Whether you’re 16 and just starting out in a minimum wage job, or fresh out of college with your degree in hand, you’ve got to watch your money.
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There are so many parts of getting paid that you unfortunately didn’t learn in high school or college. And learning those things early can mean the difference between you becoming a millionaire and you living paycheck to paycheck for decades.
The key is to understand your paycheck and to use your income to grow your wealth. GOBankingRates breaks it all down.
1. Your Salary Is Not Your Take-Home Pay, Sadly
That’s right. However much you were hired for, that’s not actually how much you’ll take home. In fact, you’ll probably take home closer to two-thirds of your actual salary. From every single paycheck, you’ll automatically pay:
- Federal income tax
- State tax (in all but eight states)
- Social Security (6.2% of your salary)
- Medicare (1.45% of your salary)
You’ll often hear people differentiate between your gross income and your net. Your gross income is how much money you get paid before taxes. Your net income is after those lovely deductions.
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2. You May Have Even More Deductions
But wait — it doesn’t stop there. Many employers in the United States also offer benefits packages that offer discounts on services like health insurance, dental insurance and retirement funds, like a 401(k) plan. If you sign up for any of these options, you’ll see those deductions come from your pay, as well.
These deductions will vary based on which options you choose and how much your employer contributes.
3. Find Out How Often You Get Paid
It’s important to know how often you get paid. Some employers will pay you twice a month, on the 1st and the 15th, for example. Others will pay you every other week on the same day of the week.
This information is helpful because it can help you decide how much to spend and how much to invest.
Biweekly pay gives you 26 paychecks per year, as opposed to the 24 you would get for semimonthly checks. That means you’d get an “extra check” two months out of the year, which you can plan to invest to grow your wealth.
4. You Need a Budget
Now that you’re making the big bucks, you want to use your money wisely. Far too many people start making money and then just spend it. Before the next paycheck comes in, all your money is gone, and you’ve begun the vicious cycle of living paycheck to paycheck.
Avoid this trap by creating and sticking to a budget.
A good rule of thumb is the 50/30/20 rule. In this scenario, 50% of your pay should go toward meeting your needs (rent, utilities, insurance, etc.), 30% should go toward what you want (entertainment, takeout meals, luxuries), and 20% should go toward your investments.
To keep you on track, you can use a budget app that will track your spending and send you reminders and alerts to help you be honest with yourself.
Assuming you make $4,000 per month, investing 20% is $600 per month. Assuming the average 12% interest in the S&P, that’s around $5,523,058 after 40 years — and this is conservative since you’ll likely get raises to increase your contributions.
5. Invest Now, Even a Little Bit
Yes. No matter how much or how little money you’re making right now, 20% of your income should go to investments. There is no better time to start than now because you cannot possibly have more expenses than you have income. It’s your first job, after all.
Make your investment contribution automatic. You can set this up with your employer or with your bank. Have the money go right into your brokerage account, and get started investing. The more you learn, the better you can get, and you’ll set yourself up for financial security for life.
In the beginning, your goal should be to save up three to six months of your monthly expenses and to make sure you’re investing in your company’s 401(k) program. At least invest as much as your company will match you. It’s free money.
6. Track Your Expenses for the First 3 Months
Not sure what the heck you’re doing with your money? Track it. Use one of those budget apps to help you track your income and expenses for the first three months after you get your first paycheck.
Tracking like this will give you a clear-eyed look at how you’re managing your money. The more you know, the more adjustments you can make to do better.
7. Don’t Inflate Your Lifestyle
Now, just because you’re making a little money doesn’t mean it’s time to go crazy. Far too many people increase their spending every time they get a pay increase. This puts you in that cycle of living paycheck to paycheck.
You can always spend more money, but what most people don’t do enough of is use their money to grow their wealth.
And definitely don’t use a credit card to “improve” your living situation. You’ll just end up paying way too much in interest and fees.
8. Review Your Pay Stub
Finally, make sure you look at your pay stub every single paycheck. Look for:
- Errors in the number of hours you worked
- Correct tax withholding
- Your benefits deductions
Humans make mistakes all the time. Learning how to read your pay stub gives you power over your financial situation from the moment you get paid.
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This article originally appeared on GOBankingRates.com: Got Your First Job? Here’s What You Must Understand About Your First Paycheck
