There is something extremely exciting about receiving your first paycheck. You are now officially a working professional, with all the rights and responsibilities that entails. Before you lavishly start spending on all your wildest consumer desires, here are four smart ways to spend your first paycheck.
Take Care of Your Obligations
It is advisable to avoid the temptation to spend your first paycheck on a cool new accessory or to splurge on an outlandish meal. Instead, make sure that you are taking care of your needs.
The best method to ensure this is to make a budget, which is always a smart move.
Many experts suggest adhering to the 50-30-20 rule, whereby 50% of your earnings are devoted to paying for your needs, 30% to wants, and 20% for savings. Whether you align your spending with this rule or another organizing guideline, creating a budget will help you arrange to use your income in a responsible manner.
Your budgetary needs should include spending on food, rent and utilities, transportation, and anything else that you simply must pay as part of your day-to-day needs. This could also include insurance premiums or childcare costs, depending on your individual situation.
Pay Off Your Debts
You are now a productive member of the workforce, one who will now be regularly earning income. Now is the time to start paying off your debts, if you have accumulated any.
Not all debt is built equally, and it is important to understand both your overall obligations and the interest rates that you are paying.
For instance, there is a world of difference between credit card debt and student loans. Credit card debt often grows notoriously quickly, as the obligations owed are often compounded daily. In contrast, public student loans come with a grace period of 6 months, meaning that you have some extra time to organize your finances before you need to begin repaying them.
Make a plan to first pay off your debt obligations that are the most expensive to service. However, you should endeavor to rid yourself of all your debts, even interest-free loans that were provided by friends and family.
You are developing your financial independence, and that includes becoming free and clear of any and all debt obligations.
Build Up Your Emergency Reserves
Getting hired is a wonderful feeling, and should bring immense satisfaction. You are well on your way to establishing your career, which will hopefully continue progressing throughout the years as you gain both experience and knowledge.
Life is full of the unexpected, though, and you can never be sure what lies in wait around the bend. There could be an industry downturn that causes you to lose your job. You could have a medical emergency, which requires out-of-pocket payments. Or, there could be something as banal as your car needing a new transmission.
Many experts recommend putting aside three to six months’ worth of living expenses for your emergency fund. While this might not be realistic at the outset, there is no reason to neglect putting some money aside for the proverbial rainy day. Even $50 or $100 a month will begin to add up, giving you a nice cushion if times get tough.
Hopefully, you will never be forced to dig into your emergency savings. However, you should have them ready in case the need arises.
Start Investing for the Future
It is hard to think about retirement when you are just beginning your professional career. However, starting to save for your golden years early will pay massive dividends later on.
For starters, your company may provide a 401(k) plan with matching contributions. Many companies offer this benefit, which means they will match the amount of money that you are contributing, up to a certain percentage. If this is the case, they are essentially offering you free money, and it would be a massive mistake to forgo these funds.
Even if your employer does not offer a 401(k), you can still sign-up for an Individual Retirement Account (IRA). Though IRAs lack employer contributions, they have a number of tax and savings benefits that can make them a very worthwhile mechanism to save for retirement.
The magic of compound interest provides a compelling reason to begin saving as early as possible, as the amount of money that will be accrued over time begins to ramp up dramatically as your interest creates its own set of earnings. You can plug various numbers in the TipRanks’ compound interest calculator to get a sense of how this works in practice, and see why starting to save for your retirement from your very first paycheck is a decision you will not regret.
Conclusion: Being Smart With Your Monies
Joining the workforce is a clear and unmistakable sign that you are well on your way to adulthood. Along with this newfound responsibility is the need to be accountable with your monies from the very beginning.
This means making a budget to ensure that you are devoting monies to pay for your immediate day-to-day needs. It also includes repaying any monies you might owe, while also thinking about future liabilities that may pop up without warning.
Lastly, it will greatly benefit you to listen to the age-old wisdom of Fleetwood Mac and, “Don’t stop thinking about tomorrow.” While it is difficult for the newly employed to visualize retirement, the more you put away today, the better off your finances will be going forward.
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