So you’ve just finished school and have been offered your first full-time job! Congratulations!
But where should you invest your first salary? There are a few options to consider, from saving it for the future to buying an expensive gift for someone special. Here is a look at the advantages and disadvantages of each way of handling that pay rise.
What to do with your first paycheck?
Investing in Yourself: It might seem counterintuitive to use your first salary as a down payment on your own self-improvement. But investing in yourself can help you become more employable i.e you’ll be worth more as an employee–either now or later. You might think about investing in something directly related to your job or industry. But it’s also a good idea to invest in yourself in ways that could help you find a new job even if your current employer goes under. Taking time to learn a marketable skillset, such as Excel or Photoshop, or attending classes at a local university can increase your value and make it easier for you to find employment elsewhere if necessary.
Buying Something for Yourself: If your employer is giving you an extra few dollars per hour above what she would normally pay an entry-level worker, consider treating yourself to something nice–maybe a new iPod or an all-expense paid trip abroad for next summer. You could even save the extra allocation for a rainy day. The point is to take advantage of an opportunity made possible by your employer’s generosity and not waste it.
Saving for the Future: If you want to start saving as soon as you get employment, any extra money will contribute to your 401(k) plan or other retirement plan. You might also consider putting some of it into a Roth IRA, which will give you more flexibility than a regular 401(k) plan in the way that it grows over time. This can be useful if you’re just starting out and don’t expect to be receiving regular pay increases. You could also consider investing in stocks, which can be more volatile than earnings from a fixed-amount account, but offers higher returns over time.
Trying to Meet Another Goal: If you’re dating someone special and have not yet asked her out, this is a great time to do it. If you have a plan to buy a car or house, now would be the best time to get started. If you have a big wedding or party coming up, consider going over your budget now rather than later. It’s like using your first salary to get started on your next salary.
Giving Back: If you identify with a particular cause or think that giving back to a community is important, put some of your first pay packet toward a charity or cause. You could also put the money into an IRA and donate it to a charity once you start taking out monthly payments in retirement. Plus, donating now will help you start building up tax deductions that may save you money when you file taxes next spring.
Also Read: Should you/How to Decline a Job Offer?
Helping Others: If you’re the kind of person who feels guilty about getting anything for yourself, you might want to think about gifting your extra cash to another person. This can be as simple as giving some money (or a memento) to a family member or friend. If it’s not tax-deductible, someone else will likely benefit from the gift in terms of having that money at his or her disposal and not being taxed on it. Perhaps you might consider giving some money to a charity, which will make you feel better about yourself for being generous and appreciated for your contribution.
Buying Something for Someone Else: Finally, if you want to get something nice for someone else, try asking that person what he or she would like. You might be surprised at how much something as small as a gift card can mean to someone who lacks material possessions. A $25 Starbucks gift card is the perfect gift for a new grad at the start of her career; it’s small enough not to be too expensive (“I bought myself a whole Starbucks!”) and yet it means so much to the new grad that she’ll probably buy herself another one in no time.
Where not to spend your first salary?
First salary is always special. You don’t want to put it in a garbage can. And it’s not even a choice, you need to put your money somewhere! So here are some important things you should consider before investing this first paycheck of yours.
- · Under no circumstances should you invest your first paycheck in speculative stocks. If you don’t know how the stock market works, stay out of it. It’s a complex matter and if you have a long-term financial plan, then stick with that. You don’t need to take any risk at this early stage of your financial life because your savings would be subject to market volatility.
- · Rather than cooling off or splurging on new stuff, try spending a little (or even a lot) on someone who could use it more than you. You know someone who needs that money more than you do? Go ahead and transfer some of it to them.
- · Think about your long-term investments. Don’t have temptation to invest in something other than a reputable company. If you don’t want to invest in stocks, what would you rather invest in? Stocks? Bonds? Mutual funds or ETFs (Exchange Traded Funds) are a good option if you want the security of a low-risk investment with potential high returns.
- · Don’t think that the money will last forever! Instead, figure out which one is suitable for your life and learn everything about it before making any kind of financial decision.
- · You might have temptation to invest all your money in the stock market and earn rapid returns. People call it ‘investing for growth’ and is a good option if you have at least five years before you need your money. If that’s not possible, think about investing in low-risk options such as bonds, which will give you fixed returns over a longer period.
As said before, first salaries are special. It’s not a moment to go on a spending spree, but instead a perfect time to set goals and give back to your community and family. Otherwise, you’ll regret setting up your future with your first paycheck. So, try to be smart. And get ready to enter the world of competition.