The good news is that they really paid you! Seriously, now that you’ve received your paycheck from your first job, what types of things should you be doing with your money? Here are a few thoughts. 

Understand your paycheck

Your paycheck—er, direct deposit—starts with your gross pay: It’s your annual salary divided by the number of pay periods in a year.

• Example: If your salary is $75,000 and you are paid twice per month, your gross pay would be $3,125. This is calculated by dividing $75,000 by the 24 annual pay periods.

Deductions from your gross salary can include:

• Federal and state income taxes.
• Social Security and Medicare taxes.
• Contributions to your company’s 401(k) plan.
• Other deductions you might establish to an outside account, or to pay a recurring charge.

The amount leftover after these and any other reductions is your net, or take-home pay. You can use calculators at websites like PaycheckCity to anticipate how much you’ll get paid before the big day arrives. 

5 tips for making the most of your first paycheck

1. Review your federal and state income tax withholding 

Tax withholding requires a balance: It’s important to be sure that you are having enough in taxes withheld each pay period, to avoid huge tax bills in April that hurt more than a Floyd Mayweather uppercut, but paying too much during the year is a bad use of your money. While you will get a refund, this is money that you could be putting to use elsewhere during the year. Check out the IRS withholding estimator for help fine-tuning.

2. Open a checking account

…AKA your core bank account. You will generally make all payments and disbursements from this account. 

What should I do with my first paycheck? Start with the basics. You can open a checking account at a brick-and-mortar bank or an online financial institution. There are a lot of options today: Focus on convenience and maintenance fees…but keep an eye out for good welcome bonuses.

3. Start an emergency fund

Let’s assume that you have money left over after paying essential bills like your rent or mortgage payment, a car payment, student loan payments, and all that. Many experts suggest saving three-to-six months’ worth of basic living expenses in an account that you can readily access if needed. Consider stashing your break-glass-in-case-of-emergency cash in a high-yield savings account (which should really be called a meh-yield savings account with interest rates struggling to hit 0.5% these days).

4. Contribute to your 401(k) 

If your company offers a 401(k) or similar retirement plan, be sure to contribute as much as you can afford each paycheck, up to the IRS annual limit. The biggest ally you can have in saving for retirement is time and the compounding of your investments over time.

401(k)s are often similar to, but not the same as, brokerage accounts. Some of these tax-advantaged retirement plans offer a brokerage account option where you’ll typically be given a set menu of investment choices in which to invest.

The major advantage to traditional 401(k) plans is their tax benefits: By agreeing to stow away your cash until retirement, the government lets you avoid paying taxes today on income you contribute. You can also fund a Roth 401(k) account, where your income is taxed today…but the contributions and their earnings never cross paths with the IRS ever again. Here’s a good explainer on how to decide which type of 401(k) to prioritize.

5. Have some fun 

What the heck, this is your first paycheck! Life is too short not to enjoy yourself—within reason. Go out for a nice dinner, or a not-so-nice one at a favorite dive joint. Buy something you’ve been waiting to purchase until you start working. You get the idea. Most of the money should be handled seriously, but have some fun: You work hard—or at least, you will be working hard in the future. 

3 types of accounts to open now that you’re earning money

Besides a basic checking account, here are some other types of accounts to consider.

1. High-yield savings account

How do high-yield savings accounts work? These accounts are FDIC-insured and pay a higher interest rate than traditional savings accounts. In return, there might be some restrictions as to how often you can withdraw funds. The benefit is safety with a slightly higher return.

Are high yield savings accounts taxed? These are taxable accounts unless held in a tax-advantaged account like an IRA.

How to open a high yield savings account? Online banks often offer the best deals on high yield savings accounts. You can generally do everything on their site, but don’t be afraid to call or message their customer service people with questions.

2. Brokerage account

What is a brokerage account used for? A brokerage account is typically for taxable investments you want to make in stocks, ETFs, mutual funds and other types of securities.

Which brokerage account is best? There are a number of good options that can be opened online. You will want to decide where and how you want to invest any money you direct there and then research what they offer to be sure they can accommodate you. It’s also important to understand all types of fees and expenses associated with the account.

3. Individual Retirement Account (IRA)

When can I open an IRA account? You can open an IRA whenever you are ready. You might consider opening your IRA at the same place you open your taxable brokerage account to make monitoring your accounts easier. 

In order to contribute to an IRA you must have earned income which of course will be the case once you receive your first paycheck. An IRA can be a good compliment to your 401(k). It can also be useful should you leave this job at some point in the future as a place to house money from your 401(k) that you want to rollover from your then former employer. 

Wrapping it up

Your paycheck is your main source of income. Make the most of it and make good choices. Spend wisely and be frugal. Save and invest as much as you can. Don’t run up credit card debt. Enjoy some of it as well. Follow these basic guidelines and you will be well on your way to a financially comfortable lifestyle.