If you're starting a new job, you likely have a lot on your mind: from impressing your boss to wishing you had negotiated for a better parking space. But you also need to think about how to manage your new paycheck.
It's easy to focus on work now and worry about how you'll spend your money later. But as you begin a new chapter in life with your career, you're also starting a new chapter with your money. If you really want that paycheck to dazzle you, consider these five financial strategies.
1. Create a Budget—and Follow It
If this is your first full-time job, you probably realize you need a budget. Maybe you've been pondering what your budget will look like for a while.
But even if this isn't your first job, give your budget a makeover. Whether you're earning more or you took a smaller paycheck to get into a field you're excited about, your money situation has changed.
There's a lot to think about, such as putting money aside for expenses like mortgage or rent, utilities, groceries, healthcare, clothing, transportation, insurance premiums and entertainment. Hopefully, you're also thinking about saving for retirement and paying off debt. Speaking of which...
2. Put More Money Toward Your Future
Without a doubt, you've heard effusive praise about the power of compound interest, and how it's smart to save for retirement early. It's all true.
Retirement calculators on the internet abound. If you play around with one, you'll see the impact of putting money away earlier rather than later. A 25-year-old who socks away $100 a month for 40 years at 4% interest would have over $114,000 saved upon retirement. Or, if you started saving $150 a month at age 35 with 4% interest (10 years later than the 25-year-old, but $50 more), you'd have about $100,000 when you retire.
The moral of the story: The earlier you put money toward retirement, the better off you'll be.
If this is your first job, you don't have to put away much—aim for $50 a month if that's all you can afford—but make sure you put away something. Get in the habit of saving some money monthly; you can increase that amount as your paycheck gets bigger. You may want to look into starting a retirement account or purchasing a different type of investment vehicle, such as a certificate of deposit.
If you're deeper into your career and you've been putting money toward retirement for some time, do your future self a favor and put even more income toward your retirement accounts now that you're earning more.
Many experts suggest directing at least 10% to 15% of your pretax income toward retirement.1 That can seem like a heavy lift if you're just starting out and feeling overwhelmed with managing your finances. But if you begin by putting just 1% of your paycheck into a retirement account, you can raise that to 2% the following year, then 3% and onward.
If you have kids, you'll also want to think about opening a 529 plan and stowing away money for their college education.
There's really no shortage of things to save for.
3. Create an Emergency Fund
An emergency fund is smart to start at any time, regardless of whether you have a new position. But with a new job, you're presumably earning more money than before. If creating an emergency fund has been on your to-do list, now would be an excellent time to check off that task.
An emergency fund is there in case of financial emergencies, so you don't find yourself raiding your grocery money to pay for car repairs.
While you can designate an extra checking account for your emergency fund, a high yield savings account may be a better option. And if you have money automatically pulled from your paycheck every week or every month, you'll never miss those funds.
If you somehow go a few years without an emergency? The worst thing that happens is you have a small, growing fortune in your emergency fund—enough for several emergencies. That's a good problem to have.
4. Pay Off Debt
Now that you're making more money, this would be a great time to use any extra money to help reduce your debt.
If you're starting your first job, you may have crushing student loans to contend with. Even if you're on your third or fourth job, you may still have student loans to tackle. (Paying off student debt takes time.)
You also might have credit card debt or a personal loan. Plenty of people go into debt for complex reasons, such as to pay for college or buy a car. But the faster you can pay off that debt, the more you'll have to put toward retirement and fun stuff like vacations and concerts.
5. Get a Credit Card and Use It Wisely
This might sound counterintuitive, considering you just got a mini-lecture on paying off debt.
But ideally, you don't get a credit card to go into debt. If you borrow on your credit card and pay it back in full every month, good things start to happen:
- • Your credit score goes up.
- • Your credit history improves, which affects your credit score. Lenders like to see a long credit history, preferably one in which payments are made on time.2
- • When your credit score goes up and your credit history looks strong, lenders give you their best interest rates, so you can buy a house, a car or whatever else you need.3
- • If your credit card has cash back rewards or some other deal attached to it, you can potentially save money every month on what you're buying anyway.
Make Your Money Work for You
It can sound like a drag, taking your shiny new paycheck and diverting it to retirement accounts, student loan debt and emergency funds.
But by deciding early on how you're going to split up your paycheck, you'll ensure that your money works just as hard as you do. And once that's done, you can hatch a plan to get the best parking space or maybe funnel some of your paychecks to buying something fun and frivolous.
Feeling motivated to do more with that first paycheck from your new job? Learn more about work and retirement.
Geoff Williams is a finance writer based in Loveland, Ohio. He specializes in consumer credit, personal finance and small business finance. For the last 10 years, he has been writing for U.S. News & World Report, and his work has appeared in numerous publications, including The Wall Street Journal, CNNMoney.com, The Washington Post and LIFE magazine.
READ MORE: I'm 50 Years from Retirement. Do I Have to Fund My 401(k) Yet?
Sources/references
1. DeVon, C. "How much Americans in their 20s need to save each month to retire at 60 with $1.2 million." CNBC. July 8, 2023.
2. McWhinney, J. "What Lenders Look at on Your Credit Report." Investopedia. April 26, 2023.
3. DeMatteo, M. "What are the biggest advantages of a good credit score? A consumer advocate explains." CNBC. August 1, 2023.