Ed note: You’ve probably gotten used to parts of adulthood – doing laundry, making it to class on time – but leaving college and taking on your first job makes it a great time to commit to managing your finances better. Leer en español.
Congratulations on receiving your diploma and landing a job offer! This is a very exciting time in your life.
As you start figuring out your next steps, it’s extremely important to set a budget. How do you establish your budget? Here are a few things I learned after I graduated from school and landed my big, adult job.
Look at Monthly Income
The starting salary number on your offer letter may seem awesome, but don’t base your budget off this figure! Calculate how much you make every month after taxes. Remember social security, Medicare, and federal taxes are taken out of your paycheck.
Employees pay 6.2% of their wage earnings, up to the maximum wage base. Employees pay a Medicare tax rate of 1.45%. Double these rates if you are self-employed.
Then, calculate your federal income tax rate based on your projected income. It will surprise you how much gets taken out when you receive your first paycheck.
Determine how much you will invest in your 401K. Does your employer provide a 401K match? Take advantage of this match, it is part of your compensation package. Invest the minimum to get the match.
If you can, start maxing out your 401K right away. If you invest with pre-tax dollars, then this will effectively lower your federal income tax rate at the end of the year. Remember to invest in low cost funds!
Vanguard Admiral Shares are an awesome way to start investing.
Maximize Pre-tax Dollars
Set aside pre-tax dollars in an HSA (Health Savings Account) or a FSA (Flexible Spending Account). Will you have any medical expenses this year that you can pay with pre-tax dollars? Contacts, glasses, braces, doctor appointments, prescriptions can all be paid with pre-tax dollars. This is an automatic savings.
Choose Housing Wisely
It’s really easy to want to move into a super, fancy apartment as soon as you graduate. I did this. Looking back, I wish we had gone with a slightly more affordable apartment.
Detail Monthly Expenses
List your monthly bills, including rent, water, sewage, electricity, internet, cable, groceries, gym, car insurance, renter’s insurance, any debt payments, gas, cell phone bill, etc. The amount you make every month will be allocated separately to all your monthly bills. You Need A Budget can help you track and manage this spending.
If you don’t have historical numbers to look at when projecting these expenses, this guide can help you determine utility costs.
Save any extra money. Once you pay off all your bills, put aside any extra money for an emergency fund. You never know when you will have unexpected bills like car maintenance.
You could even go a step further and instead of just putting the money in a savings account, you could invest it in a ROTH or Traditional IRA, or a number of other financial services.
Establishing your financial house early on will ensure you have a bright financial future ahead of you.