First paycheck? Where your money should be going
Every Easter & Halloween, after my kids have taken stock of their candy loot, I generally sneak a few pieces of candy each night from their stash. My thinking goes that they are going to learn about the impact of taxes sooner or later, so this is my way of helping them understand that their ‘take-home’ candy is not always the candy they are left with. Ok, that’s probably a poor justification for me sneaking some candy, but you get the point… If you are like most young workers, receiving your first paycheck is super exciting… Until you see the impact of taxes, social security & Medicare withholdings and health insurance costs on your take home pay!
Knowing where your money goes and how it is spent is a critical component of getting control of your finances and reaching your goals. Starting early with good financial habits can help you lay the groundwork for success along your financial journey. And no, it is not too early to think about retirement.
Keep watching to learn more about where money from your paycheck is going, and some simple financial habits to consider from your very first paycheck to help save for tomorrow.
First, we’re going to talk about taxes. A portion of your paycheck will go to taxes. Here are some to keep an eye on.
Self-employment taxes. If you work for yourself—perhaps you’re a freelancer or a business owner—you must pay self-employment tax, which accounts for both the employer's and employee's respective shares of FICA.
If you work for an employer, then you will likely have payroll taxes withheld from your paycheck. Your employer will generally withhold a portion of each paycheck to pay state and federal income tax, based on your income bracket tax rate, as well as the Federal Insurance Contributions Act tax (the government program that funds Social Security and Medicare).
Another part of becoming financially grown-up is that you will likely have to file your first return for which you are not claimed as a dependent of your parents. Fortunately, it's typically easy. The key is to stay organized. Early each year you'll receive your W-2 forms (listing any employment income you earned during the previous year) and various 1099 forms (which include income from self-employment, dividends, interest, and other sources like student loans). Create a simple system for collecting and categorizing these and any other financial documents.
Now that you recognize the impact of taxes and other FICA taxes being withheld from your paycheck, you need to figure out what to do with the remaining part of your paycheck.
#1 Assess your debt situation. If you are like most young people, it is likely that you are entering the workforce with student loan debt and potentially some other debt like credit cards. We would typically suggest drawing up a great plan to tackle debt hard early on in your career. Don’t let debt hang over your head for too long. Develop a plan, be aggressive and get it paid off.
#2 Saving for retirement: Retirement probably seems far away but setting aside even a small portion of your income now will make it easier to build the savings you'll eventually need to retire. If your employer offers a retirement plan, sign up for it. If you have a 401(k), 403(b), Simple IRA or 457 plan and your employer offers a matching retirement contribution, take advantage of it. The matching contribution is like getting "free" money. Plus, you get the potential benefits of tax-deferred growth and compounding returns.
The sooner you start, the more potential your money has to grow. In many instances, you can set up an automatic contribution to your employer's retirement plan, so that a percentage is taken out of your paycheck each month. This is a great idea, because having the contributions automated will reduce the temptation to spend that money elsewhere. You should also check to see if your employer offers a health savings account (HSA), or a high-deductible health plan option.
#3 Lastly, create an emergency fund: At some point, you're likely to have an urgent need for cash, whether your car breaks down, you get laid off, or you need to move for a new job. In all cases, you need a financial cushion to fall back on. During your first year of full-time employment, we suggest building at least three months' worth of living expenses in an easily accessible savings account, and only touch it when absolutely necessary.
Building good financial habits is a critical part of creating the life you have always dreamed of living. Now that you understand more about your paycheck, make sure to start saving for your future. It only takes small steps today to set yourself up for financial success tomorrow.
If you’d like to discuss more with a fiduciary financial planner at Simmons Capital Group, please feel free to call our office at (518) 406-5624 or book a free consultation through the link on our website at www.simmonscapitalgroup.com.
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