Receiving your first adult paycheck as a new college graduate can be exciting, but the excitement could quickly turn to regret if you don’t choose the right way to spend (and save) it.
Jack Howard, head of money wellness at Ally, said that the new salary figure can tempt spending and new grads may have to acknowledge that their paycheck doesn’t stretch as far as they thought due to taxes, benefits and new monthly student loan payments.
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Here are some do’s and don’ts for graduates getting their first “adult” paycheck.
Net pay is different from gross pay. Gross pay is the amount you earned prior to any taxes or deductions being taken out. Net pay — aka “take-home” pay — is the amount you receive after taxes and deductions are removed.
Howard suggested that when building a monthly budget, new grads should work backward from their net pay, subtracting all fixed and variable expenses to arrive at a disposable income figure. However, she also said not to forget to factor in potential “hidden costs,” such as afternoon coffee runs or a midday lunch.
“Before you arrive at your remaining disposable income figure to play with for the month, make sure all those sneaky, everyday expenses are already considered,” she recommended.
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Howard said that new grads might miss out on the opportunity to maximize retirement contributions if they don’t take advantage of what their employers offer, like a 401(k) match.
“If your company offers it, it’s recommended to contribute up to their match and if not, opening a Roth IRA is a good option too,” she said. “A lot of companies will offer additional benefits like a 529 match to help pay for grad school, tuition reimbursement, Health Savings Accounts which offer a triple tax advantage or access to a free certified financial planner who help create a plan for your financial future.”
Howard explained that the amount you “pay” yourself from each paycheck — money that goes toward savings or investments — will vary depending on salary, but allocating 10% to 20% of your paycheck is generally recommended.
She also recommended establishing an emergency fund with three to six months’ worth of living expenses. If that amount seems intimidating, Howard suggested focusing less on the total amount needed and more on creating the habit of setting aside the money. Then, she said, as your income increases, the amount of money you can save per month will also.
