How to Make the Most of Your First Job Paycheck

Set Your Finances Up For Success

25 year old using mobile banking
••• Gary S Chapman/Photodisc/Getty Images

Getting that first job after college or high school is a very exciting, yet stressful event. You’re probably overwhelmed with many new challenges, opportunities, and commitments. And you likely have a lot of questions. One of the biggest new challenges may be the management of money and personal finance.

Understanding Your Paycheck

Your new job may provide a significant increase in cash flow, and with the transition into post-graduate life, you might find that you have new responsibilities and financial considerations.

Although it might feel like your paycheck disappears as soon as it shows up in your bank account, this is a great time to begin managing your money wisely both for now and for your future.

Review your pay stub for the following:

  • Verify that your wages for the period accurately reflect your annual compensation
  • Review your federal income tax withholding allowances. If you're single and you over-withhold, you're essentially giving the IRS a free loan of your money until you file a tax return to get it back. Check the number of allowances to claim on your W-4 by using the withholding calculator provided by the IRS. Ideally, you should have just enough money withheld from your pay to cover your taxes so you neither owe nor get a refund.
  • Any additional deductions you've chosen to have taken out, such as contributions to a 401(k) plan or health plan, for example.

Create a Budget

If you’ve been in school prior to this new job, your finances were probably relatively simple. You likely had some basic bills and utilities to pay and your education may have been funded by outside sources or student loans. But now that you are beginning your life in the workforce and all that comes with it, your cash flow needs will change significantly.

Once you have an idea of how much your paychecks will be after income and payroll taxes, determine what your expenses are by surveying your situation. How much is rent? Will you be moving to a nicer place? Buying a car? How long before you have to begin paying back the student loans, and how much can you afford to pay? These items will play an important role in determining where your money has to go.

Creating a budget doesn’t have to be difficult and it can be done in a few easy steps. It is important that you establish this spending plan as soon as possible so that you don’t find yourself in financial trouble later on. You can use a budget template to speed things up and tailor it to include any additional categories you want to have in your personal budget.

Using a budgeting app is one way to make the process easier. Budgeting apps can link directly to your checking account and/or credit card accounts and automatically download transaction information. Then, through the app, you can track your spending, categorize budget expenses, set savings goals and see at a glance how much money you have available.

Tackle Your Debt

With your new source of income, it is a perfect time to get serious about repaying your debt. If you have credit cards, you may have become used to only paying the minimum payment each month, but it's time to break that minimum payment habit as soon as possible and cut down the amount of money you've been paying on interest.

Minimum payments can drag your repayment out to ten years or more, costing hundreds or thousands in interest. Make it a priority to accelerate repayment of any high-interest credit card debt.

Handle Student Loans

If you have student loans, you generally have three to six months after graduation before payments must begin. Use this grace period to plan for the payments before they start. Find out how much the minimum payment will be and factor it into your budget now.

Can you afford more than the minimum? Great, account for it in your budget. The faster you pay down these loans, the less it will cost you in interest over time. But don't let making student loan payments above the minimum a priority over building up your emergency or "rainy day" savings. Having savings in the bank can keep you from having to add to your credit card debt if an unexpected expense pops up.

There is always a balance between managing debt and building up your savings. Tackle student loans and high-interest debt first since that's costing you money on interest, and go from there. Just be sure not to miss any payments, even if it's just the minimum.

Missing a payment can have a major impact on your credit score. If your lender offers automatic electronic payment, consider setting up monthly or bi-weekly payments to come right out of your bank account. At the very least, set up banking alerts to let you know when a bill due date is approaching.

Automate Your Savings Plan

The best way to begin saving and make it a regular habit is to create an automatic savings plan. If you have a set amount of money being set aside from each paycheck automatically, it is impossible to forget. In addition, once the money is saved automatically, after a few paychecks, you won’t even miss the money, but it will be there if you need it. Being prepared for unanticipated events and expenses is part of being a responsible adult. 

But where should you keep your savings? A high-yield savings account is one option; a money market account or a CD account is another. When comparing savings options, remember to check the interest rate you can earn, as well as the fees and minimum deposit requirements.

Also, consider how accessible the money is. A high-yield savings account, for example, allows for up to six withdrawals per month but a CD account would require you to wait until the CD matures to withdraw savings without a penalty.

Begin Saving for Retirement

If you’re like most young people starting out in your first job, the thought of retirement seems like an eternity away. While it may be true that you have 40 or more years until retirement, don’t wait to begin saving. Even a very small amount can begin to add up thanks to the effect of compounding interest.

Check with your employer to see if they offer a retirement plan such as a 401k plan. Many companies even offer a matching program where you can essentially get free money just by saving yourself.

If your employer doesn’t sponsor a retirement plan, the next best thing to do is to open an IRA or individual retirement account. There are limits on what you can contribute annually, but every bit helps. And there's a distinct advantage to saving in your 20s. The longer you have to save, the longer your money has to grow through the power of compound interest.

So how much to begin saving? The typical answer is to begin contributing as much as you can afford to, but a great starting point is to take full advantage of any employer match. For instance, if your employer offers a dollar for dollar match up to 3 percent of your salary, consider at least contributing 3 percent of every paycheck. That way, you're maximizing your savings by not leaving any money on the table.

Reward Yourself

You've worked hard to finish school and land that great job, and you've certainly earned your pay. Reward yourself for being diligent and setting up your budget. While budgeting your money is wise, resentment can start to build if you put all of your money toward bills and savings without allowing any free spending for yourself. Add a category in your budget for a "slush fund," which is the amount you want to set aside each month for discretionary spending on fun activities, a special new pair of shoes, or the premium for a new luxury car payment, for example.