How to spend your first paycheck efficiently
How much was your first paycheck? Most of us can answer this question. It is because the first paycheck is always special.
However, often people are confused with what to do with the first paycheck and splurge with it. Even people use their credit cards more than what they get as their first salary.
Well, you can splurge a little bit; after all, it’s your first income. But, you should consider certain things right from your first significant earning.
Often personal financial advisers say to start saving for your retirement from your first paycheck.
Before we start discussing what to do with the first paycheck, let’s clarify some common things about it.
Understand your first paycheck
First of all, when you join a job for the first time or when you join a new job, inquire when do you get the first paycheck. It will help in your financial planning.
You should also inquire how you’ll receive your salary on monthly basis. It can be a direct deposit into your bank account or you can get a paper check. If it’s the latter one, then is it mailed to your home address or delivered at your workplace? Usually, the employers share such information when you join, right on the first day itself. Sometimes, you may get your paper check for the first month and thereafter the amount get deposited into your bank every month.
Now, how will you understand your paycheck? The amount you receive is usually after federal and local deduction, and your share of employee benefits. Usually, the companies give a W-4 form where you mention how much tax to deduct from your paycheck.
Once you receive your paycheck, you’ll also get an online or electronic pay stub where your gross pay, deductions, and net pay will be mentioned.
Later on, you may find wage garnishments, back pay, etc., if any, along with benefit insurance deductions mentioned, when you opt for it.
The net pay is the amount you receive after all these deductions.
There are websites where you can calculate your net pay if you want to be sure of the calculations.
How to spend your first paycheck
Your net pay is the amount on which you have to create a salary budget. Here are what you should do from now on if you’ve started earning a steady paycheck:
Plan a budget
When you receive your first paycheck, you’ll get an idea of how much your net salary will be every month. So, take out time and start planning a salary budget. It will take some time. But once you’re able to plan a suitable budget, a major task will be done.
To start with, jot down your income from all sources if you earn something apart from your monthly paycheck. Then, list your necessary and variable expenses. Now, allot an amount assuming your probable expenses in each category.
Now deduct your expenses from your income. If you get a positive number, you have done an awesome job. Now, your target will be to save about 20% - 30% of your monthly salary and plan your expenses in that way.
While finding out how to budget your salary on a monthly basis, make sure not to spend more than your net salary.
One budgeting tip:
If you’re opting for a big-ticket item, include the amount in your monthly budget and try to pay it off asap to pay least interest charges.
Check out 4 types of budgeting strategies, so that you can choose your preferred one.
Celebrate your achievement
You should celebrate your success with your first paycheck. But, don’t splurge much! It is ok to give a treat to your friends, spend on yourself, etc., but spend as much as your budget permits you to do so.
It is advisable not to increase your lifestyle too much so that it becomes difficult to go back to your previous lifestyle if required.
You should try to avoid credit card debt at any cost. Don’t overload your credit cards to achieve a lifestyle you desire. Have patience. With time and financial planning, you’ll be able to achieve your desired lifestyle.
Check out: Avoid credit card traps - Identify hidden costs
Start an emergency fund
You should save about 20% of your paycheck and use that amount to build an emergency fund. Life is unpredictable. No one knows what is waiting at the next moment. But, you can tackle many emergencies without falling into debt if you have an emergency fund.
However, do not use this money for shopping or other purposes. You should keep it only for emergency situations like sudden car repair, medical emergency, and so on.
You can set up an auto transfer, for a certain amount, at a fixed date, for this account.
A piece of advice:
Try to save 10% more in your savings account after saving 20% for your emergency fund. Doing so, you’ll have a good emergency fund along with liquid money in another account. You can use this liquid money to plan your vacation or to plan your holiday expense. However, again mentioning, do not use this liquid fund just for shopping leisurely.
Invest in a retirement account
As I mentioned right at the beginning of this article, start putting money into a retirement fund. You will thank yourself later for taking this good financial step, as you’ll have a great advantage of compound interest.
It is better to opt for automatic deposits since your liabilities will be much less now.
Reduce or repay your student loan
Almost all of us need a student loan to complete our education. So, paying it back should be one of our top priorities.
Therefore, allot an amount from your paycheck towards paying off your student loan(s). It is advisable to set up auto savings for paying back your student loan too.
Donate a bit
Donate a part of your first salary to a charity. Build this habit with your first paycheck. It is a great practice which you’ll be grateful for.
When you join a job and get your first paycheck, inquire how you’ll receive your last paycheck if you discontinue your service or get laid off. Will you get it on your last working day or you’ll have to wait for some time to receive it? This information will help you while making the decision for changing job.
So, what’s more! Enjoy your job life!
Also read: The budget showdown! And the best budget award goes to: