How To Make the Most of Your First Paycheck

Your first job after high school or college comes with a critical rite of passage into adulthood–earning a regular paycheck. Sometimes, that first paycheck can be a bit of a letdown. You may be surprised that your net earnings are considerably lower than the gross amount. Plus, not all paychecks are created equal depending on your job. You may even panic a little about how you will cover all your expenses. 

The good news? It is possible to get what you need out of your paycheck. Budgeting, financial planning, prioritizing savings, and paying down debt are all ways to help you manage your money, one paycheck at a time. 

Understand Your Income

At one time, when an employee received a paycheck, they were handed a literal paper check with all the withholdings listed on it. While employers still provide paycheck notices, most issue paychecks via direct deposit directly into employees' bank accounts. If you're not in the habit of looking at your digital pay stub, it can be easy to overlook how taxes and deductions affect your pay. 

Sometimes withholdings can even be surprising, says Joni Alt, a certified financial planner and senior wealth advisor at Evermay Wealth Management. 

"I remember after my daughter graduated from college, she and her friends had started their jobs, and they were at our house, and the conversation was, 'What is FICA, and why did they take my money?'" shares Alt. "I chuckled because they were becoming adults in real life."

Alt suggests that young people should educate themselves about FICA (Federal Insurance Contributions Act), the paycheck contributions that fund Social Security and Medicare. Employees and employers split FICA contributions, paying 6.2% each toward Social Security and 1.45% each toward Medicare in each paycheck.

To estimate your net pay, you must calculate your FICA contributions, plus other withholdings like state and federal taxes, shared costs for employer-sponsored health insurance, and contributions to retirement funds like a 401(k) or 403(b). This will enable you to create a budget.

How To Calculate Your Net Pay

How much money is withheld depends on your salary, where you live, and how many dependents you have. 

Typical withholdings include:

• Federal and state taxes: Your total will depend on where you live and how much you make.
• FICA (Social Security and Medicare): 6.2% of your salary for Social Security; 1.45% for Medicare
• Health insurance: Most employers ask you to contribute something towards your health insurance. For example, according to 2023 information from KFF, employees with health care coverage contributed 17% of the total costs on average.  
• Retirement benefit contributions: Your amount will depend on how much you choose to contribute. Experts advise giving some amount each paycheck. 

Net Pay Example

Let's say you earn $61,600 a year, the median earnings for a 25- to 34-year-old with a bachelor's degree, according to data from the National Center for Education Statistics. At this salary, your gross pay would be $61,600. Divide that by 12 and you have your monthly gross pay of $5,133.33. 

To figure out your net pay, determine how much you contribute to FICA, federal and state taxes, health insurance, and retirement contributions. Then, subtract those contributions from your gross pay.  

Here's an example of how to determine monthly net pay, assuming a 12% effective federal income tax rate and 4% state tax: 

• Federal and state taxes (16%): $821.33
• FICA (7.65%): $392.70
• Health insurance: $100 
• Retirement contributions (10%): $513.33

After these expenses, your monthly take-home pay would be $3,305.97. If you get paid semi-monthly or weekly, divide your yearly pay by the number of paychecks you receive per year, determine your payroll deductions, and subtract those deductions from your gross pay. 

Create a Budget

Creating a budget is the best way to track your income, expenses, savings, and discretionary spending. It can help you decide where you need to save or splurge. According to a survey by Empower, 53% of Americans across generations found learning how to make a budget to be their most valuable financial lesson. (The next most popular lesson: creating an emergency fund.) 

Having a budget is especially useful when cost-of-living expenses, like groceries and rent, are high. Today, many Americans report feeling pinched due to inflated prices at the supermarket and the gas pump. Plus, over half of U.S. renters are paying over 30% of their income on housing, including utilities, as reported by the Joint Center for Housing Studies of Harvard University.

A Few Elements To Include in Your Budget:

• Net income: This is the money you have coming in each month after withholdings and deductions. 
• Expenses: Rent or mortgage, utilities, car payments or other transportation costs, student loans, credit card payments, groceries, and pet food (if you own an animal companion), plus anything else that you have to pay for (versus want to pay for, which goes under another category). 
• Savings: Any account designed to save, such as an emergency fund (up to six months of expenses, in case you lose your job) or contributions to a retirement fund.
• Discretionary spending: This is the fun money that goes to nonessential items like dining out, entertainment, gym memberships, and anything else you want to spend on. 

Popular Budget Types 

There are several ways to create a budget, including using pen and paper or one of the many budgeting apps. Popular budgeting plans include:

• 50/30/20: This is a plan that divides your paycheck into needs, wants, and savings. Fifty percent goes to needs (rent, utilities, or car), 30% to wants (eating out, saving for a trip), and 20% goes into paying off debts beyond minimum payments and putting money into savings. 
• The envelope method: This form of budgeting uses envelopes for each expense, such as rent, groceries, entertainment, student loans, etc. You allocate a specific amount for the month in each envelope, and once the money is gone, it's gone. 
• Pay yourself first: This is more of a savings strategy. You automatically contribute to a savings or investment account directly from your paycheck. Anything left over is to be used for your expenses or discretionary spending. 

"When my son was in high school and would ask for money, I would ask him if this was a want or a need," shared Alt. "The answer often depended upon the current environment and time. People can control how much they spend and/or save. It's a choice. The 50/30/20 rule is a good guide and starting point. But everyone has a unique situation, so slight modifications may be needed." 

The most important thing when creating a budget is to consider your individual situation, according to certified financial planner Melissa Joy. 

"I don't subscribe to any one particular rule about budgeting because they all have benefits, and what works for your budget may not work for your roommate, for example, if you have student loans and they don't," says Joy, who also hosts the Women's Money Wisdom podcast.  

Ultimately, Joy advises making sure to "pay yourself first to meet your needs and understand that there isn't a one-size-fits-all-all budget. It depends on your own situation." 

Prioritize Saving and Investing

It can feel difficult to part with your paycheck for a future you can barely imagine, but the earlier you start investing in your retirement, the better. Contributing your retirement early adds up, thanks to compound interest, which allows you to earn interest on your principal and then interest on that interest, growing over time. In addition, any amount contributed to a 401(k) or 403(b) is subtracted from your gross pay, which lowers your taxable income.  

Find out if your employer offers a retirement plan; if so, allocate a percentage of your pay to that account. Some employers will offer to match (up to a certain percentage) their employees' contributions. Taking an employer match is one of the easiest ways to start investing in your retirement, and it is essentially free money. 

Other accounts you can consider funding, even a small amount if you can afford it, are:

• Emergency fund
• Health Savings Account (HSA)
• High-yield savings account
• Roth or traditional IRA
• Stocks or mutual funds

Where To Start Saving

"I would recommend starting an emergency savings account, over investing in stocks and mutual funds, or opening a Roth or IRA when you are first starting out," says Joy. 

After you create an emergency fund, Joy suggests contributing to another account, such as an HSA, which can be used as emergency reserves for medical expenses. Note that you are only eligible to contribute to an HSA if you have a High-Deductible Health Plan (HDHP).

Joy also encourages young people to take advantage of high-yield savings accounts. "At this time, these types of high-yield savings accounts can pay off, and there are plenty online to consider that offer high interest rates," she shares. 

Alt agrees about using a budget as a beginning point and starting an emergency fund first; when you get that going, "put money into saving in your company retirement plan to maximize employer matching contributions." 

She encourages young people to pay down debts such as student loans, credit cards, and other personal loans. "If there are still extra funds left in your monthly budget, consider contributing to your Health Savings Account (HSA) if available and finally to taxable investments."

Manage Debt

Unfortunately, most graduates leave school with some debt, either student loans, credit card debt, or both. In the fourth quarter of 2023, the amount of student loan debt in the United States was $1.6 trillion, approximately $37,087.96 per borrower.  The College Board estimates that half of the students (2021-2022) from public and private institutions who graduated with a bachelor's degree have student loan debt; the average debt amount was $29,400 per loan holder. 

According to a 2023 study by Experian, the average credit card debt among Generation Z (18 to 26 years) is $3,262. It's not surprising that experts say paying down debts is an important part of budgeting your paycheck. 

Figuring out the best way to pay down your loans for your individual circumstances is key. 

"I recommend doing a personal finance audit every month or so of how you are spending, and then see where you can cut back and put more money towards debts or investments," suggests Joy. 

How To Reduce Debt 

When you need to tackle debt, there are options, such as the snowball method, where you pay off your smallest debts first, or the debt avalanche strategy, where you pay the minimum amount due on all debts and then use any extra money left to pay the card or loan with the highest interest. You could also choose to use a debt payoff app. 

"Make sure you make your student loan payments on time, and investigate if you qualify for student loan repayment plans or student loan forgiveness programs," says Joy. In terms of credit card debt? "Get rid of it, especially the cards with high interest rates," she recommends. 

If you don't have a credit card, be careful about taking them out, especially if you are on a tight budget. "I would not recommend getting a card unless you can afford to pay it off each month," cautions Joy. "And if you have debt that you can't manage, consider credit counseling with a reputable advisor." 

Seek Financial Education and Resources

Learning more about personal finance is a good way to prepare yourself ahead of time for managing your money in those first paychecks at a new job. Many books for a younger audience, personal finance podcasts, apps, and even banking or investment websites are available.

"I like the podcast Money Wisdom," shares Joy. "‘[And] You Need a Budget' is a good budgeting app if you like to track everything because it offers feedback on your finances," she recommends. "Also, check to see if your workplace offers meetings with financial advisors connected to the retirement plan you are enrolled in." 

Alt asked her younger colleagues to get a sense of what they like in a budget app. "I decided to take a census of the 'young people' in my office about budget apps. Simplifi by Quicken was at the top of the list, followed by Excel spreadsheets. Rocket Money had an honorable mention because it helps identify all the subscription services being utilized and where there might be overlap," shares Alt. 

She advises young people learning to manage their paycheck to be cautious of the financial education provider, especially if they are trying to sell a product or service. "Those are not the people you necessarily want to speak to because it might not be in your best interest," she explains. 

If your family has a financial advisor or planner, ask your parents about meeting with them. They will likely be a trusted source for advice, and you may be able to pay by the hour for guidance. 

"If that's not available, do research online and look for a fiduciary (an advisor that must put their client's interest ahead of their own). The National Association of Personal Financial Advisors (NAPFA) is a terrific way to research and look for an advisor that is a fiduciary," suggests Alt. 

Tips to Make Sure Your Paycheck Pays the Bills

• If you are following a 50/30/20 budget plan, make paying down your debt a "need" and put more money into getting rid of debt. 
• Try the envelope method of budgeting. Put cash in envelopes (real or virtual) based on your monthly income, and then earmark each envelope for expenses (based on your budget), from groceries to entertainment. Set a cash amount aside for each category. Once the cash is gone, you will have to go without. 
• Set up automatic payments to your credit cards and student loans, utilities, and other recurring charges. 
• If there is money leftover after your bills are paid, consider setting up automatic transfers from your checking account to your savings account. Even $25 a paycheck will add up over time. 
• Joy recommends doing a financial audit on a regular basis. You may be able to cut corners by simply cutting down on subscriptions, which can add up. "Look back on a few months and see where your money is going, then audit what you can cut back on," she suggests. 

Frequently Asked Questions (FAQ)

The Bottom Line

When you get your first full-time job, it may feel challenging to see your net pay and understand how to make it work for you. However, there are several strategies that you can use to help, including setting a realistic budget, contributing to an emergency fund, participating in your employer's retirement plan, and taking advice from the right financial experts. A little planning today will set you up for a positive financial future.