5 things new grads should do with their first paycheck
It is the month of August and hopefully you have settled down from all new grad celebrations that started ever since you graduated from college. It is finally time to focus on some wealth creation. As your paycheck comes in here are 5 things you must do :
Contribute to a 401k
401k is the employer sponsored retirement account that you can contribute your money into. The main advantage of 401k is that your contributions are deducted before your income taxes kick in. What this means is that your overall taxable income is reduced by the amount of money you contribute to the 401k, but don’t start thinking that you will save a lot of taxes by contributing as much as you because there is a limit to your contributions. For the 2022 tax year you can contribute upto $20,500 and for the 2023 tax year that increases to $22,000. This has one more little perk up its sleeve, your employer can make contributions to 401k (if they wish to) to match your contributions. In simple terms, for every dollar you contribute your employer will give your 401k a dollar. That is basically free money!
Build a safety net
This step is important to shield you from any unexpected expenses that may come up. Ideally you should save 3-6 months worth of expenses saved in your safety net but I recommend starting with at least $1000 and going from there. You can save this money in a savings account at your current bank or sign up for a high yield savings account. Apps like SoFi and Betterment are a good place to start.
Start a Roth IRA
A Roth IRA is special individual retirement account where your post tax money can grow tax free. The main benefit of a Roth IRA is that unlike a traditional IRA, you can make withdrawals without paying taxes on your contributions and earnings once you retire. Once you have made an account, you can choose investments. Any growth that you get on these investments is tax free and the withdrawal after retirement is also tax free. This is only valid if you withdraw the funds after turning 59 1/2 years old. Now you may think if I can grow all my investments tax free, why dont I put all my savings in Roth IRA, well, hold that thought there since Roth IRAs have a limit.
Filing status Taxable income. Contribution limitSingle Under $129,000 $6000
$129,000 - $144,000 Reduced contribution
$144,000 or more No contribution allowed
Married Under $204,000 $6000
$204,000 - $214,000. Reduced contribution
$214,000 or more No contribution allowed
We know picking the right investments for an IRA can be tricky, that is why we recommend using a robo-investor like Betterment which can not only balance your portfolio but also help you save some taxes. You can learn more about Betterment here.
Build credit
Building credit and having a good credit file can pay off well in the long term. If you never had a credit card or have no history, starting out with a secured credit card would be perfect. One of the popular starter credit cards is the Discover credit card, you can learn more about that here. But if you have started building your credit file and you need add a some diversity to your file, some of the no annual fee credit cards from issuers like Chase, Citi and Bank of America may be the way to go. The Chase Freedom Unlimited is a great card for grocery store purchases and the Citi Visa Costco Card is great for gas purchases and if you shop at Costco often.
Start paying off debt
Debt is a serious threat to your financial security because it stops you from making the most out of your money. If you have a lot of credit card debt, then paying it down quickly can result in you paying less interest on the money owed. Another major advantage of paying off debt is that you can be stress free and there is one less bill to take care of at the end of month.
