Getting that first job in your chosen field is an accomplishment to be celebrated. Take some time to celebrate your success by treating yourself to a night out or a weekend away before you get down to business preparing for your first day on the job. I think you’ve earned it.
What’s next won’t be as exciting, but it’s essential to your financial security in the long run.
An entry-level role is typical for a person’s first “serious” employment. It may not pay very much if you got it immediately out of college or a trade school. Even so, your first paycheck is almost certainly going to be greater than any you’ve received before for a temporary or part-time job.
And if your job develops as it should, you should expect to increase your income in the years to come. The exception to this rule would be if you choose to take a pay cut to do the work you love, which, with forethought, might not be too much of a hardship.
What are your plans with the money you earn in your first “real” job? In what ways do you plan to make the most of your (hopefully) regular paychecks? How can you make sure you’re on track to achieve your short- and long-term objectives by boosting your financial literacy and establishing a solid foundation for your future financial success? Find out by reading on!
Financial Advice to Help You Make the Most of Your First Job
To get your career off to a good start, take heed to these money management tips and methods. The items in this list are presented in roughly chronological order, starting with those that must be done immediately following the successful acquisition of employment.
- If you do not already have a bank account, open one.
The first thing you should do is create a checking and savings account with an FDIC-insured bank or credit union in the United States. Try to find a checking account that doesn’t cost you anything every month, or at least doesn’t charge you anything if you meet certain criteria, like making regular direct deposits or keeping a certain minimum amount in your account every day. One of my favorite financial institutions, Chime, does not charge any fees and provides early access to your paycheck two days before it is deposited.
It’s important to choose a bank or credit union that works well with your particular situation. Savings account yields and loan rates at online-only banks like CITIBank may be higher than those at brick-and-mortar banks with more support employees. Never set foot in a bank branch again if you are paid by direct deposit (more on that below) and pay all your expenses online.
When picking a checking or savings account, overdraft protection is an important feature to look for. The majority of ATM and one-time debit overdraft fees assessed by U.S.-based deposit banks are forbidden by law and, as a result, are refused unless the consumer gives their express permission.
Overdraft costs usually approach $30 per item, which is a blow to the bottom line for anybody, but especially for young workers with few savings. You could decide it’s better to skip overdraft protection and deal with the temporary inability to make discretionary purchases, with the expectation that you’ll have less overdraft issues as your bank balance increases.
- Establish Direct Deposit
Make sure you have a direct deposit set up with your new workplace before your start date if they provide it for free, as the majority of companies do these days. If your basic checking account doesn’t already waive monthly maintenance costs, setting up automatic direct deposits is the simplest method to avoid them without sacrificing the convenience of depositing checks at the branch or using your mobile banking app.
- Set up Automatic Savings Contributions
You can never start saving too soon. So, why not use your first paycheck as a springboard?
Automating your savings is the most reliable strategy to save regularly and keep your savings rate stable. It’s possible to do this by:
- ACH Transfer. If your company will let you, you should put money aside from each paycheck directly into a savings account.
- Constant Electronic Funds Transfer From Your Bank. Set up automatic deposits from your checking account into a savings account on payday or on the same day of the month.
- Smartphone program that automatically puts money away. You can save money without even thinking about it if you use an app like Acorns ($5 bonus when you sign up!) or Digit to automatically transfer money from your checking account into your savings. Digit and similar apps utilize complex algorithms to calculate monthly savings goals. The savings rate can also be established and adjusted manually. There are a few financial institutions and a handful of applications that will automatically add any spare change from your debit card purchases to an available savings account.
Of course, there’s no law that says you can’t use more than one way to put money away. If you’re content with the automatic savings plan your bank offers, I still think it’s a good idea to use a round-up-the-change app as well. The difference between the two will be so minor that you won’t even notice it, but your savings will increase more quickly.
What is the ideal interest rate for your savings? You decide. Aim to put away at least 10 percent of your paycheck initially, preferably in an FDIC-insured bank account rather than a tax-deferred retirement account that has a penalty for early withdrawals. Getting to 10% may take some time, especially if you have to pay down high-interest debt first, but it’s a sensible target that should be easily accomplished in the long run.
You should aim to save at least 10% of your after-tax income for retirement, although there are government restrictions on how much you may put away. For further information on retirement planning, see Points 7 and 8 below.
- Distinguish between discretionary and non-discretionary expenses.
The ability to exercise fiscal restraint and spend less money than you bring in each month is possible even without a formal household budget. The ability to reduce debt, keep up a steady savings rate, and prevent lifestyle inflation (more on that below) without the use of a budget is admirable.
However, without knowing what constitutes a discretionary and what constitutes a non-discretionary cost, practicing fiscal restraint is next to impossible.
There’s no complex reasoning involved. You undoubtedly recall learning in grade school that necessities must always come before wants. The split between optional and necessary spending is consistent with this definition. Non-discretionary costs include things like rent and electricity, whereas discretionary costs include things like entertainment and dining out that you can choose to spend less on if money is tight.
Even if you don’t have a formal budget, it’s still a good idea to review your spending patterns on a regular basis, with a focus on where your money is going. Be ready to cut back on spending if you discover that your spending in an area with more leeway, like entertainment, is excessive. Tiller is a good example of a money management tool that may help you see where your money is going by category and by store.
- Create a strategy for dealing with any high-interest debt.
Most young adults nowadays carry student loan debt into their first jobs, and others have racked up absolutely staggering amounts of debt by the time they reach their thirties.
Obviously, student loan debt is the biggest problem, but millions of people in their twenties also have trouble paying off high-interest credit card debt.
Paying off such debts should take precedence over saving for retirement. This is due to the fact that the long-term cost of carrying high-interest debt is significantly higher than the probable long-term rate of return on money stored in bank accounts or exchange-traded products, such as stocks and funds.
While the stock market may yield 4% to 6% annually over the next decade, carrying a credit card load could cost you 15%, 20%, or even 25% every year. Paying off high-interest debt first is typically the best decision, even after factoring in the tax benefits of tax-advantaged accounts and matching employer contributions (assuming your company is kind enough to give them).
- Begin Building an Emergency Fund
The first thing you should save for is an emergency fund. An adequate emergency fund should be enough to cover at least three months of living expenditures at your present level of spending, with six months being preferable.
That’s thousands of dollars, so even if you’re really conservative, you won’t have enough to cover your emergency expenses after your first paycheck, and probably not even after your first ten. But that shouldn’t stop you from starting to save for an emergency fund right away. Start saving immediately with a high-yield CIT Bank savings account.
Consider investing all or most of your 10% savings share here. That’s $400 a month if you make $4,000 a month. Supplement your funds for unexpected events with irregular or irregularly occurring windfalls, such as your yearly income tax refund.
- Set Up Recurring Contributions to Your Employer-Sponsored Retirement Plan (If Available)
Join a 401(k) or 457(b) plan as soon as you are eligible to start making monthly contributions if your company offers this type of tax-advantaged deferred pay. It usually happens after you’ve paid off your high-interest bills.
It’s better than nothing if you can donate even a small amount, even if it’s just one percent of each salary. One evident financial benefit beyond the return on investment is that your contributions come directly from your gross (pre-tax) income and are not subject to federal or state income tax in the year that you make them. You may increase your contribution rate when your financial situation improves, albeit doing so may involve some paperwork.
Employer matching is a perk of some retirement plans offered via workplaces. If your workplace offers a matching contribution program, it’s in your best interest to contribute at least up to the maximum allowed under the program.
If your work offers a 401(k) match and you’re saving money anyhow (either in a regular savings account or on frivolous purchases), it’s probably worthwhile to put that money toward retirement instead.
- Open and Start Contributing to an IRA
If your company doesn’t provide a qualified deferred compensation plan, you can still set up an IRA with a third-party provider like Betterment. The vast majority of filers select either Roth or traditional IRAs.
- Contributions to a traditional Individual Retirement Account. Traditional Individual Retirement Account contributions are tax deductible for the year they are made.
- Taking a withdrawal triggers the normal income tax rate. After reaching age 70.5, you are compelled to start taking withdrawals (also known as RMDs), even if you are not in need of the money. In most cases, you’ll need to wait until you’re 59 12 to avoid paying a 10% penalty for withdrawing money from your retirement account early.
“Roth IRA” However, while contributions to a Roth IRA aren’t tax deductible, withdrawals aren’t taxed either. Contributions can be withdrawn tax-free before age 59 12, but earnings cannot.
Both types of accounts count toward the IRS’s yearly contribution limit. That is to say, regardless of how many IRAs you have, you cannot make contributions to all of them in excess of the annual limit for that tax year.
Due to the same tax treatment of employer-sponsored deferred compensation plans and standard individual retirement accounts, most workers would be better off prioritizing neither.
But if your company has a matching 401(k) or other deferred compensation plan, you should take advantage of it first before putting money into an individual retirement account (IRA).
- Apply for a Credit Card
Aversion to acquiring a new line of credit is reasonable if you have a history of struggling with high-interest debt. However, credit isn’t harmful or wicked in and of itself. In reality, obtaining a couple of small credit lines, keeping the amounts low (under 30% of the spending limitations), and paying them off in whole and on time every statement cycle is the gold standard for developing or rebuilding credit.
If you’re just starting out in life or are trying to improve your credit score, using a credit card for most of your routine transactions may be a great way to build credit, get rewards, and save money.
While doing so would undoubtedly increase the number of credit cards you have in your possession, doing so is perfectly OK so long as you maintain manageable balances on each card and pay them off in full every month. Consider putting any cash bonuses toward retirement savings or paying off long-term debt, including college loans.
- Create Goal- or Category-Related Savings Containers
If you’re just starting out, it’s more vital to start saving than to worry about how to allocate your funds between short-, medium-, and long-term goals. But when you’ve established a habit of saving, it’s time to focus your efforts.
I think it’s great to have a savings account for each distinct financial objective. By opening a savings account with a free online bank, you may avoid having to pay monthly fees. A 529 plan, a health savings account (HSA), or a flexible spending account (FSA) are examples of tax-advantaged savings programs that an employer could provide (FSAs).
- Determine Your Housing Requirements
When you get your first job in your chosen field, you may not give much thought to where you’ll live five years from now. It’s possible that you’re living with your parents or in a small place with many roommates; while these arrangements could be manageable for the time being, they’re far from ideal.
Consider trading up for better accommodation once you have saved up some money and are free to move out of your current place without breaking your lease.
Even if you have a good income, it may be years before you can afford to live alone or buy a property in a city with high housing costs. San Francisco Bay Area property prices, for example, averaged $830,000 at the beginning of this year. An initial payment of 20% would result in a total out-of-pocket expenditure of $166,000 (not counting closing charges).
If you want to buy a house or find a decent-sized apartment without having to share with strangers, moving to a cheaper city could be your best chance, as upheaval and anxiety-inducing as it may sound.
Even while the beginning salary may reflect the cheaper cost of living, there are many robust, varied economies with equivalent employment options in areas that are more inexpensive to buyers. For example, those from the Bay Area who are ready to face the city’s long, severe winters may be enticed by Chicago’s flourishing tech industry and moderate property costs (at least, by coastal standards).
- Conduct Extensive Research on Major Purchases
Never think that the lowest price means the best quality. You may want to emphasize quality above price if you’re planning on making a large purchase of durable items, such as a new washing machine or refrigerator, that you expect to endure for many years.
You can’t be sure of anything unless you complete the necessary investigation. Always do your homework before making a major purchase by consulting reliable sites like Consumer Reports (for analyzing anything from new vehicles to home appliances) and the Consumer Financial Protection Bureau (for reviewing financial goods and avoiding potential frauds).
Use a service like HomeAdvisor or Angie’s List to locate and evaluate reliable handymen and contractors for any home improvement jobs you need done.
- Think About Hiring a Financial Planner
You may put this off until far after the first month on the job has passed. But if you’ve been working consistently and receiving a “real” income for a while, with consistent spending and saving habits, it may be time to see an expert.
A CFP® professional is trained to analyze your current financial situation and provide strategies for the future. Investing in a CFB was among the best choices I’ve made for my business. It wasn’t inexpensive, but it was money well spent.
The most common type of service provided by fee-only financial planners is project-based planning, which is performed once and does not necessitate a costly continuing investment management relationship. The cost of a financial plan can range from $500 to over $2,000, with the final price determined by the planner’s hourly rate and the intricacy of your finances. Get a written quote right now.
Your financial plan is something you can preserve and refer back to even after your project is finished. Even though my wife and I have completed all of the plan’s immediate tasks, we still return to it on occasion, especially before making any major financial decisions.
- Reward yourself on a regular basis for meeting financial targets.
Reward yourself on a regular basis for completing or surpassing recurrent financial objectives and one-time milestones without sacrificing the budgetary discipline that allowed you to achieve them.
An example of a regular or continuous objective may be saving 10% of your take-home salary every month. If you succeed in doing so for three consecutive months, treat yourself to something inexpensive like a trip to a secondhand store or a romantic evening out with your significant other.
One-time objectives include things like finishing an emergency fund or paying off college loans. You deserve a reward after making that last payment or deposit.
Greater achievements merit greater recognition. For example, it’s more significant to keep up your savings rate for another quarter than it is to buy your first home. It’s up to you to decide when and how to celebrate the achievement of financial targets.
- Prevent Lifestyle Inflation
This is yet another of my ultimate dreams. As a result of the excitement surrounding their first “real” paychecks, far too many young workers fall victim to lifestyle inflation, the gradual but steady loss of financial restraint in the face of increasing earnings.
An escalating cost of living may be exacerbated by social factors. The temptation to keep up with the Joneses may be intense if most of the people in your social circle have a comfortable salary and spend it lavishly.
Maintaining a frugal attitude akin to your college years is not necessary to prevent lifestyle inflation. You should reward yourself quite often when your income improves, so long as you can resist the temptation to overspend, pay off your debt, save and invest consistently, and live well below your means.
The advice of several experts on personal finance is to befriend someone who has either filed for bankruptcy or come very close to doing so. They believe that you can’t appreciate the importance of good financial management unless you’ve faced severe financial hardship.
The following advice on personal finance for young professionals is neither groundbreaking nor particularly novel. Your parents may have used this guidance as-is or with minor adjustments as they built their own financial foundations.
Even if your parents and their parents before them have been through their own financial ups and downs, you are now on your own path to financial independence. All of these suggestions make sense, but not all of them will work for you. There is no replacement for your own good judgment, which should be based on thorough study and the counsel of competent, respected specialists who are aware of the specifics of your financial position.