Your First Big Paycheck! What to Do Before Spending It
If you’re just starting your first “real” job, your first “real” paycheck will be coming in soon. For many, it will be bigger than any paycheck received before. Time to take it to the bank and cash it for a fun weekend, right?! Not so much.
Before going on a spending spree, you need a plan. Now is the time to start managing your money. Don’t goof off for months or years by deciding to worry about debt and savings later in life. Getting started right away could mean the difference of millions of dollars in retirement and years of hard work on the road to get there.
Here’s how to get on the right track starting with your first payday.
Give Yourself a Little Reward
Landing the job and receiving your first paycheck is definitely cause for celebration, and you deserve to do something nice for yourself. But you shouldn’t celebrate by spending the whole thing on a down payment for a new car or a slew of new gadgets.
Instead, reward yourself a little more modestly, like a night out to a nice restaurant or tickets to see your favorite sports team. You’ll get the satisfaction of having a little fun while not overdoing it.
Start With a Budget
Yes, this is a less exciting follow-up to the “reward” step above, but it’s an important one that will lead to much larger rewards in the future.
A quick and easy budget that takes a few minutes to set up can make a big difference for your financial health. Getting the budget right from the start is hugely important.
These budget items need your attention ASAP:
1. Emergency Savings
There’s always the chance of getting surprised by an emergency. Having a plan to deal with regular monthly expenses is a great start, but you need to take steps to protect yourself in case of a car accident, a medical emergency, or anything else that unexpectedly comes up.
The best way to do this is to have an account that only gets touched in the case of a real emergency. And no, running short on cash for shopping at the mall is not an emergency.
To start, $1,000 is a good goal for an emergency fund. This will be a nice cushion for minor emergencies, so work to save that up in within the first few paychecks. Eventually you’ll want to save more in your emergency account, but this initial amount is a good start.
2. Your debt
If you’re like the average graduate, you probably have a good amount of debt that you need to start paying off. According to USA Today, students leave school with about $25,000 in student loans plus credit card debt on top of that. Paying just the minimum on those debts would take years to pay off while racking up thousands in interest. You don’t want to go that route, trust me.
Work on a plan to start paying your debt, and do your best to pay extra. You can use various online calculators, like this one, to see how increasing your payments will cut down on total interest paid and the term of your loan, too.
You might not have an investment account set up yet or even a plan for how to invest, but that doesn’t mean you shouldn’t start thinking about it. Even if you don’t have something to invest in yet, like a 401(k) or an IRA, still put some money aside for when you’re ready. Even if $25 per paycheck is all you can afford for now, get started and increase this amount later. Once you have a better idea of where and how you’ll invest, you can deposit what you’ve already saved.
4. Savings for a purpose
Setting aside money in a savings account for a certain goal can be both motivating and easier for organization. For example, if you’re trying to save $1,000 for a tropical vacation, keep it in a savings account just for that purpose. By designating savings for something specific, you’ll be much more inclined to stick with your goal. By keeping it out of a checking account, you won’t accidentally spend it.
Automate Every Way You Can
Budgeting is half the battle, but getting your money to the right places is what gets the job done. There’s no better way to make sure that happens than to automate payments and transfers.
First off, make sure you paycheck is directly deposited into your bank account. It’s very common these days, and this makes the following the automation steps much easier.
Next, set up automatic payments and transfers that coincide with the budget you created in the previous step.
Here’s an example: You want to apply $200 of every paycheck towards your credit card debt. You get paid on the 15th and 31st of every month. Set up automatic payments of $200 on those days. This way, your payments are sent before you can withdraw that money from your paycheck to spend on something else.
This strategy works with emergency, investment, savings, and loan debt, too, so use it as often as you can.
Remember: being financially successful isn’t just about how much you make. It’s about how well you manage your money, too. Getting started right away is the best thing you can do for yourself after finding a job. So what are you waiting for?