There’s no better feeling than landing your first job and depositing that first paycheck.
But with that money comes responsibility: You need to figure out how to stretch your wages to pay your bills while setting money aside for emergencies, retirement and life’s other big costs..
What you do with those early paychecks “can really set a tone for your personal finances” for the future, says Marguerita Cheng, CEO of Blue Ocean Global Wealth, an investment advisory firm in Gaithersburg, Maryland.
Remember you won’t get rich overnight and you’re just taking the first steps toward financial adulthood.
Divvying up your take-home pay will be challenging, especially for those with modest starting salaries, and credit card and student loan debt, personal finance pros say.
“They look at all the bills screaming at them on a monthly basis and say, ‘I have to pay all of those? I have nothing left. So what am I to do?’“ explains Tony Ogorek, CEO of Ogorek Wealth Management in Buffalo, NY.
Here’s a step-by-step plan of priorities:
Create a budget
“It all starts with the ‘B’ word: budget,” says Cheng.
Doing a budget may sound boring, but it lets you know how much money you have going out in bills each month, and, hopefully, how much cash is left over to put to use elsewhere. Tally up all your monthly expenses: rent, student loans, car payments, auto insurance, commuter fees, smart phone bill; electric and other utilities; and food.
These “essential” living expenses must be built into your budget since they’re recurring monthly costs. If there’s not a lot of discretionary cash left, look for ways to save. That might mean eating out less, cutting out your daily coffee fix or settling on a car that has a monthly loan payment much lower than the average of nearly $525.
Set up an emergency fund
Stuff goes wrong in life. Cars break down. Family members get sick, creating budget-busting expenses. Ideally, it makes sense to build up at least three months’ worth of bills in a rainy-day fund. But at minimum one month is a good starting point if you want to free up cash for other must-save buckets like retirement savings.
The popularity of 529 savings plans has fallen, but they still provide advantages for users saving for college.
The popularity of 529 savings plans has fallen, but they still provide advantages for users saving for college. (Photo: Sezeryadigar/Getty Images)
Start saving for retirement
Getting an early start on saving is the best way to amass large sums of money. Not only does your money have decades to grow and time to ride out inevitable market downturns, it also benefits from “compounding,” which allows you to earn money on the money you’ve already saved as well as on the gains from those investments.
With traditional pensions being phased out in favor of employer plans that require workers to sock away their own retirement savings, this is an expense that should be viewed as an investment in your future.
“Your twenties is when you really want to be forming good habits that will allow you to accumulate wealth,” Ogorek says.
Investing in a 401(k) retirement investment plan at work, therefore, is the next thing to build into your budget – especially if your company offers a matching contribution. The most common match is 50 cents for each $1 contributed by the employee up to 6 percent.
“It’s free money,” says Ogorek. “If you put away a dollar and they match 50 cents, you just made a 50 percent return. That’s one of the best deals on the planet.”
Remember that 401(k) contributions are made with pre-tax dollars, which will lower your tax bill. Account gains are subject to taxes.
To maximize growth, Ogorek advises savers in their 20s to invest 100 percent of their money in stocks, preferably in low-fee index funds that track broad market gauges, such as the Standard & Poor’s 500.