Buzz
Receiving your first paycheck from your first job is an exhilarating experience. You've worked hard for it, and it's finally yours. While it's tempting to reward yourself for your efforts, it’s worth thinking carefully about the best ways to use that money.
As a recent graduate or someone stepping into the workforce for the first time, you may have a lot of questions: Am I budgeting effectively? How should I handle this new income? It can be overwhelming to figure out the most sensible way to manage it all.
Step One: Review Your Paycheck
Before taking any action, ensure your paycheck is accurate and verify your final amount. Here's a breakdown of the items listed on your paycheck for clarity:
Gross income: This refers to the total amount you earned based on your hourly wage and the hours worked.
Net income: This is the actual amount that ends up in your bank account after taxes and deductions are taken out.
Work hours: Depending on your employment type, this may show the hours you worked if you’re hourly paid or your set salary if you're a monthly employee.
Deductions: These are the amounts subtracted from your paycheck, including taxes, insurance, and other withholdings.
Understanding Your Tax Obligations
Your taxes include income tax, Social Security contributions, and Medicare taxes. Depending on where you reside, there could also be state or local taxes. For example, New York has a state income tax ranging from 4% to 8.82%, plus an additional city tax that varies from 2.907% to 3.876%.
These two websites can assist you in calculating your income tax:
SmartAsset: This tool allows you to calculate your Federal Income Taxes by inputting your income, location, and filing status.
TaxFormCalculator: This site helps you estimate your Federal Income Taxes for your state and also allows you to compare your 2018 taxes to previous years.
Budgeting
After receiving your first paycheck, it's important to calculate your monthly expenses, including groceries, transportation, housing, utilities, and clothing. Allocate part of your paycheck to cover these costs for the upcoming month, and save the rest. Don’t forget to leave some money in your checking account for emergencies. If you have anything left by the end of the month, add it to your savings.
Start a Savings Account and Automate Transfers
Opening a savings account is a great step toward growing your savings. A useful tip: link your checking account to your savings account and set up automatic transfers for a set amount each week or month. By scheduling this on payday, you'll easily save without even noticing the deduction.
Consider creating an emergency fund as well. This will help you avoid relying on credit cards or loans when you need quick cash. Focus on building this fund early in your career, and make sure it’s easily accessible. It's better to prioritize your emergency savings rather than contributing more to retirement funds initially.
Pay Off Your Student Loan
Depending on your repayment plan and the amount owed, set a monthly budget specifically for your student loan payments. Decide how much you want to pay each month and how long you'd like it to take. Once you have a clear idea of the amount and time frame, it will be easier to reach your goal. However, always make sure to meet the minimum payment each month to avoid loan default. If possible, paying more than the minimum will save you money over time.
A few important things to consider:
What type of loan do you have? Is it federal or private? Be sure to note the interest rates, the lender, and the balance.
What is your grace period? In other words, how long do you have after graduation before your first payment is due?
Set up automatic payments, just like you did with your savings.
Start Saving (and Investing) for Retirement
It may feel like it’s too early, but starting to save for retirement now is crucial (read this for an illustration of why it matters). You can do this through a 401(k) plan, which is a tax-deferred account provided by your employer, or via a traditional or Roth IRA. With a 401(k) or traditional IRA, you're putting a portion of your salary into the account before taxes, reducing your taxable income and receiving a small tax break. You'll pay taxes on the gains when you withdraw the funds during retirement. In contrast, with a Roth IRA, you contribute money after income taxes, and it grows tax-free.
The key point is that once you've opened an account and started contributing, you must choose investments—otherwise, the money will just sit there. Here’s a beginner’s guide to selecting an investment strategy (your HR representative can also assist with this).
Here are a few more things to keep in mind:
Start by saving a small portion of your pay, even if you can only contribute one percent right now. Every little bit helps.
If possible, try to contribute enough to take full advantage of any employer match your company offers.
Don’t forget to choose your investments!
Reward Yourself
If, after following all the previous advice, you still have some money left and feel like treating yourself for all your hard work, go ahead! You’ve definitely earned it.
