What to Do With Your New Salary

Landing that first job is tough, but once you’re employed, the work is just beginning. Trading your tuition payments for a salary is definitely nice for your wallet, but what’s the best way to budget for this shift?

Make sure to follow these steps as soon as possible (preferably before you sign a lease or buy a car), and don’t let your new paychecks cloud your financial prudence.

1. Identify your income.

The first thing you should do before making any financial moves is sit down and figure out how much money is going into your bank account, and how much is flying out. Identify your total income, including your yearly salary, any side income, even vestiges of your parental allowance if you’re so lucky. Put it all together and divide by 12 to get your monthly income.

2. Calculate fixed expenses.

Next comes the hard part: examining what you’re spending. For the most part, expenses come in two forms, fixed and variable. Fixed expenses are costs you’ll incur that won’t change month to month, like taxes, student loan payments, contributions to employer benefits (your company’s insurance or retirement plans), and monthly credit card payments if you’re working your way out of debt. Subtracting all of these vital payments from your monthly income will leave you with the money you have to spend on everything else.

3. Play with variable expenses.

If you calculate your budget before you sign the lease to a new apartment, you’ll be much more knowledgeable in your house hunt when it comes to what you can afford. Rent and utilities will typically be the biggest portion of your expenses, around 30%, and even though they don’t change month to month, you have a say in what you’ll pay by staying within your price range. The rest of your costs usually include food, transportation, phone bill, investments, clothing, entertainment and more. The less necessary an expense, the more leeway you have with cutting it down, and for the first few months at least, you should keep your purse strings as tight as possible to prioritize more important expenses.

4. Save!

One of your biggest priorities should be establishing an emergency fund as soon as possible, in the event of just that — an emergency. Ultimately, your goal is to have a bank account that can float you for six months in case you find yourself unemployed or going through a tough time. Though more than a quarter of Americans are doing it, living paycheck to paycheck is far less than ideal. An emergency fund protects you if your car breaks down or you find yourself facing medical bills not covered by insurance. Save as much as you can for as long as it takes to get six months’ worth of bill payments, and once you’re there, experts recommend you continue to put away a set amount (preferably 10% or higher) from each paycheck to protect yourself and get in the habit of saving.

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5. Focus on paying student loans.

As soon as you have your emergency fund in place, you should kick your loan repayment into high gear. Prioritize your student loans over all other non-essential payments, try to reduce your interest rate, and sink as much money into those loans as often as you can. It may squeeze your spending now, but you’ll be thankful later. If your starting salary is less then desirable and your student loans are overwhelming, you might qualify for an income-based repayment (IBR) plan, which lets you pay what you can based on what you earn. Remember though that the longer you’re paying your loans off, the more you’ll pay in interest.

Navigating your first paycheck, and the next few after that, can be tough, but it’s important that you budget and prioritize. As a young professional, the financial habits you form now will stick with you down the road, and being smart with your new salary definitely pays off.

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