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Here’s how to handle your first big paycheck

Your big paycheck goes to savings, investing, and just plain fun.

On top left, person using fingers to touch small blocks that read "Pay Day." On top right, person smiling while holding paycheck. On bottom left, person taking pay check out of envelope in front of laptop computer. On bottom right, person using hands to thumb through cash bills. Credit: Reviewed / Getty Images / focused / efetova / AndreyPopov

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Your paycheck from your new position or first summer job, or salary increase just hit your checking account, and you feel like you’ve hit the jackpot. This is the most money that you’ve ever made in your life!

What should you do now? Celebrate, for sure—but you’ll also want to do some thoughtful planning with your newfound wealth to make the most of the financial opportunity. Let’s get some advice from the experts.

Take it slow and see the big picture

Don’t rush any of your financial decisions. As long as you don’t spend it, the money will be there waiting for you. There’s no reason to hurry. “Resisting the immediate urge to upgrade your lifestyle will allow you to be deliberate in the execution of your financial plan,” says Samuel Lewis, founder of SJL Financial in Wilmington, Delaware.

Before you mentally spend (or sock away) all your cash, internalize this budgeting guideline, known as the 50/30/20 rule: 50% of your income goes to essential items such as rent, groceries, and monthly bills, 30% of your income goes to discretionary or non-essential items such as dinners out, concerts, and online streaming services, and 20% goes to savings.

Treat yourself

Person shouting happily with fists balled up.
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You've worked hard and now you afford to spend it, but remember to do so wisely.

Don’t hold back the excitement of landing a job with a big paycheck. You earned that money by working hard and should use some of it to celebrate. “If you don't have fun along the way and only focus on earning and saving more, your money is controlling you—not the other way around,” says Elliott Appel, a financial planner and founder of Kindness Financial Planning based in Madison, Wisconsin.

Of course, you’ve probably daydreamed about all the different things you’d like to buy or do with your paycheck. But you’d be wise to rein yourself in by giving yourself an allowance. As already noted, a good rule of thumb is to cap your discretionary spending at no more than 30% of what you earned, after ensuring your essentials are handled. And if that value seems high, remember: You don’t have to spend it all.

Determine your priorities

Make a list of financial goals and then put them in order of importance. This simple but useful task will help you ascertain what’s most important to you financially. Think of it as filling buckets. “Basically, you take the amount of money to be deployed and fill up the first and most important goal or ‘bucket’ and the remaining funds ‘spill’ over to the next goal until that is filled, and further down filling up each bucket until the funds are exhausted,” Lewis says.

In keeping with the 50/30/20 rule, it’s smartest to start with a financial bucket for your rent or mortgage payment, as well as your car payment and any student loans you’re paying off, which are most people’s biggest bills each month.

For someone fairly new to the workforce or to a significant pay bump, Lewis suggests considering these potential financial priorities:

  • Begin contributing to an employee-sponsored retirement plan and contribute enough to receive the employer’s matching contribution.
  • Tackle high-interest debt such as credit cards and personal loans.
  • Start building a small emergency fund, typically three to six months of living expenses.
  • Add more money to an employer-sponsored retirement account such as a 401(k) plan or 403(b) plan or add money to an IRA account or brokerage account.
  • Pay down the principal on other debt such as student loans or car loans.
  • Save up for a down payment for a house.

No matter what, don’t forget you’re in charge. You get to prioritize the order of your financial goals. “Your personal circumstances and goals will dictate what is most appropriate for you,” Lewis says.

Use automatic transfers to automatically save more

Once you determine how much you can save, you can set up automatic transfers from your checking account. Appel recommends setting specific goals within a savings account, which some banks allow you to do using their online interface.

“These buckets can allow you to save towards different goals, such as a new car, travel, insurance, emergency fund, etc.,” says Appel. “By putting things on autopilot, your system is automatically working for you without much effort or energy.”

Shift priorities, if you’re an older worker

If you’re an older worker who may have been out of work for a while, your financial priorities may be different than a younger worker in their 20s or 30s. If you struggled through unemployment, Lewis suggests you do the following with your big paycheck:

  • Pay off expenses that you paid for with credit, especially if the balances carry high interest.
  • Catch up on retirement savings by making greater contributions.
  • Build up savings that was spent during unemployment.

The order of these priorities are up to you, and you may have additional financial goals that you might wish to add based on your personal situation. For example, if you have high car payments, your first instinct may be to make some extra payments. But if you have credit card debt with a higher interest rate than your car loan, it makes the most financial sense to pay off your credit card debt first.

Watch out for overestimating your new means

Coins falling into piggy coin bank.
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Think about the longevity of your funds when it comes to impulsive splurging.

Spending too freely may take you off your brand-new budget. You still need to think about how much you have to spend, even if your total take-home is more than you’ve ever had before. Don’t change your life all at once.

“Instantly ‘upgrading’ your life with new long term costs, new car, better apartment, bigger house [will] have you tied to higher payments for years,” Lewis says. “The euphoria of new ‘wealth’ quickly subsides, and you realize you may not have adjusted your spending in line with your long-term goals.”

So before you commit to a new car or a new place to live, make sure it makes sense in your long-term budget. If you aim too high, you may get stuck with uncomfortably high payments for years. And that’s nothing to celebrate.

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