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How you should budget your first paycheck

You might be tempted to spend it all—here’s what you should do instead.

How you should budget your first paycheck

The first paycheck from a new job is like a freshly baked apple pie. When you see it, you’re not sure how exactly to divide it, and you probably want to devour it all immediately.

One thing is for sure—on either side of this metaphor, an impulsive approach will leave you regretting your decision.

Money management is a foreign concept to many millennials. Recent survey results from PricewaterhouseCoopers show that out of 5,500 millennials surveyed, only 36% have put money into their 401(k)s, and 20% have already taken money out, subjecting their accounts to steep fees—an indication of financial hardship, lack of knowledge, or both.

As a 20-something, surely retirement is the last thing on your mind. But it creeps up sooner than you think, and you don’t want to be stuck without a nest egg when it matters most. So what’s the best time to educate yourself on personal finance best practices? Start with paycheck number one.

We spoke with financial experts to figure out how millennials should break down their earnings.

First things first—pay off debt

Credit card debt, student loan debt, auto loan debt—sound familiar? These types of debt are common among many young workers. The problem is, high interest rates can cripple your long-term financial standing and make it difficult to move forward in your career.

Paying off debt should be priority number one, says Winnie Sun, Forbes contributor and managing director and founding partner of Sun Group Wealth Partners in Irvine, California.

“This wouldn’t include the entire balance, unless you are behind in payments,” she says. “But you certainly want to make sure you are on time with payments, and this should be factored into your paycheck usage.”

Build an emergency fund

Life is beautifully, horribly unpredictable. The future is uncertain—so hope for the best, but plan for the worst.

Aoife Quinn, founder of Quinn HR Consulting Group in Somers, New York, urges new employees to save with emergency funds in mind—and start saving from the moment you begin making money. “If you wreck your car and need money to get to work so that you can continue earning that paycheck, it’s going to be easier to access your emergency account than take a loan from your 401(k) account,” she says.

Invest in a 401(k) or IRA

Millennials may be decades away from retirement, but with uncertain social security benefits and diminishing pensions, putting money into retirement accounts such as a 401(k) or IRA has never been more essential. Plus, years of compound interest will multiply investments, and the earlier you start saving, the better. And the great thing is, you don’t need to make a ton of money to get ahead.

Lidia Shong, a personal finance writer and the head of marketing at aboutLife, a retirement planning company in San Francisco, shares her success story:

“I started saving 12% of my salary at age 25 when I was making $9.25 per hour, and today I have over $400K in retirement savings. It wasn't easy to take 12% out of my paycheck when money was so tight, but I had to keep reminding myself that this would pay off in the end. And it did.”

Though millennials are saving for retirement, research suggests they aren’t saving nearly enough. But if you start young, enroll in automatic deposits and get in the habit of saving a small percentage of your paycheck, you’ll be on the right path.

Ask questions, and enjoy life

What you don’t ask, you don’t know.

It may be worth sitting down for an hour with a financial advisor and having a candid conversation about your saving plan. Also, pick your HR rep’s brain for knowledge on company benefits—it’s their job to inform you of them. Does your company offer a flexible savings account? Discounted life insurance? Commuter benefits?

Just remember, every financial situation is different. Develop a plan that’s right for you, not your cubicle buddy. And when it comes down to it, life is all about doing what you need to do to be happy. Don’t forget to budget for some fun.

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