What to Do With Your First Paycheck
Getting your first paycheck at your first job is great. After all, you’ve worked hard for it – you deserve it. And while the first thing you might want to do is indulge in all your hard work, you might be a little smarter about what you do about it.
If you are a recent graduate student or new to working life, many questions will arise in your head: Am I budgeting right? What should I do with this money? Deciding what to do and how to properly manage it can be difficult.
Check your salary first
Before doing anything else, make sure your salary is correct and then calculate the final amount. Here’s a breakdown of what’s on your paycheck:
- Total Gross: The money you made based on your hourly salary and how much you worked.
- Total Net: The amount of money you made after taxes and deductions were paid. Basically what will actually go into your bank account.
- Hours of Operation: You are either an hourly employee or a monthly paid employee. It will tell you how many hours you worked or your monthly wage.
- Deductions: What has been deducted from your paycheck, such as taxes, insurance, and more.
How much taxes do you have
Your taxes will consist of income tax, Social Security tax, and Medicare Tax. On top of that, depending on where you live, there may be a government tax and even a local (or city) tax. In New York, the state income tax ranges from 4 to 8.82 percent, and the New York City income tax ranges from 2.907 to 3.876 percent.
These two websites can help you calculate your income tax:
- SmartAsset : You can calculate your federal income tax by listing your income, location, and fill status.
- TaxFormCalculator : This website calculates federal income tax for your state. You can also compare your 2018 taxes with those of the previous year.
Budget
Once you get your first paycheck, calculate your expenses like groceries, transportation, housing, utilities, clothing, and more. Leave a portion of your check for all of the above next month and put the rest in your savings. Be sure to also keep some of it in your checking account in case of emergencies. If you find that you still have something left by the end of the month, add that to your savings.
Open a savings account and set up automatic transfers
Opening a savings account can save you a lot of money. Key step: Connect your checking account to your savings account and set up automatic transfers for the amount you want every week or month. It’s an easy way to save money, and if you plan it for every payday, you won’t even be missing out on any extra money.
Also consider setting up an additional emergency fund. This will help you not rely on your credit card or loans if you need quick cash. Grow your fund gradually and make sure you have easy access to it. Place your bet on fast-track savings early in your career, not on a retirement account.
Pay off your student loan
Depending on your repayment plan and the size of your debt, set a budget that will go towards your student loan payments each month. Calculate how much you want to pay and how long it will take you. Once you determine the amount and years, it will be easier for you to reach your goal, but be sure to make the minimum payment every month, otherwise your loans will no longer be outstanding. If you can handle it, paying more than the minimum will benefit you in the long run.
Here are a couple of things to keep in mind:
- What is your loan? Is this a federal loan or a private loan? Pay attention to the interest rates, the lender and your balance sheet.
- How long is the grace period? In other words, how long can you wait after graduation after the first payment.
- Set up automatic payments as you did with your savings.
Save (and invest) for retirement
It may sound early, but it’s time to start saving for retirement now (read this to illustrate why this is important). This could mean that the 401 (k) plan is a tax-deferred account offered by your employer – either through a traditional or Roth IRA . With a 401 (k) and a traditional IRA, you transfer a portion of your paycheck to a pre-tax account, which means you lower taxable income and get a little break. You pay money on profits when you use the money in retirement. With a Roth IRA, you deposit money after taxes have been paid and then it grows tax-free.
It is important to remember that as soon as you open an account and start investing in it, you will need to choose an investment – otherwise it will simply remain in place. Here’s a helpful guide for newbies on choosing an investment plan (your HR representative will also be able to help you).
Here are some other things to keep in mind:
- Try to save a small percentage of your salary, even if you can only afford to save one percent of your salary right now. Anything helps.
- However, strive to contribute enough so that you can at least achieve full employer compliance, if your company offers one.
- Choose your attachments!
Pamper yourself
If after completing all of the above suggestions, you still have money left and want to reward yourself for your hard work, continue! You deserved it.