Whether you’re starting your first job or switching to a new one, it’s important to understand your paycheck and know what to expect. No matter your salary, your finances can take a nosedive if you do not make some important decisions or pay attention to where your money is going.
Money Management 101
First, your paycheck:
- Your pre-tax pay
- Federal and state income taxes
- Medicare and social security deductions
- Any health insurance payments
- Retirement contributions/withdrawals
- Any other deductions that your employer may take depending on where you work and the setup
- Post-tax pay
- Any post-tax deductions, again, depending on your work and setup
For each of these, you’ll see columns for the amount you’ve contributed and what your employer has given you as well. I recommend paying attention to your pay stub, especially when you first start. Sometimes mistakes are made, and you won’t know it unless you keep an eye on things.
Before You Get Your Paycheck
There’s a lot that can happen to you before you get your paycheck. Taxes, for instance. There are also options for investing in a retirement plan (in most places). Some companies may also offer you a chance to invest in their stocks (post-tax of course).
It’s important to go over these options and opt into some of them as they can have great long-term benefits.
When You Sign On To Your New Job
1 – Set Up Direct Deposit
This way, you never lose a check or forget to deposit one.
2 – Match Your Employer Retirement Contribution
When you complete your sign-on paperwork, you’ll be asked about retirement. If your employer has a “match,” meaning whatever you contribute they match that same amount, then do it and maximize the contribution.
For instance, if they match up to $500 a month maximum into a retirement account, then you should contribute the full $500. This way, you get $1000 per month put into retirement. The $500 from your employer is essentially free money, so don’t let it go!
Remember, many employer matching programs require that you work a certain number of years until you are “vested.” Once you are vested, you can keep the employer’s contribution into your account. If you change jobs before that vestment period, then you will not keep the employer’s contribution (you can keep your own).
If your employer doesn’t do a match, that’s ok, be sure to just put away the maximum they say you can. Remember, this is pre-tax money, so you will not be “losing” on your paycheck. You’ll be saving money on taxes and paying your future self!
Other Accounts to Watch For
If there are additional options for saving into pretax accounts, then look into them (these may be 403b or a 457b, Health Savings Accounts, etc). Even if you can’t make it up to the maximum amount, every little bit counts and will pay off in the future.
Remember: The earlier you start, the less you need to contribute, thanks to compounding interest. The most important thing is to start.
If there are no other options through your work, you can consider opening an IRA- an individual retirement account. This can be traditional or a Roth. A traditional IRA is pre-tax, and if you are below a certain income level, you will likely get a tax refund because of it.
A Roth is a post-tax account. To get the tax break or to contribute to a Roth, both require that you are below a maximum annual earnings level. If you call a company that handles these accounts and speak to them about it, they can give you more information.
3 – Understand Your Coverage
Hopefully, your job gives you health insurance, dental, and vision coverage. Understand your options and choose what’s best for you and your family. Premiums can vary widely, so a bit of due diligence can go a long way.
If dissatisfied with your initial choice, you can change your coverage allocation once a year in October during open enrollment.
This expense is usually taken out of your paycheck before you are paid. So keep an eye out for that line item on your pay stub.
Once You Get Your Paycheck
4 – Understand Your Expenses
Just because you get your first paycheck doesn’t mean it will last forever.
One of the most important money management tips is to determine your monthly take-home pay. Then, make a list of the things that you have to pay for – the necessities, for instance:
- Gas (if you own a vehicle)
- Commuting costs (if you ride a bus, taxi, or Uber)
Your take-home pay minus your necessities is what you have left over for everything else. If you are finding that your costs are high, then look at where the money is going. Taking the time to reduce expenses where possible can pay off in a big way in the long run.
When it comes to spending for fun, everyone has different priorities; the important thing to remember is to not compare yourself to others. However you decide to save, or wherever you spend your money, should be a very personal decision.
5 – Build An Emergency Fund
Anything can happen at any time, and you need to be prepared for it.
Having an emergency fund to help offset these costs is a great way to prevent yourself from accumulating debt. To build your fund, you should aim to set aside up to 3-6 months of expenses. Keep this money in a separate savings account, not to be touched, except for in actual emergency situations.
6 – Create A Debt Repayment Plan
You’re going to have to pay off your student loans, and other debt at some point; getting started, or increasing your payments if possible with your new paycheck is a great way to start reducing the burden. Although there’s normally a “grace period” of six months after graduation, once that period is over, it’s time to pay up.
The good news? There are more debt repayment strategies today than ever to help you manage and repay your student loans. Here are some of the ways to do that:
- You can refinance and consolidate your loans into one monthly payment with a new servicer so that you get a lower interest rate or adjust your loan term to save money over the life of the loan.
- Ask your HR department if they offer a refinancing program through partnerships with lenders. Many employers now provide loan payback programs as a benefit, just like health insurance, 401Ks, or paid time off.
- Depending on your income level, you may qualify for an income-based repayment program
These are just a few places to get started. The route you decide to take is completely up to you. Just be sure you have a plan and stick to it.
7 – Start Investing
You don’t need to hire a financial planner, or have a lot of money available to get started. Just a little bit invested each month can go a long way towards building your portfolio. Give yourself time to learn about some investment basics, and talk to people you know who may be doing this.
An easy way to get started is to look into index funds. These mimic the S&P 500 and are generally low risk. Find some mutual funds or ETFs (exchange-traded funds) and put together a plan to automatically debit your account each month. The amount is up to you; the most important thing is that you start doing this early. As you make more or come to learn more, you can diversify and take more risks.
Again, the earlier you start, the better able you are to take advantage of compound interest and give yourself an exponentially higher amount of savings in the future.
8 – Delay Large Purchases
This is a key money management tip especially when you first start your job. Getting used to the rhythm of your new workplace, making sense of your paycheck, and realizing how much you’re taking home can take some time. This is particularly true if you have moved to a new city. Give yourself a few months to settle in, and understand where your money is coming from and going.
9 – Protect Yourself As Needed
Depending on your field of work, you may require insurance. For instance, in healthcare, it’s recommended that everyone have disability insurance. You may also consider life insurance if you have a family or dependents.
There are many companies out there that offer insurance plans that you may need. Shop around and compare prices to get the best deal (often, if you pay upfront for the year, you’ll get a reduced rate). Purchasing this when you’re young is also better than waiting, as you’ll get locked into significantly lower rates.
General Money Management Tips
10 – Don’t Hire A Financial Planner
I mentioned this briefly already, but it’s worth repeating. It takes a few minutes a day, or a dedicated few hours per month (if even that), to understand and figure out what to do with your finances. Financial advisors and planners often don’t have their interests aligned with yours. As a result, they may give advice that helps in the future but hurts you today, which doesn’t need to happen.
Instead, look for finance blogs, and talk to representatives at companies like Vanguard or Fidelity, who will be more than happy to walk you through their process and tell you what services are available. Speak to people you know regarding how and where to invest. There’s a ton of information out there, and some of the best advice will come from those who aren’t financial advisors.
11 – Avoid Credit Card Debt
If at all possible, avoid credit card debt. Pay your credit cards in full each month. The interest payments on these cards are sky high, and you’ll end up digging a hole for yourself if you carry a balance.
If you find paying off cards difficult, it’s time to re-evaluate. Either you need to cut back expenses, or perhaps you need to abstain from using a card, to begin with.
12 – Learn Your Financial Priorities
I say this all the time, there is no such thing as keeping up with the Jones’s. They don’t exist, and it’s just not possible.
When it comes to recreational spending, know yourself. What makes you happy? What makes your life easier? What adds value to your life? Your money should go to these areas. Your neighbor may love cars and get a new one every year; however, if you find joy somewhere else, that’s where your focus should be.
Too often, we spend because we feel the need to keep up or do what society is doing. Don’t fall into that trap. Focus on your own life, priorities, and happiness.
13 – Communicate Openly With Your Partner
If you’re in a relationship, the money talk will inevitably happen. Depending on your relationship dynamic, you may also have different spending habits.
Make communicating about finances a priority and a regular event. Doing so can help with setting financial goals for your relationship and family. It will also help prevent surprises from cropping up down the road.
These money management tips with your first job are meant to help you make sense of what to do with your money and utilize it in a way that maximizes its value.
It’s exciting to start something new, especially if you’re getting a higher salary. But as long as you are intentional with your finances, you can avoid some of the financial pitfalls that may plague your neighbors. Follow these tips to develop healthy financial habits and secure your future!