4 Common Budgeting Mistakes
- No specific motivation
- Unrealistic spending estimates
- Overlooked expenses
- Too many restrictions
After months spent scouring career boards and hours of networking, interviewing and submitting applications, landing your first job is a major relief—and a big accomplishment. It also brings new responsibilities as you learn how to manage your first salary, budget for your lifestyle and develop the smart savings habits that will serve you your entire life.
As you prepare for your first day, it’s critical to start thinking about how much of your paycheck you should save.
To help you find the answer, financial experts provide tips on how to manage your first salary, offer strategies to help you save money at your first job and explain how to adjust your savings as your career flourishes.
You may feel intimidated by the commitment to save money at your first job, especially if you’re carrying student debt or feeling like you aren’t making quite enough. Joy Liu, head trainer at personal finance company Financial Gym, certainly felt that way.
“When I got my first job, I made $35,000 a year,” Liu says. “It was easy to just throw my hands up and say, ‘I can’t save right now on this salary.’” But she urges young savers to reconsider.
“Looking back, with the knowledge that I have now, I could have made it work if I knew that saving was something I needed to do,” she says.
In fact, saving money at your first job will put you in a better place when you’re a seasoned professional, Liu says. When you deposit some of your paycheck into a savings account, you’ll earn interest on the balance. Your now larger balance will itself earn interest (you’ve got compound interest to thank for that). The earlier in your career you start to save, the more time you’ll have for your money to grow exponentially.
Saving money at your first job might also make sense because you likely aren’t juggling the large financial commitments you’ll face later in life.
“You may have student loans, you may have some credit card debt, but you most likely don’t have a mortgage, which is a huge lifelong commitment,” says Ashley Dixon, a CFP® and lead planner at financial planning firm Gen Y Planning.
You now know you need to sock away part of your earnings from your new job, but how much of your paycheck should you save?
While your specific savings rate will depend on your goals and circumstances, Dixon recommends saving 20 percent of your monthly take-home pay. If that’s too challenging, start with 10 percent, Liu says.
If you don’t think you have enough to save, review your essential expenses, like rent, student loan payments, utilities and groceries. Save from whatever cash is “left over” each month, and see how close you can get to that 10 to 20 percent goal.
When determining how much of your paycheck you should save, you might initially find that there isn’t enough cash left over. If that’s the case, create a budget to keep your spending and savings on track, or review your existing budget to see which unnecessary expenses you can cut.
“Being mindful of where you’re spending your money and keeping track of spending in real time is the hardest part and is where people struggle the most,” Liu says. “But knowing where your money is at any given point is how you stay on track, whether that’s creating a spreadsheet or using a budgeting app.”
If you’re not able to hit these savings benchmarks right away, don’t sweat it. The key is to save what you can, and you can gradually work to increase your savings over time.
To help you get in a groove saving money at your first job, define exactly what you’re saving for. Need some ideas?
When learning how to manage your first salary, Liu recommends prioritizing an emergency fund. A top reason you need an emergency fund is the stability and peace of mind that this stockpile can offer, Dixon says. Should you face an unexpected expense like a costly car repair or lose your job in the future, you’ll then have a backup fund to dip into.
“If you’re young and single, you should try to strive to save six months of living expenses in your emergency fund as a guideline, but that can be different for every individual depending on where they live and family situations,” Dixon says.
Consider your emergency fund one of multiple savings accounts, or buckets. “You want to have all of these different buckets of money set aside for different goals, and move and prioritize how much money you save for each goal based on their priority level to you and what is realistic within your budget,” Liu says.
In addition to your emergency fund bucket for life’s surprises, you can also save money at your first job and contribute to other funds that align with your financial goals, like a car fund to help you buy new wheels or a vacation fund to save up for a getaway.
However you define your goals, the important thing is that they’re clear to you and that you’re actively saving money at your first job. This positive momentum can guide smart savings habits even once your first day of work is a distant memory.
Even with the best savings goals and intentions, it can be easy to get tripped up. Enter automation. By automating your savings, you reduce your chances of overspending or skipping savings altogether.
There are a couple ways you can use automation to help manage your first salary. You could set up a weekly or a monthly automatic transfer from your checking account to your savings account, Liu suggests. Or, you could ask if your company’s payroll department allows you to split your direct deposit, sending some of each paycheck into your checking account and some into savings.
Another consideration when learning how to manage your first salary is where you’ll keep your hard-earned funds. Many people opt to open a savings account from the same bank where they have their checking account, but Dixon says that’s not always the best approach.
“You want to look for a high-yield savings account,” she says.
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By keeping your money in a high-yield savings account, it will earn a higher-than-average interest rate. Remember compound interest? The higher your interest rate, the more your money will be able to grow over time.
As you do your research to find the right savings account for saving money at your first job, Dixon recommends comparing interest rates from different banks.
“Typically, online banks offer higher interest rates than traditional brick-and-mortar banks,” Dixon says. “Most online banks don’t have an actual storefront for you to visit so they’re saving overhead costs and are able to pass that interest down to the customer.”
In addition to contributing to your savings account, enroll in your employer-sponsored 401(k) plan and take advantage of employer matches if they’re offered.
In addition to interest rates, pay attention to fees and required minimum balances, says Liu. Fees can eat away at interest earnings, and you may not want to worry about keeping a minimum balance when you’ve just landed your first job and are gradually ramping up your savings.
Lastly, consider your access to your funds. “Because your savings account is separate from your checking account, consider how long it may take to get your funds,” Dixon says.
If you’re looking for a high-yield savings account, the Discover Online Savings Account has no minimum balance requirement and no fees1, so you can turn your savings from your first job into something meaningful—without any hassle or stress.
As you manage your first salary, saving for emergencies and other short- and medium-term goals is essential. But you also want to start saving for retirement, even if that seems like ages away. Thanks again to compound interest, time is on your side, Dixon says.
“When you’re in your 20s, you don’t see the large effect compound interest will have because you are just starting your savings; all you see is the money sitting there,” she says. “But when you get to your 60s, that account’s going to glow because it’s been growing over time.”
In addition to contributing to your savings account, enroll in your employer-sponsored 401(k) plan and take advantage of employer matches if they’re offered, Liu says. Your 401(k) contributions automatically come out of your paycheck, so you won’t even have time to miss the funds.
How much you save for retirement depends on your goals and age, but when it comes to benchmarks for 401(k) contributions, many personal finance experts recommend saving 10 to 15 percent of your income, according to the Financial Gym. That said, be careful to not overfill your retirement “bucket” and run the risk of locking away money you may need in the short term for your emergency fund or other priorities.
As you advance in your career, you’ll likely see an uptick in your take-home pay. After a bonus, promotion or new job, your first inclination may be to spend more because you’re earning more.
“You don’t want to create a lifestyle that you can’t keep up or maintain,” Dixon says.
While you deserve to celebrate your career wins, determine how you can maintain (or even accelerate) your savings progress as you increase your earning potential.
If you’re earning more and you’re maintaining a manageable cost of living, Dixon recommends putting extra income toward your 401(k) or another savings goal—like going from renter to homeowner—rather than spending.
If you keep these tips on how to save money at your first job—and beyond—in mind, you’ll gain financial security and be prepared to hit all or your financial goals.
Now that you know how to manage your first salary, learn how to negotiate your next one. Here are four tips to successfully negotiate your salary as your career grows.
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1 Outgoing wire transfers are subject to a service charge.
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1 “Expenditures on Children by Families, 2015,” Revised March 2017, Center for Nutrition Policy and Promotion, United States Department of Agriculture.
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