Your biggest expense should be for your future self for the first 5 years. The younger you are, the easier and better it is for you to take 50%-60% of your paycheck and put it away. Imagine being 19, 20, or 21 and earning $20,000 and not having to pay a student loan and you are living at home (or with a family member that is paying the rent/mortgage and you happen to live there with them). So what is an alternative choice you can make? What about putting 50% of that away and not paying a dime in Federal Income tax! Crazy?, not at all!
If you have a 401k available to you through your employer, you could put $5,500 into a traditional IRA, and $4,500 in the 401k, and may even get a match on some of the 401k contributions. Since the standard deduction and personal exemption total $10,000 in 2013 according to the IRS 1040EZ, the $10,000 you put away into a deductible IRA and deductible 401k comes down to a taxable income of $0! After that, you will be in the 10% tax bracket for Federal purposes. So, if you’re making $30,000, you’d only have to have paid $1,058 for the entire year … with one caveat that I wrote about here.
Will you still have to pay Social Security Tax – yes, Medicare Tax – yes, State Income Tax – yes (maybe), Unemployment tax – yes. So that means that the $20,000 that you earned is taxable as far as those particular taxes are concerned, and that would amount to: SS ($1,240), Medicare ($290). So your total Federal taxes paid on an income of $20,000 would be $1,530 or 7.65%.
I didn’t used to think of my future self as an expense, but I most certainly do now, and you should consider YOU as your biggest expense. As a matter of fact, I save off the emails that I receive for various other bills paid, and simply added a folder named “FutureUs” as a sub-folder to the “Bills” folder. This helps further to solidify it in my mind that I am absolutely doing what I can to pay myself first and the other bills after that.