What to Do With Your First Paycheck
Learning the difference between “gross” pay and “net” pay for the first time can be a huge wake-up call for recent college grads. Besides acting as a wake-up call on the realities of taxes and other withholdings, your first paycheck also signals the beginning of financial adulthood, and what you do with that first paycheck can really set a tone for your personal finances. Here's what you should do when it arrives.
Ideally, you won’t even have a physical check to deposit on payday, as most employers offer the ability to have your check instantly deposited into your checking account. So that you know when the money is available to you, consider downloading your financial institution’s app and signing up for text alerts. Your payroll schedule may be semi-monthly (twice a month) or bi-weekly (every two weeks).
In any event, it is important to make sure that you don’t have more month than money. Rent and student loans may be due at the beginning of the month, so take inventory of all of your monthly expenses. Apps like Mint, YNAB, Goodmoney, Mvelopes, and EveryDollar can help with cash flow management aka budgeting.
First, you need to organize your expenses in different categories. Start with the essential expenses, which include rent, student loans, cell phone, utilities, car payment, car insurance, groceries, etc. Next, include your variable expenses. Some examples would be entertainment, dining, clothing, personal care, etc. Once you have an understanding of your monthly income and expenses, you can be in control of your finances and plan for the future. It’s important to have short-term savings-cash and build a long-term investment plan-retirement.
Rainy Days and Mondays.
Prepare for emergencies or opportunities, such as car repair or travel expenses associated with attending a college classmate’s wedding. Having a cushion helps when you need to pay your cell phone bill and have to pay your rent, but still, have a student loan payment or expenses. Many experts encourage recent grads to save up three months’ worth of bills.
Can't buy that swag, if you don't have the cash.
The first step is to look at the pay stub to understand all of the deductions. Also, don’t forget to include health insurance premiums. By understanding the difference between “gross” and “net”, you can determine how much money you will have for your monthly obligations.
Save for your future.
If your employer offers a 401(k) plan, enroll. A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their salary to individual accounts. The purpose of this plan is to set aside funds for retirement. While many view retirement as a concept for their parents or grandparents, it is important to start saving right away. As the cost of living rises, so will the cost of retirement. The 401(k)plan will help save money in taxes today, accumulate wealth for your future and take advantage of time value of money.
Many employers offer matching contributions. Some employers match 100% of your first 3% and others may have more generous matching contributions.
Let's crunch some numbers as an example. Say your annual salary is $52,000 and your gross bi-weekly pay is $2,000. If you contribute 3% to your 401(k), then your gross bi-weekly pay is $1,940. In this example, your employer can match your $60 contribution and you’ll be saving $120 every paycheck for retirement. The maximum that you can contribute to a 401(k) is $18,000. The biggest takeaway is not to leave money on the table and start enrolling in your 401k) as soon as you become eligible.
You owe, you owe, so off to work you go.
After graduation, think about starting to pay off those pesky student loans. There are several repayment plans available, providing the flexibility you need. If you don’t choose a repayment plan, you will be given the Standard Repayment Plan, which means you will pay off your loans in 10 years. You can switch to a different plan at any time to suit your needs and goals. Visit https://studentaid.ed.gov and look at the repayment calculator estimate. This tool can help determine the most appropriate repayment plan for your situation.
Budget for a better tomorrow.
Look at the total amount of money you have after deductions for employee benefits, retirement savings, and taxes. Take inventory of your monthly expenses such as rent, utilities, food, student loans, cell phone, etc. If you have trouble remembering when bills are due, consider scheduling automatic payments through your bank or the service provider to avoid late fees.
Lastly, reward yourself for your hard work. You don't need to splurge on a big purchase, but you can buy yourself something small. Earning your first paycheck is a great accomplishment and you should celebrate your success on this important milestone.