You officially finished school and you landed your first job.
Along with that, the long–anticipated First Paycheque just hit your bank account.
Although this makes me sound like I’m 80 years old, I remember my first paycheque well…
I got paid monthly, so when it showed up in my account, I felt like a very, very rich lady.
Just kidding. I felt like a new grad on a budget, which was the appropriate reaction.
So yes, I was getting paid for my work, instead of getting graded on it. I now needed to make this very limited amount of money cover ALL of my monthly needs. (And stretch it to include a few wants.)
Luckily, I had read a personal finance book or two in my time (#nerdalert) so I wasn’t flying blind – and you don’t have to either.
Here are 7 steps you need to take to make the most of your first paycheque. And still have a little bit of fun along the way.
1. Figure Out How Much You Make After Taxes
Remember when you saw or heard your annual salary for the first time, and thought it was the biggest number in the world?
Well, that’s not the number you’re actually going to have to work with in your bank account – even if you divide it by 12 to account for your monthly budget.
To get to your real-life monthly money number, first things first:
Figure out how much you’ll be paying in taxes.
To do that, you can use an online calculator that looks at your annual income and your province to show you how much you will pay in federal and provincial taxes every year – and how much of your earnings you’ll get to keep.
Most employers will take the required taxes out of your paycheque for you. So you’ll only see your post-tax income in your bank account.
If you’re working on a contract basis, or in any other situation where taxes are not automatically deducted from your paycheque:
- Make sure to take those taxes off on your own, and
- stash them in a separate savings account.
The CRA will definitely want them back. And you’ll be prepared to pay your thousands-of-dollars tax bill in April.
Related: Basic Tax-Saving Tips for Investors
2. Build A Basic Budget
Now that you have a realistic idea of how much money you’ll have to pay for everything each month, it’s time to make a plan for how you’re going to use that money to get the things you want.
That’s right, I’m talking about a budget.
There are a lot of ways you can go about building an effective budget, but if you’re looking for a fast, easy and mostly–foolproof way to do it, you can’t go too far wrong by sticking to…
The 50/30/20 Rule
In this approach, you’ll allocate:
50% of your monthly income to paying for necessities
That’s everything from housing, to transportation, to food, and your internet bill.
Yes, I do categorize internet access right up there with food on my list of necessities. And I’d bet that on further reflection, you probably do too.
30% of your income to spend on wants
This is everything that you could live without, but would rather not, like new running shoes, art supplies, the occasional latte or a round at the pub.
20% on savings
This approach is a great way to start your new-grad budget. Because it gives you a lot of flexibility.
And if you want to tweak your total percentages in each category, you’re only working with three, so it should be pretty easy to make sure they always add up to less than or equal to 100%.
3. Set Up An Emergency Fund
Speaking of that 20% savings number, one of the first things I recommend is to start an emergency fund.
See, it’s all too easy to get used to money showing up in your account like clockwork every two weeks, or every month. But…
That money is never, ever guaranteed.
Not to be a downer, but here’s what could happen:
- Your company could have layoffs…
- They could choose not to renew your contract, or…
- They might even go out of business.
Since so much is outside of your control when it comes to your paycheque, you need to make sure you’re prepared if it ever does go away.
Being able to pay rent and eat food even if you lose your job is going to be something future-you will be very grateful for, should you ever find yourself in that position.
Related: It Pays To Plan Ahead
4. Put Aside Something For Retirement
There’s another version of future-you that you’ll need to start thinking about too, now that you’re an Income-Earning Adult:
It’s all well and good to joke about how “you’ll never retire!” now, but it’s less cute when you’re still making that joke in your 50s.
In fact, if you’re still making that joke by then, you’re probably just going to make everyone around you really, really uncomfortable.
The good thing is: you’ve got a massive advantage because you’re starting young. Even $100 a month, invested for the long term in an account you don’t touch, is going to have over 40 years to grow and compound.
If you start investing $100 a month at 22, and it compounds at 5% annually, and you never increase your contributions, you’d still be looking at $180,171 when you turn 65.
(Let someone else joke about never retiring.)
5. Evaluate Your Recurring Costs Closely
It’s one thing to make a decision to spend $20 going out for drinks with your coworkers after work…
And another thing to sign up for a $20 streaming-video service to supplement your Netflix addiction.
“How is that any different?” you might be thinking. “It’s $20 either way.”
You’re right, and excellent catch: It is $20 either way.
The one key difference?
One of them will happen again next month. And the month after that...And the month after that…You get it.
It’s far too easy to let seemingly small monthly commitments add up to a significant portion of your budget. And it’s also easy to get so used to them that you almost don’t notice the money being spent any more.
So be very, very wary of every monthly recurring charge you commit to. Especially if there might be months when you don’t use it regularly.
If you’re sure you want to add it to your monthly money plan, go ahead. But make sure you pay close attention to any cancellation policies or fees you might be up against to get out of it.
6. Select A Credit Card
Managing your first paycheque isn’t just about saving and planning...
There’s also going to be a fair bit of spending.
Because you really do have more money now than you used to. Even as a responsible budgeter.
One of the best ways you can maximize that spending money is to make sure that when you do spend, you get rewarded for it.
And you don’t pay exorbitant debit fees for putting everything on a debit card that charges per transaction. (I learned that one the hard way.)
A credit card that fits your life can help you do more of what you want, and make sure you optimize your spending. To find one that’s right for you, consider:
- What kind of rewards you’ll actually use and value
- Whether you spend enough to make an annual fee worth it
- How much credit you can responsibly handle
Related: Canadian Rewards Programs
7. Keep Tabs On Your Spending
To make sure you don’t let all of the work you’ve done getting your money situation handled go to waste, you’ve got one last step:
Track where your money goes every month.
It’s all well and good to plan for spending 30% of your income on wants, but…
If you end up spending 50% of your income on wants, and you’re still trying to save 20% of your income and put 50% towards necessities, then you’ll run into problems pretty quickly.
The best way to make sure this doesn’t happen, and to know when you do need to rein in your spending, is to track your spending.
- You can do it manually using a spreadsheet, or
- by using an app like Mint or You Need a Budget.
Either way, make sure you’re checking in once a week or so to see where your money really went – and to adjust as needed.
A+ For Real Life
So there you have it!
If you’ve done those seven things, you’ve officially earned your first A+ in adulting – because you put your hard-earned first paycheque to good use.
Now go spend some of that 30% “wants” money on something to celebrate.