So, you recently picked up your college diploma and settled in at your first job. Congratulations. You now have plenty of newfound freedom and money in your pocket—or do you? If you’re like most young workers, the actual dollar figure you take home—after reductions for taxes—can be a surprise. The more you know now, the better prepared you will be to start off on the right foot.
Here are three ways to make the most of your paycheck.
1. Understand taxes and deductions
Before you see your take-home pay, your employer is required to pay for a variety of income taxes on your behalf, such as state and federal tax income tax. During tax season, you can file an income tax return for the taxes that were withheld.
- You may also see additional FICA taxes, which is the government program that funds Social Security and Medicare.
- Mandatory pretax contributions to either the University of California Retirement Plan (UCRP) or the Defined Contribution Plan will be shown on your paystub.
- If you’re enrolled in the UC Retirement Savings Program, your contributions will also be shown on your paystub.
2. Start saving for retirement
One important financial move you can make is to start saving for your future. If you are a Career employee, UC helps you prepare for retirement through its primary retirement benefits: the UCRP pension plan for members hired before July 1, 2016, and Pension Choice or Savings Choice for members hired on or after July 1, 2016.
However, if you’re like most people, you’ll work for several employers during your career. That means you might not stay at UC long enough to build up your primary retirement benefits.
To help fill the gap, consider saving a bit extra in UC’s 403(b) Plan.
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When you start early, even a 1% contribution can make a difference. |
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| If you’re a single filer, for every $10,000 you earn, a 1% change in your UC 403(b) contribution reduces your bi-weekly paycheck by about $3. |
But contribute that additional 1% for 25 years and, for every $10,000 you make, your account balance could increase by more than $5,800. |
If you earn $100,000 annually, the total could add up to as much as $29,000. (That’s not small change.) |
| This hypothetical example is for illustration only. It assumes a single filer with an average tax rate of 20% and bi-weekly contributions of 1% for the next 25 years. Contributions earn a hypothetical 6% rate of return compounded bi-weekly. No loans or withdrawals are taken; no pay increases are assumed. Your own Plan account may earn more or less than this, and taxes will be due when you withdraw from the account. Distributions before age 59.5 may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon before making an investment decision, as the illustration may not reflect this. The assumed rate of return in this example is not guaranteed. Investments that have potential for a 6% annual rate of return also come with risk of loss. | ||
3. Deal with debt and build good credit
Not all debt is created equal, and because debt can affect your credit score, consider developing a strategy to tackle it.
Prioritize paying off credit cards. Since credit cards typically carry high interest rates, consider choosing the highest rate card to pay. Make a promise to yourself to pay the minimum payment and as much as you can possibly afford every month.
Begin paying off student loans. Most student loans allow a brief grace period following graduation, during which no payments are due. Once that period is up, however, you’ll need to begin payments unless you qualify for a deferment due to unemployment or health problems. Federal loans offer several repayment options, including an income-based option that may enable you to meet the minimum payment.
Build your credit score. Building good credit can help you qualify for low-interest loans, score an apartment, get a job, qualify for a mortgage, and help create the life you want to live. The most important element credit agencies consider when figuring your credit score is your payment record.
Study your spending habits. Most banks and credit card companies make it easy to access your spending records online, making budgeting easy. You can use your spending history to make informed estimates of your future expenses. With this information, you can prioritize your goals and make sure that you’re spending money on things you really care about.
Automatically save up. It’s always tempting to put off saving until later, but there are ways to make it routine. If you have direct deposit, consider arranging for your bank or brokerage account to direct a portion of each paycheck into a savings account. If it’s not in your checking account, your budget will automatically adjust. You probably won’t feel the difference—and you’ll start building a stash for a rainy day.
Create an emergency fund. At some point, you’re likely to have an urgent need for cash, whether your car breaks down, you get laid off, or you need to move for a new job. In all cases, you need a financial cushion to fall back on. Gradually build at least three months’ worth of living expenses in an easily accessible savings account, and only touch it when absolutely necessary.
Look ahead with confidence
As you continue to wrap your arms around your new financial responsibilities, embrace the changes and enjoy the process. It takes time to become financially established, but keep in mind that you are in a unique position: You have a new degree of freedom to create the life you want to live, and you have the time to keep learning and growing.
Building healthy financial habits is a critical part of creating the life you have always dreamed of living. By staying organized, saving for retirement, reducing debt, building credit, and sticking to a budget, you’ll be able to get that much closer to achieving your financial goals.