Getting your first paycheck is a momentous occasion and one that cements your introduction into adulthood. But before you start planning all the ways you could spend your money, you should also think about how you can save for your future.
The habits you set now early on in your career will help secure your financial future, so there is no better time than the present to start saving.
However, as a young adult at the start of your career and with a newfound sense of independence, it can be challenging to figure out how to plan and set a budget while saving money for your future.
Keep reading to discover some of our top tips for financial success for young adults. We guarantee that your future self will thank you for it.
How Do You Financially Plan in Your 20s?
When you’re young, saving money can seem very daunting. You may find that your living month to month on your paycheck and financially planning for your future just doesn’t seem to be a possible task, but we can assure you it is.
By just setting yourself a budget, focussing on paying back loans, and setting aside a little bit of money each month, you can make a big difference.
Budgeting might sound tedious and time-consuming, but it’s only by knowing exactly how much money is coming in and how much is going out that you can plan your life accordingly.
You also need to learn how to prepare your tax return to save money while also thinking about investing in an emergency fund and even planning for your retirement so that you have money set aside for life’s eventualities.
What are Financial Goals for Young Adults?
Young adults might have several financial goals. Some of the most common goals are paying off debt, saving for the future and retirement, building an emergency fund, buying a home or a car, saving for travel, or building your own business.
At the core of achieving any of these goals is setting a budget, creating savings and investments, building a good credit score, and developing good money habits.
If you can do all of these, you’re well on your way to achieving any financial goal you set for yourself in the future.
Understanding Your Paycheck: What Do You Need to Know?
Getting your first job and your first paycheck is an exciting event, but with it comes a whole host of new responsibilities and financial considerations.
The first thing you need to learn is how to understand how your paycheck is laid out, what tax you’ll be paying on your salary, and how much money you’ll get in your pocket at the end of the day.
- Your bank account details and tax file number: Your employer will need your bank account details to pay you, so if you don’t already have one, now is the time to get yourself set up. You’ll also need to provide your employer with your tax file number, or you could end up paying more tax than you need to.
- What super fund you’d like to choose: A super fund is one that you set up to help you save for retirement. This can be a fund suggested to you through the company you work for or one that you choose for yourself.
When choosing a fund, consider the fund’s fees, the performance history of the fund, and any withdrawal terms and conditions. You’ll also want to look into how the fund is insured so that your money is secure.
Also, if you change jobs, try and keep your fund with the same organizations. Multiple funds mean multiple sets of fees, which means less money going to you at the end of the day.
- What tax you’re going to pay on the income you earn: Various apps, such as SmartAsset, will help you calculate the pay you’ll take home after any tax deductions. That way, you won’t be surprised when the cash you get is a lot less than you expected to earn.
You can also use the IRS withholding calculator to check the allowances you should pay. You want to ensure that the money being withheld from your pay each month is correct to cover your taxes so you don’t owe it at the end of the tax season, but you also aren’t owed a refund.
- What tax you can claim back when tax time rolls around: If you’ve spent any of your own money on things you need for work, such as uniforms, courses, or safety equipment, you can claim this back when it comes time to do your tax return at the end of the financial year.
Just be sure to keep any receipts as proof of these expenses. You can use various apps to track these expenses and record the receipts throughout the year, so you’re not trying to find them all when it comes time to file your return.
A tax agent may also assist you in claiming back expenses, but they usually do charge a fee for their services.
- What’s in your contract and what you’re entitled to: Always be sure to read your contract thoroughly, so you know what’s covered by your employer and what you’re entitled to.
In addition to your contract, there are also certain legal minimums and maximums in terms of your holiday, family responsibility, and sick leave, working hours, break times, public holidays, and redundancy pay.
- How to read your payslip so you come across potential errors: Each month, you’ll want to confirm that the wages on your payslip accurately reflect the agreed salary with your employer.
You’ll also want to check the amount being withheld for taxes. If you over-withhold, you’re essentially unable to do anything with that money, including earn interest on it, until it comes time to do your tax return.
You should also check your payslip for any deductions you and your employer have agreed to, such as 401k payments, health plans, or loan repayments.
- How much super is coming out of your pay package and if it’s correct: You need to check how much is going into your super and if it’s accurate based on the discussions you have had with your employer, the fund you agreed to, and the legal requirements where you reside and work.
Special rules may apply depending on your work or your contract terms. If something doesn’t look right, don’t hesitate to clarify it with your boss, HR, or accounts department.
How Can You Save Money from Your First Salary?
Your first salary may seem like a lot of money and a chance for newfound freedom, but that cash can disappear surprisingly quickly. By following a sound financial strategy, you can set yourself up for success in the future and start making your money work for you.
1. Set a budget
Before you can start saving, you need to sit down and figure out how much you typically spend on things like groceries, gas, transport, housing, electricity, clothes, and entertainment.
Use these expenses to calculate a budget, making sure that your income is always higher than your expenditure so that you have money to save at the end of the month. You may need to figure out what items you can cut back on so that your budget balances out.
You don’t want to be left in a situation where you can’t pay your rent or electricity because you bought some new shoes or ate out a few too many times. You can create your budget on a spreadsheet in Excel or with the help of apps like Mint, YNAB, and Personal Capital.
2. Keep housing costs low
You ideally don’t want your housing costs to amount to more than a third of your income. Sharing a bigger place with a few roommates can be one great way to save on housing.
When you get a raise, you also shouldn’t move to a bigger place immediately, instead, keep living in a smaller spot or with a roommate and invest that extra cash into a savings account.
3. Pay down existing debt
Paying off any current debt like credit cards or student loans should be high on your priority list.
By consolidating your debts and paying them off as quickly as possible, you’ll save yourself a lot of money on interest and can instead focus on investing this cash elsewhere to start earning more money.
4. Handle student loans
Most students enter the working world with at least $30,000 in student loans. There is usually a grace period of six months after you finish your studies before you have to start paying back these loans. Thankfully there are various methods you can use to handle your student loans.
The first method is to use a refinancer to achieve lower interest rates or adjust your loan term. This is also something you want to do once you’ve been working for a few years or have managed to build up a credit score as refinancing partners will be able to relook your interest, saving you lots of money in the long run.
Your new employer may also offer a loan repayment agreement with additional benefits like health insurance, so always be sure to check on these opportunities when considering employment offers.
5. Start an emergency fund
Unfortunately, you can’t go through life without encountering some emergencies. Cars need to be fixed, pets need to go to the vet, and sometimes we experience medical emergencies ourselves. Often these expenses cost in the thousands and need to be paid instantly.
Without a solid emergency fund, you can end up taking out high-interest loans and putting yourself into some serious debt. Therefore, the aim is to have at least one or two months’ worth of living expenses in a savings account to cover these unforeseen events.
Start building up your emergency fund by transferring a small amount of your salary into a high-interest-bearing account each month or week.
6. Don’t wait to save and invest
There will always be big-ticket items you’re dreaming of, such as a new car or a trip to Europe.
It’s therefore always a good idea to start saving. You’ll also get into the good habit of putting aside a little bit of money each month which will come in handy on those rainy days and mean you won’t go into debt should you lose or quit your job.
- How much should you save from your first job? While it may seem like your first job doesn’t pay a lot, you can still earn to save some of it. As mentioned, you’ll want to have a month or two worth of your salary in an emergency fund, but the more you can put away, the better.
A three to six-month saving investment will allow you more financial freedom should the need arise.
- Save one-third of your income: If you’re unsure how much to save, a good amount to start is a third of your income. You should also try saving at least 50% of every raise and every bonus. This will increase your savings dramatically and leave quite a bit in the kitty for those fun items.
- Automate your savings plan: To ensure consistent savings, you want to make a habit out of it. By setting up automatic payments into a savings account, it will be impossible to forget to make those investments. After a few paychecks, you also won’t miss the money as you’ll be so used to it coming out of your account.
Apps like SmartyPig or Qapital can help you automatically funnel money into savings account regularly.
7. Build your credit history
A good credit history and score will set you up for life. You’ll need this to secure apartment rentals, take out mortgages and even sign cellphone and utility contracts.
Thirty-five percent of your credit score comes from your payment history, so be sure always to pay your bills on time and pay off any credit cards you have before the due date.
Also, never miss a payment or carry a balance. Focus on paying off any credit you incur at the end of each month. Not only will you build a good credit history, but you also won’t waste your money paying off interest.
8. Start saving for retirement
Some employers will give you access to an employer-funded retirement fund or a 401k. If you don’t have access to this, it’s still a good idea to start saving for your retirement as early as possible with an IRA.
Try investing as much of your salary as you can into the retirement plan, especially if your employer matches what you put in.
What are Other Good Financial Planning Tips for Young Adults?
As you know, there’s a lot of things competing for your cash. Alongside the necessities of transport and housing, you undoubtedly are also eyeing out that new cellphone, tech gadget, or pair of shoes. But you also know you’ll want to buy a house or go overseas soon.
So what are some more financial planning tips to help you achieve everything you want and more?
- Control your financial future: Instead of relying on your parents or others for advice, be sure to educate yourself on your financial future. Read a few basic books on financial planning or listen to webinars on the subject, and you’ll soon know what to look for when considering a new investment opportunity.
Also, stay away from friends or relatives who come to you with get-rich-quick schemes and instead speak to a trusted advisor with years in the game. You’ll also want to cut ties with friends who constantly need you to pay for things or are happy to blow lots of cash on one weekend away.
- Know where your money goes: As mentioned, you want to make sure your expenses don’t exceed your income and the best way to know where your money is going is by drawing up a strict budget. Once you can see exactly where your money is being spent, you can better determine where you can make changes.
- Learn self-control: Part of making and sticking to a budget is learning to delay gratification. You need to know the difference between wants and needs and how to put off buying items until you can afford them rather than just whipping out the credit card every time something takes your fancy.
You don’t want to be paying off the interest on a shiny new pair of earrings or yet another chocolate bar for the next ten years. One way to help yourself is to only shop with a debit card rather than a credit card as then you will only be spending money you have.
- Protect your wealth: You will want to ensure that all your hard-earned money doesn’t vanish in the blink of an eye, and so it’s essential to protect your wealth. Renter’s insurance, disability insurance, and life insurance will help protect your income in unfortunate circumstances.
Just be sure to read all policies carefully before signing so that you know exactly what’s covered and what’s not. You can also protect your money from inflation and taxes by investing it wisely.
- Guard your health: While health insurance might seem expensive, those monthly payments are a lot cheaper than an unexpected trip to the emergency room might be. Your employer may even offer a health plan where you can save on monthly premiums, or your state may have a public health plan.
Don’t just go for the option your parents used. Take the time to compare different health plans from various providers. If you have chronic issues like diabetes or asthma, being on a more expensive health plan might be cheaper in the long run.
Keeping yourself healthy by eating right, not smoking, and excessing regularly will also help keep yourself out of the hospital and ensure you don’t need to take off time at work.
Frequently Asked Questions on Budgeting & Spending Money
What is the 50-20-30 budget rule?
In this rule, your money is split 50-20-30, with 50 percent of your funds going to necessities like rent, water and electricity, transport, food, and contact bills like your cellphone and WiFi.
The next twenty percent of your salary goes to long-term savings such as investments, your emergency fund, and retirement plans.
Finally, the remaining thirty percent of your salary can be used on lifestyle purchases such as eating out, entertainment, beauty, clothing, gadgets, and home decor.
Following this simple approach to budgeting can help you save while still leaving enough money to do all the things you want to do.
What is the 70-20-10 budget rule?
The 70-20-10 budget rule is another simple way of dividing your budget and is particularly helpful if you need to spend a large portion of your salary on necessities like accommodation and gas. This can be the case if you live in a big city where housing is expensive.
While you might be spending more on the essentials, the savings portion of this budget remains the same as the previous rule, with 20 percent of your salary still going towards investing in your future.
The final ten percent is then yours to do with as you please, whether that’s buying concert tickets, enjoying after-work drinks with friends, or splurging on a morning coffee.
What is the 30-day rule?
The 30-day rule is a rule to help you avoid impulse purchases that can eat away at your savings. The rule goes that anything you want to buy, you leave in your checkout cart for 30 days before completing the purchase. The money that you wish to spend then goes into a savings account.
If when the 30 days is up, you still want the item, then you know it is not just an impulse purchase. You may have also had time to price match or find a coupon on the article by that time.
If you have decided that you don’t need the product, after all, you will have the bonus of adding to your savings account.
Reward Yourself for Your Hard Work
You’ve worked hard to finish university and land your first job, so be sure to reward yourself for all your efforts. Try not to only focus on savings, investments, and paying off bills, but put a little bit of your cash aside to spoil yourself for your hard work.
When you’re done splashing out on that new pair of shoes or treating yourself to a day at the salon, remember, the best thing that you can do is to grow your income.
This means not only sticking to a budget but also investing part of your salary so that your money can start working for you.
Do you have any money-saving tips to make your first salary last longer? Do feel free to share them with us in the comments below.