Give yourself a raise! Stretch your paycheck

Most of us receive our paychecks, pay our bills and spend the rest, not thinking about ways to make our salary go further.

30th January 2004






Most of us receive our paychecks, pay our bills and spend the rest, not thinking about ways to make our salary go further.

More than 63 percent of America's workers are still living paycheck to paycheck, according to a recent survey conducted by the American Payroll Association, and although up-to-date wardrobes and French manicures might provide comfort, so does having enough money to pay bills and save for the future.

"Most people have enough money coming in that they don't have to be diligent," says Judy Lawrence, author of The Budget Kit: The Common Cents Money Management Workbook.

Instead of examining ways to make their money work in their favor, most people relax into comfortable, and often nonproductive, spending habits, says Lawrence.

Below are some easy ways to stretch your take-home pay.

Push your income to the limit

Take charge of your salary. The first step in maximizing what you earn is to understand where you spend money -- including $3 on a latte every morning and $10 on late fees at Blockbuster.

Lawrence recommends writing down everything you spend.

"You have to be in a certain psychological place to do this," she says. But it's helpful to know what your lifestyle is really costing you. Face the numbers. Once you know how much you spend, look for little ways to save.

The next step is discovering how your employer can help.


Take full advantage of all the employer-sponsored benefits such as flexible spending accounts, retirement plans and direct deposit to save time and money.

Flexible spending accounts

Participating in an employee-sponsored health plan is one of the most popular ways to stretch your paycheck. These plans allow you to pay for health care tax-free, and set aside money in a flexible spending account to cover any costs not covered by your medical insurance.

"Pre-tax benefits are the way to go," says Steve Goldberg, owner of a tax consulting and accounting services firm in Lexington, Mass. "If you are a salaried employee and do not own a home, there are not a lot of other things you can do on your own to save on taxes."

Flexible spending accounts are one of the most popular options for saving pre-tax dollars. The two most common types are health-care flexible spending accounts and dependent-care accounts. Some employers offer a third option -- a transportation reimbursement incentive program -- which is slowly increasing in popularity.

Health-care flexible spending accounts allow an employee to set aside pre-tax dollars to pay for medical costs not covered by insurance. The money may be used to pay for expenses such as prescription drugs, alternative therapies, chiropractic treatments, contact lenses, smoking cessation programs, orthodontic expenses and eyeglasses. In September, the IRS approved paying for over-the-counter drugs with flexible spending account money. The list of approved items is extensive, so contact your employer for an up-to-date itemization.

This is how these accounts work: You decide on the amount you want to set aside for health-care costs for the following year. Each pay period a portion of that amount is deducted from your paycheck. If you designate $2,400 for a health-care flexible spending account, $200 will be deducted each month, before taxes.

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At Texas Children's Hospital in Houston, 30 percent of the hospital's 6,000 employees participate in flexible spending account programs. Arlene Hillegeist, director of human resources services, says that many more employees could benefit from these accounts, but they either don't know the options exist or are wary about putting money into them.

One reason for the hesitation is the "use it or lose it" rule under which these accounts operate. You lose any money that you don't use by the end of the year. But if you plan conservatively and carefully, you can avoid this loss.

Health-care flexible spending accounts operate on an individual basis, so you and your spouse may each contribute to your own accounts. Your employer determines the maximum contribution.

Dependent-care flexible spending accounts operate on a per-household basis -- up to a $5,000 per year maximum.

While companies are powerless against the limits the IRS has set on some of the flexible spending accounts, they can be creative with other pre-tax benefits such as transportation reimbursement.

Tax benefits for traveling to work

According to the IRS, transportation reimbursement of up to $190 per month for parking and up to $100 per month for mass transportation and van pools may be made available to employees. You must work for a company that has such a plan in place to have these costs deducted from your paycheck before taxes.

Texas Children's offers several tax-saving commuter options for its employees, who can deduct a $50 monthly parking fee from their paycheck. Van pooling and bus passes can save employees as much as $2,000 a year in commuting costs.

To find out which of these and other money-saving programs your company offers, contact your human resources department.


Retirement plans are another great way to stretch your paycheck. Your contributions are made with pre-tax dollars. You're saving for the future while reducing today's taxable income.

With 401(k) plans, employees can contribute a portion of their salary to a company-sponsored plan. Many employers will match a certain percentage of this contribution, in essence offering "free money" to those who invest in the plan.

While it is difficult to argue against socking away money for those golden days, it is also important not to get too carried away with unrealistic visions of leaving the workforce at age 40.

"If you're putting too much away in a 401(k) or savings account, and you don't have enough to live on, and you're using credit cards all the time, that is defeating the purpose," Lawrence explains. "If at the end of the month, you are pulling money out of savings, you end up saying to yourself, 'I'm not a very good saver.' There's a kind of psychological erosion."

Mapping out monthly and yearly expenses using tools such as "The Budget Kit" can help you predict the cost of incidentals and determine how much money to put into flexible spending accounts and retirement plans.

Direct deposit

One of the most basic benefits an employee can use is direct deposit. With this feature, your employer deposits your paycheck directly in your account each pay period. Not only is it easy, it makes other automatic payments simpler. Plus with automatic deposit, there is generally no hold on the funds.

For example, if a $3,000 paycheck is added to your account on the first of every month, you might also set up your $250 car payment to be automatically deducted each month. This saves time and eliminates the chance that you may forget to pay the bill and incur a late fee or finance charge.

Regardless of whether you contribute $10 each month to a 401(k) or $100 to a savings account, plan out how best to allocate your paycheck -- and then stick to the plan. You may find that some luxuries will become more affordable than you had imagined.

Copyright © 2004 Bankrate, Inc.