So you’ve graduated college and, after several months of interviews, landed your first job. Congrats! That’s a big milestone. And while it’s not easy to adjust to a full-time work schedule, the arrival of your first paycheck should make all of that hard work worthwhile.
If this is the first time you’re looking at a sizable paycheck, you may be tempted to go out and spend that money on a host of items on your wishlist. And that’s understandable. But before you spend your first paycheck on splurges and other such fun things, consider these important uses for it instead.
1. Start building an emergency fund
Did you know that 63% of Americans do not have enough money in their savings account to cover an unplanned $500 expense? Such were the findings of a recent SecureSave survey.
Chances are, if you’re about to collect your first paycheck, it means your cash reserves are limited, too. But it’s really important to have money in the bank to cover unexpected expenses. If you don’t, you might instantly be forced into debt when those bills arise. So it’s a smart idea to use your first paycheck to begin building an emergency fund.
In fact, your goal should be to sock away enough money to cover three full months of living expenses. If you’re brand-new to a job, your living expenses may not be set in stone, though. For example, you might still be living with your parents because it’s hard to qualify for a rental of your own until you can show proof of a steady income.
But do your best to estimate your monthly costs so you can set an emergency fund target. And then, ideally, allocate money not just from your first paycheck, but also subsequent ones, to get to that goal.
2. Chip away at credit card balances
You may have racked up some credit card debt in the course of getting your degree or moving to the city where you found the job that’s about to hand you a pile of money. The sooner you’re able to whittle down that balance, the less interest you’re apt to pay on it. So if you can use some of your paycheck for that purpose, it might result in nice savings.
Meanwhile, perhaps you owe money on more than one credit card. In that case, a good bet is to focus on the balance with the highest interest rate first, since it’s what’s costing you the most.
3. Put some of it into an IRA or 401(k)
Did you know that you might not have to pay taxes on all of your first paycheck? If you put some of that money into an IRA or 401(k) plan for retirement savings, you’ll exempt a portion of your income from taxes. Plus, you’ll be doing your part to help set yourself up for a financially sound future.
If you’re getting your first paycheck, it likely means you’re pretty young. So let’s say you’re 22 and put $100 from your first paycheck into a retirement account. Over the past 50 years, the stock market has averaged an annual 10% return. If you score that same return in your IRA or 401(k), then at age 67, your $100 investment will have grown into almost $7,300.
What’s more, let’s say you’re able to contribute $100 from every monthly paycheck you get over 45 years. At that same 10% return, you’re looking at $863,000 in savings.
Your first paycheck is truly something to celebrate. Make the most of it by building emergency savings, paying off debt, and seeding your nest egg.
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