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7 Ways to Make the Most of Your First Salary

by Jean Chatzky /
Image: Writing in checkbook
Woman writing in checkbook.Bruce Laurance / Getty Images
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Ahh, the challenges of a first job: Impressing the boss, navigating office politics, building a professional wardrobe, the list goes on and on. For many recent college grads, getting the basics down can be so all-consuming that one of the things you should focus on goes overlooked — making the most of your first salary.

If you’re new to the workforce, I know what you’re thinking - that you’re so broke right now, you’re just trying to get by. I hear that. (I lived on hot and sour soup and the free rice that came with it for a long time after graduation.) But I’m here to tell you that many of the seemingly small money decisions you make today can have a big difference in your long term financial future. Here’s how to put your first salary to work for you.

1.) Watch your expenses

“When you get that first salary, it feels so well-deserved,” says Abigail Gunderson, certified financial planner at Tanglewood Total Wealth Management, a comprehensive wealth planning firm in Houston, Texas. “But you can’t go to Starbucks every day and expect to reach your bigger financial goals.” Gunderson doesn’t suggest depriving yourself of life’s small joys, rather just be aware that it all has a price tag - and an opportunity cost. “The earlier you can start saving, the better off you’ll be, because of compounding interest. How much will that coffee be worth in 40 years if you invested that money instead?”

2.) Take advantage of your company’s retirement plan offerings - or create your own

If you’re lucky enough to work for a company that offers a 401(k) plan, take advantage of it and any company match that may be offered, says Anna Colton, an executive for Bank of America Financial Center Sales & Merrill Edge. “If your company matches a percentage of what you put in, that’s free money,” she says. If your company doesn’t offer a retirement savings plan, establish your own brokerage account with a company like Schwab or Vanguard, Gunderson suggests. “Then you can automatically move $50 every pay period over to your account. Treat it like a bill, only you’re paying yourself.”

Pay no attention to anyone who insists you should be setting aside a full 10% toward retirement when you’re just starting out, says Douglas Boneparth, certified financial planner and co-author of The Millennial Money Fix. That sounds - and may be - undoable. “The worst thing you can do is let guilt over not saving enough make you postpone your goals. Any amount you can save is great.”

3.) Check in on your goals regularly, with the help of an expert

How many times have you thought about a financial plan, but hesitated to get going? That’s a trap a lot of us fall into, Colton warns. “It’s not about where you are right now, it’s about where you want to be in the future,” she says. It’s a big mistake to think that a financial planner won’t want to speak with you if you aren’t making six-figures. You should consider doing an annual financial check-up with your advisor, just as you would a health check-up with a doctor. “Automated solutions have made it easier than ever for us to save, but it’s important to check in with someone on a regular basis and make sure you’re meeting your goals,” Colton says. (Your retirement plan at work will likely have someone you can speak with for free.)

4.) Eliminate debt

The formula here is simple: start with credit cards, then move on to student loans, Gunderson says. “Pay off the highest interest rate first. With credit cards, you’re looking at 19-20 percent, and soon it’s going to seem like you’ll never get out from under it.” The only thing more important than paying off all your debt is securing the free money you can get from matching 401(k) contributions and - if your company offers it - the free money that comes from your Health Savings Account (more on this in a moment). Make sure you’re still saving enough to get those matching dollars (at most companies, that’s 3%) and that should take priority over both student loans and credit cards, Gunderson explains.

5.) Save for something important to you

What do you really want to do with your life? Do you want to take an international vacation every year or donate money to a museum or charity? Consider starting a separate fund to finance the things that add meaning to your life, Colton says. “Everyone has something that’s important to them, that brings them joy,” she says. “It’s important to have the financial freedom to do those things.” If you’re not yet sure what might be significant to you, that’s okay, too - put aside $50 a month, and you can figure it out over time.

6.) Build an emergency fund

“Cars break, you lose your job, and things happen,” Gunderson says. “What are you going to do with all the set bills that you have every month?” Saving six months’ worth of living expenses is ideal, but if that figure seems too daunting, save what you can to start (try for 3-5 percent of your salary until you reach your goal). “Eventually you’ll be in a position to cover all your expenses until you can get back on your feet.” Gunderson says.

7.) Open a health savings account (HSA)

“No matter how much you’re making, you’re going to be spending money on healthcare,” explains Michelle McKinnon,certified financial planner and senior wealth advisor for Payne Capital Management in New York. Health Savings Accounts allow you to set aside money for health-related expenses, before tax. For individuals just starting their careers, HSAs can be especially beneficial since they stand to save you a couple of thousand dollars each year on taxes. Plus, some companies offer incentives (i.e. free money) for participating. With an HSA, you can roll the money over from year to year - this is different from a flexible savings account (FSA) where you have to use the funds within the year, or lose them. Not everyone is eligible for an HAS since you have to have a high deductible health insurance policy. Contact your benefits office at your company and see if they offer one and if you’re able to enroll.

Keep trying, even if you face setbacks

As you grow your career and start down the path to financial health, know that it’s okay if you don’t reach all your goals - you can change them anytime, and keep fighting for them. “Let’s say your goal was to build a cash reserve in two years, but you find you couldn’t save as much as you planned,” Boneparth says. “If you can’t adjust your spending behaviors, then you can push your goal from two years to four years. The only thing that’s unacceptable is complaining.”

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