Your biggest expense might not be what you think it is
Budgeting is important. It helps you see where your money is going and why, and it helps you control those flows in and out of your wallet and bank account. Maybe your biggest expense is your mortgage or your rent. Maybe it’s childcare, an expense so large it drives many people (especially women) out of the workforce.
But in some cases, like my own, your biggest expense might be one you don’t even notice… except for one day of the year. Yes, I’m talking about your taxes (ugh).
In my case, my husband and I live in New York City, which means we pay federal, state *and* local income taxes, all of which definitely piles up. I’m generally okay paying that, because we get a lot in services, though I admit to a fair bit of internal grumbling. Still, I work hard to reduce that expense however I can. (And just in case it needs saying: Don’t do anything illegal!! That is NOT what I’m talking about!)
This is why tax-advantaged accounts are so important. For example, the contributions to my 401K at work come out of my paycheck *before* taxes. That means I’m not paying taxes on those contributions, which means my overal taxable income will be lower. (I’m not even mentioning the potential for your employer to match your contributions, a perk of many full-time jobs. I’ll write more about that in the future.)
Another example: I have a flexible savings account through my health insurance, to help pay for any out-of-pocket medical expenses. I’ve already tapped into that account this year because my husband had oral surgery for an ongoing issue. (Pro tip: Do not crack a tooth while eating chicken wings, because my god has that been a whole saga for the past few years.) Same deal with those contributions — they get taken out of my paycheck before I pay taxes, so the overall amount of salary that I have to pay taxes on is lower.
Using these kinds of tax advantages helps you save even more money. For one thing, you’re paying less in taxes. But also, deductions that come out of your paycheck before the money hits your account are like letting your employer’s payroll system build a habit for you — set it and forget it! And using something like a flexible savings account, or FSA, is sort of like building your own little emergency fund for medical expenses.
There are rules and limits around these kinds of tax-advantaged accounts, of course. You can’t just dump your entire paycheck in and then pay zero in taxes. But there are definitely a lot of benefits to using them, and I think they should be part of any well-rounded wealth-building/personal finance arsenal. I know that for many people something like a 401K is a luxury, whether because they don’t have that kind of perk at work or maybe because they’re living paycheck to paycheck and don’t have that kind of money. But if this is something you can afford at all, I think it should be a priority in figuring out your own finance and savings plan.
