Starting your first professional job brings the prospects of career growth and the possibility of new opportunities in the long term. Perhaps more importantly, it provides a steady stream of income, which often pays a lot more, and has better benefits compared to your old summer job.
As a recent college graduate entering a historically strong job market, earning your first big paycheck provides you with improved financial security and an opportunity to further diversify your savings or investment plans.
Now that you’re finally earning more money, it’s time to start thinking of how you will be spending it, and what you will be doing to get the most out of your salary.
While you may be thinking of spending it all on the things you’ve dreamt about for so long, perhaps it would be wise to boost your savings and create a steady, yet versatile investment strategy that can support you in your golden years.
What are college graduates earning?
New graduates might be overestimating what they will be earning once they enter the job market. One survey of college students found that many of them estimate that they expect to make roughly $84,855 one year after graduation.
Unfortunately, this isn’t the reality, and in fact, that average is closer to $52,000 annually for American college graduates with a Bachelor’s degree, according to Statista.
Overall, wages for college graduates have steadily been climbing over recent years, following the pandemic and widespread macroeconomic challenges.
While many companies and employers may be looking to steadily increase employee wages in the coming year, this might not be the case for a freshly graduated college student who still has limited work or industry experience.
Something that may play in favor of the class of 2023 is that many employers are planning to increase their intake of new college graduates by 4 percent compared to last year following a report by the National Association of Colleges and Employers.
The overall job prospects are looking somewhat more promising for those who are leaving college and beginning their ascend on the corporate ladder.
How to budget and save with your first big paycheck
Now that you’re in your new job, and making real money, it’s time to start talking about how you will be spending your paycheck each month that allows you enough leverage to cover your expenses, but also have a bit of cash left to spend on other luxuries.
Find a balance with your budget
The cash has dropped in your checking account and you’re ready to start spending. While seeing that first paycheck hit your bank account will leave you thinking about all the things you can now buy with it, right?
While you might feel rushed to start spending your first paycheck, whether that’s to start building a savings account, invest, pay off student loans, or even buy something bigger, it’s best that you consider a budget strategy that works best for you and your lifestyle.
Oftentimes, people want to upgrade their lifestyle immediately once they start earning a bigger paycheck, but in reality, this isn’t always possible, and there could be more important things you could be putting your money towards than having a closet full of nice clothes or buying brand new tech devices for your home.
Establish a budget guideline that works for you. Many new working professionals often follow the 50-30-20 rule.
- 50% of your paycheck is used to pay for essential expenses including rent, monthly utility bills, transportation costs, and groceries.
- 30% of your paycheck can go towards discretionary or luxury expenses such as experiences, travel, online streaming services, dinners, and non-essential items.
- 20% of your paycheck is used for savings, which could be further diversified into things like investments, 401(k), a retirement plan, or even your savings account.
The 50-30-20 rule is one of the most widely used budget guidelines and is often considered to be a more frugal way of getting the most out of your paycheck.
The more time you spend following this rule, and better work with your money, the easier it will be to save for bigger purchases or have enough money stocked away in your savings, while still upgrading your lifestyle.
Set your financial priorities
Having financial priorities will help you align your lifestyle and budget equally, ensuring that you will use your money on the things or people that are most important to you since leaving college.
Your financial priorities might’ve changed significantly since leaving college or moving somewhere else, and now you need to determine which of these priorities you want to check off first of your list each time you are paid.
Start by listing your financial goals. There are multiple things that you want to do with your money, however, it’s not possible to do them all at the same time.
Next, you can begin to categorize these goals accordingly. Things like traveling abroad are perhaps a more long-term financial goal, compared to paying off high-interest debt that might be considered a more near-term financial priority.
Each of these goals will require you to carefully budget your paycheck from month to month. You might find yourself having a bit of cash left at the end of each month or week, and you’ll need to decide how you want to spend that money, or what you will be doing to ensure you meet your financial goals.
Whether it’s paying off your student loans, perhaps saving for a down payment on a new house, or even clearing your name of any high-interest debt, or maybe saving up for that big trip at the end of the year, make sure that you have financial goals you can incorporate within your budget each month.
You might feel a bit restricted, seeing that this is your first big paycheck, but remember that by carefully evaluating your financial goals, you will steadily create financial habits that will help you in the long run.
Build an emergency fund
Planning for the future, as soon as possible, is perhaps one of the most important financial decisions you need to make early on in your career.
Building an emergency fund takes time, and you might often find yourself having to dip into your savings to pay for unexpected expenses or cover costs during times when your paycheck has been stretched thin.
That’s what an emergency fund is for. While you might be earning a hefty paycheck right now, tomorrow you might be booted and will need to start looking for a new job, and still be able to pay your bills at the end of the month.
Stocking away enough cash, in your emergency fund, will ensure that you have enough disposable cash on hand in the event that you might lose your job, or have to cover expenses that you didn’t budget for.
More importantly, an emergency fund is more than simply stocking cash in the bank, or a savings account and leaving it to incur interest. Instead, consider diversifying your savings portfolio, by investing in stocks, Exchange Traded Funds (ETFs), or mutual funds.
You might want to start thinking about building your retirement plan as well. Opening a 401(k) retirement account is one of the easiest ways you can begin planning for the future. Consider whether you have an employer-sponsored 401(k) and see if you can match their contributions each month.
Again, these activities should be carefully evaluated with the consideration of your monthly income, but also what you consider a financial priority. It’s advised to consult either with a financial professional or accountant in case you’re not sure how to build an emergency fund, or even do a bit of research as a way to guide you.
Automate savings
Another easy way to improve your saving habits is by automating your savings plan. This would mean that by setting up an automated withdrawal, a dedicated amount of money will be deducted from your paycheck each month and will go toward your emergency fund or savings.
Consider the type of savings account that you’d like to have linked to your checking account. One possible option could be a standard savings account, that offers you a small percentage of interest each month on the amount saved. A standard savings account, offered by a bank, is one of the best ways you can begin saving for medium-term or long-term financial goals.
Another option could be a money market account, which is often similar to a standard savings or high-yield interest bank account. These accounts are typically offered by a bank or credit union. One of the downsides of a money market account is that there may be a minimum deposit requirement.
On the upside, you may have easier access to your cash when you need it, and you may receive a better interest rate compared to traditional banks or savings accounts.
The other savings option would be a CD or Certificate of Deposit account, which allows you to save your cash and automate deposits while incurring some interest. One of the benefits, and perhaps downsides is that you agree to leave your money in a CD account without making any withdrawals before account maturity.
Some CD accounts may pay out the interest received on the amount in the account, however, this would largely depend on who you opened the account with, and the general terms of the account. A CD account is a smart way to save for long-term financial goals, without ever needing to invest the money further, and allowing it to mature.
At first, you may feel that an automated deposit to a dedicated savings account will make a dent in your paycheck, however, over time you will begin to realize that this money is being put toward your financial priorities.
Adjust your financial objectives over time
There’s no guarantee that your financial objectives will remain the same over time, and as you begin to age, and climb the corporate ladder, you may be earning more, while simultaneously earning more money, or taking on more expenses.
The opposite may also be true. You may find yourself having to downsize on a few things, such as moving to a smaller and more affordable apartment, or even earning less money as you shift jobs over time.
Regardless of what the situation may be, ensure that over time you adjust your financial objectives to suit your lifestyle, and most importantly your paycheck.
Over time, as you begin to repay high-interest debt such as credit cards or auto loans, you may find that you have a bit more money left that you can put toward your retirement savings or even your emergency fund.
Maybe you’ve managed to repay your student loans, and will now have enough money left each month that you can use as part of your down payment on a house or apartment.
Perhaps you found yourself being unemployed for several months and dipped into your savings to help sustain yourself while finding a new job. You might now have to rebuild your emergency fund, or even catch up with your retirement saving goals.
Either way, you will find that over time, your lifestyle will begin to change, and so will your spending habits and even your financial goals. Remember that when something no longer supports your overall goals, consider re-evaluating the importance thereof, and consider whether this money could rather be put towards something more meaningful.
There’s nothing wrong with changing your financial objectives, as long as you ensure that it suits your needs, and is in line with your long-term plan to save and secure your financial future.
Pay yourself
Nothing like treating yourself to something you’ve always wanted to have, but never really had the money to pay for it. Now that you’re making enough money, it’s time to start spending it on the things that you value as important, or even put it towards the things and experiences you’ve always wanted to have.
While it’s important to budget and save for future expenses, it’s just as important to spend your money on yourself. There is nothing wrong with using the money you’ve worked so hard for yourself. In fact, a lot of people tend to regret not spending more money on the things they enjoy during the early years of their careers.
Before you take on more debt or even more financial responsibilities, make sure that you spend your money on the things you consider important. Remember that you still need to have enough money put aside to cover your expenses such as rent, utility bills, debt, and other necessities.
As a young professional, take the time to evaluate your budget, and how much of your money is being used for things that you enjoy and value. Over time, the urge to spend money on these things may wane, and your priorities will begin to change. Nonetheless, as a responsible adult, you can have a bit of leg room, and spend your money as you please.
The bottom line
Earning a bigger paycheck can be an exciting, and seemingly daunting time in your career. Now that you have a bit more money to spend, you will need to consider your financial obligations, and how you will spend your money wisely on the things that add value to your life.
A bigger paycheck would also mean that you need to budget for things like saving for retirement and diversifying your portfolio to ensure you can incur enough savings for unexpected expenses or have enough put aside if you might find yourself unemployed.
Building healthy financial habits takes a bit of time, but the more you begin to practice having a healthy relationship with your paycheck, and money, the easier it will be to save for important events, pay your bills, build an emergency fund, and have enough left to splurge on the things you’ve worked hard to have.
