I Just Got My First Paycheck — How Should I Spend the Extra Money?

A woman out to lunch with friends photographs her paycheck with her smartphone to deposit it in her bank account.
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Whether you’ve started a new job or your first job ever, getting your first paycheck can be an exciting reward for your hard work. Of course, you’ll want to first cover your essential living expenses and bills. Ideally, you’ll also end up with some cash to spare.

Without a financial plan, you may feel tempted to spend that money on nonessentials to reward yourself. While this might feel good at the time, it comes at the cost of not building a solid financial future. Here are four ways to use your extra paycheck funds more wisely.

Pay Off Your Debts

Since interest costs you money and debt payments can strain your finances, consider making debt repayment a priority. You could put some of your extra money toward larger monthly payments on any credit cards and loans, or you could pay smaller debts in full.

It helps to know your debt’s interest rates so you can strategize. June 2023 Federal Reserve data indicated that credit cards had an average interest rate of 20.68%, so you could start with those. You might then target your personal, auto and student loans.

Make Your Money Work for You

Build Your Emergency Fund

A Federal Reserve survey showed that just 54% of Americans had three-month emergency funds in 2022. Whether you become sick, lose your job or incur a major expense, lacking savings puts you in a financially risky place and could lead to needing debt.

To prepare, set aside some of each paycheck to ultimately cover at least three to six months of essential expenses. You can put that money in a money market or high-yield savings account to have easy access and get the best interest rates.

Start Investing in Your Retirement

You’ll likely need significant savings to supplement your Social Security benefits during retirement. Even if that seems a long time off, consider starting now by either enrolling in your company’s 401(k) plan or getting an individual retirement account. You can contribute up the allowed limits annually and even enjoy tax benefits.

A rule of thumb is to put 15% of each paycheck toward your retirement. However, you might need to save more to meet your goal, so consider using a retirement planning calculator. You’ll also want to learn more about the different investment options and their returns.

Make Your Money Work for You

Leave Some Cash for Fun

Being financially responsible doesn’t mean having to sacrifice all your extra paycheck money. Doing so could actually demotivate you and lead to an imbalanced financial life.

So alongside paying down debt, saving and investing, set aside a small amount, such as 10%, for the things you enjoy. For example, you might splurge on a concert, take a fun class or enjoy a spa day.

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