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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