Congratulations! You’ve gotten your first job. Here are some things to keep in mind.
First of all, congratulations! Getting a job is not easy. Creating a resume, interviewing, applications, referrals, and more – you’ve done it all at this point.
4 Financial Tips for your First Job
Now, let’s get down to business. There are a few things to be prepared for as you start your new job.
- Paycheck Withholdings. You probably know this already, but your salary or hourly wage will not actually be the amount that gets deposited into your checking account. The difference between your wage (say, $10 per hour to make it simple) and the amount that goes into your paycheck, is due to expenses that are “withheld” from your pay before you receive the pay. Here are some examples using that $10 an hour wage:
- Federal taxes. Depending on your income and how you complete your paperwork, your employer withholds a portion of your paycheck to remit to the IRS to pay federal income taxes on your behalf. As an example, let’s say this is 12%, or $1.20.
- Medicare and social security taxes. You’re also required to pay taxes for Medicare and Social Security; according to irs.gov, “If you work for an employer, you and your employer each pay a 6.2 percent Social Security tax on up to $142,800 of your earnings and a 1.45 percent Medicare tax on all earnings.” So this is 7.65% of your $10, or $0.765.
- State taxes. If your state has income taxes, you’ll probably have a portion of your wage withheld for state taxes. In Illinois, we have a flat 4.95% tax. So let’s say $0.495.
- Health insurance. Does your employer offer health insurance? Your share of health insurance premiums will also be withheld. Typically this is a specific amount per month based on health insurance coverage you elect. Let’s say it’s $400 per month (note that this varies widely so this is just an example), or about $0.25 per hour (40 hours x 4 weeks = 160 hours x $10 = $1600 monthly wage. $400/$1600 = $0.25 per hour). $0.25
- Retirement contributions. Does your employer offer a retirement plan? You may have the option to contribute to that plan which is another type of withholding. See the employee benefits section below for details.
- So in this example, we have total withholding of $1.20 + $0.765 + $0.495 + $0.25 = $2.71
- Meaning that in this example, you as the employee will receive $7.29 in pay for every hour you work.
- Budgeting. Many times, new employees are excited by the pay they will receive but don’t realize what other expenses come along with being an employee, including transportation to/from work, purchasing a snack or lunch to eat at work or on breaks, clothing (uniform cleaning, professional clothes, dry cleaning, etc.), and more. Make sure you’re not spending more than you can afford. Pay those credit cards off each month and be wary of signing a too-expensive lease, since housing is one of the most expensive parts of a budget. Also, include an amount of savings in your monthly budget too – even if it’s just a small amount like $10 to start. Check out budgeting tips here.
- Employee Benefits. Your employer may offer different benefits which you should evaluate carefully. If you choose not to participate in the benefits your employer offers, you may be leaving money on the table because often employers will subsidize a portion of the cost. Here are some examples of employee benefits:
- Health Insurance. Can be very costly, and depending on the type of employer and state specific regulations, employers may be required to pay for a portion of their employee’s health insurance, such as 25% of the cost. So it can be less expensive to get health insurance through your employer than on the marketplace. Ask your employer what health insurance options are available, and if you don’t regularly see a doctor or mental health professional, check if you could sign up for a high-deductible plan that includes a Health Savings Account. For certain people, these types of plans can be beneficial because a Health Savings Plan can grow over time and even be invested for compounding interest.
- Retirement Plan. These plans come with a variety of names/numbers, like 401k, 403b, 457b. They are all ways for you as an employee to set aside money from your paycheck now, for your future later. Many times, employers also contribute on your behalf. They may contribute an automatic 3% of your paycheck whether you participate or not. Or their contribution level may vary based on whether you also contribute. Check with your employer on what their policy is. Talk to your financial professional about your situation and whether you should participate – these plans can be some of the best ways of saving towards retirement.
- Group Life Insurance and/or Group Disability Insurance. Many times an employer will offer life insurance free to you, valued at a set amount like $25,000 or one time your annual salary. In addition you can often add additional insurance onto this that you pay for, called supplemental insurance. Again, check with your financial professional on what levels of participation might make sense for you.
- Open Enrollment. Open enrollment is the time your employer gives for you to elect your benefits for the year. When you are a new employee, you have a period of “open enrollment” right when you first start. Then, annually, open enrollment occurs at a set time, and often runs for about 2 weeks, at which time you must choose your level of participation for the following year. For some of the benefits I mention above, like your retirement plan, you may be able to adjust your participation levels throughout the year. But for other benefits like health or life insurance, you typically can’t adjust your participation except during the open enrollment time unless your life circumstances change. Talk to your employer about what your open enrollment period is, and ask them for help in understanding the benefits you have to choose from if you don’t know what they are.
These are just a few of the practical considerations to keep in mind when starting your first job. And again, congratulations! You’re starting an exciting period of life as you develop your professional life!
Every situation is different, so please talk to the financial professionals in your life before making decisions about how to handle your first job.