Five things to do with your first real paycheck
Starting your first job is an exciting milestone and likely will change your life in many ways, both financially and personally.
As you begin to accumulate hard-earned money in your bank account, it’s important to devise a strategy for your earnings that will help lay a strong financial foundation for your future.
Consider these five suggestions for how to use your first real paycheck to your advantage.
Keep track of your earnings
- Tracking your earnings and your spending—your overall cash flow—can be a good way to evaluate your financial health.
- The first component of cash flow is income, and the second part is your expenditures. Try spending less than what you earn to help reduce the risk of debt.
- Keep in mind that you won’t take home your total or “gross” salary. You’ll have to pay taxes and deductions for items like retirement plan contributions and health insurance.
Pay off debt
- Put a plan in place to tackle any debt you may have, such as student loans or credit card balances.
- Although some student loans have a six-month grace period before the first payment must be made, interest does accrue during this time. Starting your student loan payments sooner can help you save money in the long run.
- Paying loans and credit card bills on time also can help boost your credit scores, which play a critical role in building financial security. For example, if you need a loan to purchase a car or a home, a good credit score may help you secure a lower interest rate.
Build out your budget
- Now that you have a steady paycheck, it may be time to create a budget for managing expenses while also saving for your goals.
- As a general guideline, your budget should be fluid enough to adjust to a career or life change.
- Consider setting aside a portion of each paycheck in an emergency savings fund, with the goal of saving three to six months of income. This can help you remain financially secure when unexpected life events occur.
Start saving for retirement
- You’re just beginning your career journey and retirement may seem far off, but now is actually the perfect time to start planning.
- Compound interest on investments is the crux of a retirement account—the more time you allow your investments to grow, the better off you’ll be in the long run.
- If your employer offers a retirement plan, such as a 401(k), this may be a great place to start saving — especially if your employer matches all or part of your contributions to the plan. You also can set up a personal account, such as an IRA.
- Consider contributing enough to meet the match, if it’s offered in your employer-sponsored plan.
Plan ahead for long-term goals
- Picture your future. What milestones do you hope to achieve? You may dream of traveling the world, having children, or eventually owning a home.
- For these larger goals, setting aside money now can help you slowly begin to prepare for the costs, so they won’t feel so overwhelming later on.
To learn more about establishing strong financial habits and planning for money milestones, talk to a financial professional.