How to spend your first paycheck (wisely)

Congratulations! You got the job!

If you're like most people, the excitement of your first paycheck has you mentally spending every penny well before payday. A steady income, even if it's part-time, can be life changing. Whether you're hoping to spend your earnings on a new ride or to save for college, understanding how to handle your new income before you receive it is key to making every dollar count. 

Understand your paycheck

If you think your first paycheck will equal the number of hours worked multiplied by your hourly wage, you could be in for a shock. Your check will be less than that for several reasons. Understanding why begins with learning a few key terms that appear on your paystub.

Social Security Taxes and Medicare Taxes

Every American who receives a paycheck from an employer must pay taxes. Some taxes are collected before you even receive your check. For example, Social Security Taxes are taken out of your check now, but expect to see that money again at around age 67. Those funds become available during retirement when you're past your peak earning years. Medicare Taxes are paid now and can also be used starting in your mid-60s. This money is used to pay for medical expenses during retirement.

Federal Withholdings and State Withholdings

Other taxes, such as Federal Withholdings and State Withholdings, are also paid by all Americans for things that support society. This might include national defense, law enforcement, highways, jails, low-income assistance programs, etc. Not every state has a State Withholding Tax, but every American must have a Federal Withholding taken from their paycheck.

The taxes withheld will depend on the amount you earn and the information you provided on your Form-W4. Your employer pays the Internal Revenue Service (IRS) and your state (if applicable) the amount withheld in your name. Use the IRS's Tax Withholding Estimator to see how changing information on the Form W-4 affects the size of your paycheck.

As an income earner, you must file an income tax return every year by April 15. If your withholdings were too much, you will receive a refund. If they were too little, you might owe the federal government or your state more money.

Your paycheck might have optional deductions, too. If you participate in health benefits, insurance, or retirement savings plans, those deductions are taken from your check before you receive it.

Gross Pay and Net Pay

This brings us to the two most important terms on your paystub: Gross Pay and Net Pay. Gross Pay is the amount you might have expected before reading this article: what you earned before deductions. Net Pay is your paycheck after taxes, withholdings, and deductions have been taken from your earnings. This is sometimes called "take-home pay."

Deposit your paycheck

It's payday! With your first paper check in hand, it's time to deposit it into your account. If you have a checking account, you can save time and money using your financial institution's mobile banking app. Many offer account holders the option to remotely deposit their checks by taking snapshots using a mobile device. 

Remove this task from your to-do list entirely by setting up direct deposit. Complete your employer's direct deposit form to allow future paychecks to arrive in your designated account each payday without touching a paper copy. Your employer should still provide access to the paystub.

Spend your paycheck

While saving all your money is probably unrealistic, spending it all is unwise. Enjoying the fruits of your labor means buying items you want, but only after your other financial obligations are paid. So, if you're responsible for a phone bill or car insurance, then subtract those amounts from your check before you spend your first dollar.

But even before you pay bills, pay yourself first. This means depositing a regular amount into your savings account before you spend money on bills or anything else. A good rule of thumb is to save at least 10% of each paycheck for emergencies and large planned purchases. If you wait until after you pay bills and make other purchases, you might have nothing left over to deposit into your savings account.

Make it automatic by designating a portion of your paycheck to "savings account" on your employer's direct deposit form. Or, work with your financial institution to set up automatic transfers from your checking account to your savings account. The easier you make it to save, the faster your account balance will grow.

Adopting smart money habits now can lay the foundation for a stable financial future with little effort. As your paychecks increase over the years, so will your ability to live your dream lifestyle.