When I received my first paycheck after finishing college, I was shocked at how much money I had. Even after taxes were taken out, the balance felt like a small fortune. For the previous four years, I had worked part time or received small stipends for being a resident adviser or an intern. So getting a real, full-time paycheck felt like being on the verge of vast new riches.
Unfortunately, I didn’t set myself up for financial success. Giddy with the idea of spending power, I skipped making a budget and squandered my first few paychecks — setting up bad habits that landed me in debt. Don’t be like me. Start with good habits from the beginning. Here are some smart ways to spend and maximize your first real paycheck.
1. Contribute to a retirement account
If you have access to a retirement account through your work, sign up for it ASAP. Your employer automatically will deduct the money from your paycheck and put it in a tax-advantaged investment account meant to help you build a nest egg.
This contribution means a slightly smaller paycheck, but the benefits can be big down the road, according to Phuong Vuong, the head of marketing with the money management app Empower.
“It helps to contribute early, and your money will grow over time through compounding interest,” said Vuong. “Take advantage of an employer’s match, if there is one. That’s the only kind of free money that’s actually free.”
If your employer offers a matching contribution, it will put additional money into your retirement account, which in some cases could double part of your own investment.
For example, your employer might match 100% of your contributions up to 4% of your income. If you make $38,000 a year, you can contribute up to $1,520 annually in contributions if you go with just the maximum amount for a match. So if you’re paid every other week (26 pay periods a year) and you contribute $58.46 from your paycheck, your employer will put in $58.46 as well. The total contribution to your retirement account will be $116.92 each pay period, but you’d only pay half of that.
If your employer doesn’t match your contribution, it still can be worth it to begin setting aside money now, even if it’s just $100 per paycheck. Use our investment calculator to see the difference. Here’s one scenario:
As you can see, if you contribute $100 per biweekly paycheck to your retirement account, you could more than double it at 62. That’s assuming a 6% average annual return and that you start saving at age 22 instead of 32.
As you earn more money, you can increase your contributions to boost your long-term wealth.
2. Take advantage of other employer-sponsored benefits
Check out other perks offered by your employer.
“Paying for things like health insurance or public transportation programs through your employer on a pretax basis will help lower your taxable income,” said Misty Lynch, a certified financial planner and consultant with the John Hancock Financial Center.
When you opt in to your employer’s health plan, the company usually helps pay for part of your premium. This can lead to lower upfront insurance costs. Plus, having a health plan reduces the chance that an unexpected illness or hospital visit will decimate your finances.
These benefits save you a little bit in taxes since the insurance premiums you pay are deducted from your pretax income. Plus you get more bang for your buck because your employer helps subsidize the premiums. The same is true of health savings accounts and wellness programs, according to Lynch. Your paycheck might be a bit smaller now, but the eventual return can be outsized and save you money down the road.
3. Cover your basic needs
“Write down your basic needs like rent, transportation, and utilities,” Lynch said. “Pay those bills on time.”
She recommended paying attention to due dates on these items and getting a feel for what you spend. Once you know the date you’ll get paid and the amount you’ll bring home, you can set up automatic withdrawals from your bank account to pay your bills. That way, you’ll never miss an obligation or face late fees.
“When you’re starting out, you want to make sure you have a good payment history and don’t waste money on things like late fees or overdraft charges,” Lynch said. “This will help when you want to make bigger purchases and need a mortgage or car loan someday.”
4. Reduce your debt
If you have loans, use part of your paycheck to reduce that debt, Vuong said. She suggested paying more than the minimum required on debt to help reduce it faster.
“If all else fails, make sure you make minimum payments on all your debt,” Vuong said. “Build momentum to eventually squash that monster debt, making extra payments as you can afford them.”
To make this process easier, Vuong recommended you look into refinancing your student loans and other debt in order to reduce your interest rate and payments. Refinancing can make things more manageable and can help you get out of debt faster.
5. Start building an emergency fund
“Set aside a portion of your paycheck, however modest, for emergency savings,” said Vuong.
Even though the amount might not seem like much, the important thing is that you’re developing a good habit, she pointed out. Plus, you might be surprised at how quickly your money can add up. “Pick a high-yield savings account to stockpile a cushion in case of emergency,” she said.
Lynch agreed that getting in the habit of setting money aside for emergencies is vital. “Keep your emergency fund somewhere that is accessible, but separate from your checking account,” she said.
Setting up an automatic transfer from your checking account to your savings account each month can be a good way to build an emergency fund without having to remember to move the money, said Lynch.
6. Don’t forget to have fun
One of the most important reasons to budget your first paycheck carefully is to prepare yourself to have enough money left over to do things you enjoy.
It’s important to make sure the essentials are covered first, said Vuong. After all, if you spend your paycheck on unnecessary fun first, you might end up finding the hot water or the lights turned off at home. Once everything else is taken care of, though, you can be free to spend money how you want.
Lynch pointed out that budgeting for necessities first also can increase your confidence in spending on other items. “If you know the rest is covered, you can reduce stress and spend on the things you enjoy,” she said.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
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