you may want to check out your company’s vesting schedule to see what makes sense for you to contribute. With most plans, the employer match doesn’t become “yours” until you’ve been with the company for a certain length of time.]
Contribute to Your HSA
In a high-deductible insurance plan, you essentially pay for all of your medical costs until you hit an annual limit (the “deductible”). High-deductible plans are risky because they leave you on the hook for most expenses up to the deductible, but they tend to come with a much lower monthly payment (the “premium”).
Fortunately, with most high-deductible plans, you’re allowed to contribute to a Health Savings Account (HSA), which is a tax-advantaged account you can use to pay for these expenses. The money comes out of your pay check tax-free, grows in the account tax-free, and is withdrawn to pay for medical expenses tax-free. That’s a lot of taxes you don’t have to pay.
The even better thing about HSAs is that they can function as a backup retirement account. The funds never “expire” and once you hit 65, you can withdraw money from your HSA for any reason and only pay taxes on the withdrawals (similar to a traditional 401 (k)).
So why do lots of people have risky, high-deductible insurance plans, but don’t put any money into their HSAs? I assume they’re either physically invincible or they enjoy paying income tax on medical expenses.
Don’t be like these people. If you have a high-deductible plan, you should put money in your HSA. If you’re lucky enough to never use it for a medical expense, you’ll end up with extra savings for your retirement, and with your impeccable health and longevity, you’ll need it.
Pay Attention to Your Tax Withholding
I’m pretty sure about 95% of employees don’t check on their tax withholding until April 14th, which can lead to angry phone calls to the payroll department from employees that under-withheld throughout the year.
Look, taxes are complicated and you should check on your withholding every few months. Make sure your employer is taking out the right amount from your checks so your tax refund is as close to zero as possible. If you overpay throughout the year (which some people do intentionally as a savings plan), you’re missing out on money that could be put to better use, like paying down debt. On the flip side, if you under pay, you could end up owing the government money during tax time.
Within reason, you can decide if you want to overpay or underpay throughout the year, but the important part is that it should be a conscious decision on your part. Your payroll clerk is not your personal tax accountant—it’s up to you to make sure the right amount is being withheld each paycheck.
What payroll mistakes do you see people making? Leave your answer in the comments.