7 Dos and Don’ts for New Grads Getting Their First ‘Adult’ Paycheck
Written by
Cynthia Measom
Edited by
Gary Dudak
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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.
Here are some do’s and don’ts for graduates getting their first “adult” paycheck.
Do Understand Your Net Pay and Consider Any Hidden Costs
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.
Don’t Forget To Take Advantage of Employee Benefits
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.”
Do Pay Yourself First
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.
Do Figure Out Any Loan Repayment Plans
For graduates who took out student loans, it’s important to prioritize student loan payments as soon as the paychecks start rolling in.
“You may still be riding the high of graduation, but figuring out your total loan balance and monthly payments as soon as possible is important to set yourself up for financial success,” Howard explained.
She also said paying more than the minimum can help you pay off loans faster and cut down on interest.
Don’t Overlook ‘Microsaving’
Howard said that one common misconception about saving is that each deposit must be hundreds of dollars, but that’s not the case. She explained that it’s possible to make meaningful progress by “microsaving,” which involves saving small amounts of money consistently.
She also recommended saving extra income, such as a tax refund, birthday cash or money from a side hustle.
Do Automate Payments Whenever Possible
Automating payments is a smart move, and one of the most foolproof ways to stay consistent with your financial goals, according to Howard.
“Scheduling payments and deposits not only saves time, but it also helps you avoid late fees or potential harm to your credit score,” she said.
Don’t Fall Victim to Lifestyle Creep
Lifestyle creep is when you spend more just because you’re earning more. Howard said that it’s a common mistake young people entering the workforce make, especially when factoring in FOMO (fear of missing out) or other pressures from social media.
“Ally’s recent Minds on Money report found that nearly 40% of Gen Z have gone into debt to maintain appearances on social media, with nearly a third buying items they saw on social media either immediately or the same day,” she said. “If you find yourself committing to group trips, fancy dinners or overspending on the latest fashion items just to ‘keep up,’ consider financial wellness resources like Money Roots, a free program based in money psychology that can curb bad money habits while still empowering you to enjoy your money — without outpacing your new salary.”
Source
- Jack Howard, Ally
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