A fresh crop of college grads are about to head into the workforce and snagging that first professional job is a major milestone. Getting your first paycheck is equally thrilling, but it pays to be smart about how you use it. The decisions you make with your money in your 20’s can set the tone for your financial future, so it’s important to get started on the right foot.
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1. Make a Spending Plan
Budget is a dirty word in some personal finance circles, but it can be one of the most important tools if you want to keep debt under control and work toward building wealth. Instead of thinking of a budget as something restrictive, it’s a good idea to look at it as a way of telling your money what to do. It’s a way to be in control of your money instead of the other way around.
When you get your first full paycheck, it’s best to sit down and go over what your expenses are. This includes regular bills like your rent and utilities as well as the things that you have a little more leeway with, like groceries and entertainment. Before you start blowing cash willy-nilly, you might want to figure out how much of it you need for your living expenses.
2. Don’t Forget to Save
In addition to determining how much of your pay needs to go toward the basics, you have to decide how much to put toward future financial goals. Setting aside a specific amount for savings may be a hard habit to develop in the beginning, but it can work in your favor down the line. Many experts say this should actually come before your living expenses so you don’t risk spending all of your money before saving.
There are two basic saving areas to concentrate on when you’re just starting out: retirement and your emergency fund. If you’re eligible to participate in a 401(k) at work, it’s wise to save at least enough of your paycheck to qualify for the company match. If you don’t have access to this type of plan, an IRA or Roth IRA could be the next best thing.
Once you’ve allocated some of your check to retirement, your next priority should probably be setting up an emergency savings account for rainy days. Generally, three to six months worth of expenses is a good target to work toward. Aiming to sock away $500 or $1,000 can be a good first milestone.
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3. Check Your Tax Withholding
Getting a big tax refund back from the government may feel like hitting the lottery. But if you had that extra money in your paycheck instead, you could use it to attack your student loan debt, bump up your retirement contributions or complete your emergency fund much faster.
Adjusting your tax withholding ensures that you’re not having too much or too little taken out of your check each year. If you’re not sure how much money is supposed to be taken out, the IRS offers an easy-to-use withholding calculator that figures it out for you.
It’s tempting to go out and celebrate when you get your first paycheck, but that can cost you in more ways than one. The smarter you are with your money now, the bigger the payoff can be later on. (And maybe you’ll even be able to budget in a small celebration!)
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