The Finatical

Week of June 28th, 2021 - Earning Money Tips, Supply Disruptions, Interest Rates

Finatic

Aditya Bagga

, and

Sidh Aneja

Jun 30, 2021

1 - Understand Your Paycheck

Gross income is what you earn and net income is what you take home after deducting taxes and other federal expenses. It is thus important to know your net income before you make any decisions that can affect your finances. There are several deductions that are made to your paycheck. Some of them are listed below:

Federal Taxes - Income, Social Security, Medicare, and FICA Taxes
State Taxes (Most States) - Income and Disability Taxes
Local Taxes (Uncommon) - Income Taxes
Employee Benefits - Health and Life Insurance

Deductions can be classified into three types:

Pre-Tax Deductions - A pre-tax deduction is money that is taken out of your gross pay before any taxes are withheld from your paycheck. Pre-tax deductions reduce your taxable income, which means you will most likely owe less taxes. This includes retirement contributions, college savings plans, health insurance etc.
Federal, State and Local Taxes - These taxes are withheld from your pay on each paycheck.
Post-Tax Deductions - A post-tax deduction is money that is taken out of your paycheck after all applicable taxes have been withheld. For example, union dues, donations, retirement funds etc.

Some of the post-tax deductions are voluntary deductions and you can choose to include or exclude them at your will. Understanding your paycheck can allow you to control a part of your earnings and to also ensure you don’t spend money you don’t have.

2 - Paying Your Taxes

It is important to know how taxes work even before you receive your first paycheck. Calculating and filing your taxes is more simple than you think. There are several online calculators that will tell you exactly what you will be left with after paying your taxes.

There are three types of taxes:

Progressive - A progressive tax system favours low-income individuals and places a higher burden on the high-income population. Marginal tax rates are much higher, which means that as your income increases you are liable to pay more tax, reducing income inequality.
- US Federal Income Taxes follow a progressive tax system and there are seven tax brackets or marginal tax rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
Proportional - This is known as a flat tax as everyone pays the same proportion of their income as tax, no matter their income.
- US Payroll Taxes (FICA) are proportional at a rate of 7.65%
Regressive - This tax system is based on a flat percentage on product and goods regardless of buyer’s income. This places a much higher burden on the low-income population since the lower your income, the higher percentage of your income goes to taxes
- US Property Taxes are regressive since they tax the house not the earner purchasing the house

If you have the time to do your taxes yourself, there is absolutely no need to hire a tax professional. Here are the steps on how to file your tax returns:

Gather your paperwork, including:
- A W-2 form from each employer.
- Other earning and interest statements (1099 and 1099-INT forms).
- Receipts for charitable donations and medical and business expenses if you are itemizing your return.
Choose your filing status. Filing status is based on whether you're married. The percentage you pay toward household expenses also affects your filing status.
Decide how you want to file your taxes. The IRS recommends using tax preparation software to e-file for the easiest and most accurate returns.
Determine if you are taking the standard deduction or itemizing your return.
If you owe money, learn how to make a tax payment, including applying for a payment plan.

If you received unemployment benefits during the pandemic, then rest assured that you do not have to file tax returns on those benefits. You have nothing to worry about and the IRS can always be contacted for tax help.

3 - Understanding Employee Benefits

A high-paying job might not be the best thing for you if it does not offer employee benefits. It is important to know about the other perks that a job can have before you make a decision about your employment. Employee benefits can be categorized into four types:

Benefits at work (Working hours, sick leave, paid vacation, clubs and activities)
Benefits for health (Healthcare Plans)
Benefits for Financial security (Pension plans, Insurances)
Lifestyle Benefits (Work-life balance)

The most coveted and important benefit of all is the insurance plan. An insurance plan that has been agreed upon between you and your employer will consist of three components:

Deductibles - The amount that has to be paid in advance for you to avail the insurance service.
Copays - A small fee that has to be paid at the time of service.
Coinsurance - That part of the fee that exceeds the deductible and must be paid by you at the time of service.

FinaticTrends - 2 Financial Trends

1 - Suez Canal 2.0…Ugh

Recently, when a shipping container blocked the Suez Canal for six days, the global economy was heavily impacted due to delayed shipments. The impact was such that the problem has still not been resolved entirely. A similar issue is on the rise as the Yantian Port in China is unable to perform due to a new outbreak of COVID-19 in the area. The large port handles 10% of China’s exports. 298 container vessels have already “skipped the port” (not allowed to load or discharge cargo at the port), a 300% increase since last month. The crisis does not just end at Yantian. The blockage of cargo has started disrupting activity at other prominent ports as well and the global economy is likely to be negatively impacted again. Economists fear this may cause an inventory shortage creating a ripple effect across manufacturers around the world. As the world returns to normalcy, the demand for goods is at an all-time high and, thus this crisis might also contribute to inflation in many countries. Shipping costs have increased by 200% since the start of the year and are now even higher than pre-pandemic levels.

2 - Interest Rates Changing

The US Federal Reserve had predicted that inflation in 2021 would be 2.4% and that the first interest rate hike would take place in 2024. Then last Wednesday, the Fed altered its forecast. They now state that they expect inflation in 2021 to be 3.4% and that there could be two interest rate hikes in 2023. They also increased their forecast for growth of real GDP from 6.5% to 7.0% in 2021. The Fed does expect inflation to rise but they suggest that it will have “transitory factors”. What does this mean for local businesses? Yes, indicators do suggest that the inflation will likely be transitory and it will revert back to the range of 2-2.5% within the next two years. Thus, businesses do not have anything to worry about and an inflationary market environment is not likely to occur. They should not expect higher labor and borrowing costs. However, predictions can go either way and a problematic inflationary crisis is not improbable.

Financial Guidance

“Real wealth is not about money. Real wealth is: not having to go to meetings, not having to spend time with jerks, not being locked into status games, not feeling like you have to say ‘yes,’ not worrying about others claiming your time and energy. Real wealth is about freedom.” – James Clear

No explanation needed for this one. James speaking facts.