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First Paycheck

 

Target group: Full-time employees (especially new hires)

 

So you just got a big paycheck from one of the top companies in the world and you're sitting there staring at it thinking: "man, this is a lot of money; what should I do with it?" This article provides some reasonable answers to that question.

1. Pay the necessary bills/Take care of necessary monthly expenses.

This should be one of the first things that is taken care of. Necessary monthly bills such as rent, car insurance, health insurance, student loans, child support, etc. should be one of the first things that the check is devoted to. Once ALL of these necessary bills are taken care of and there’s something leftover, we can move on to the next phase. Very important: these expenses do not include discretionary expenses (i.e. expenses that are not necessary such as a new pair of Jordans).

2. Invest in your company’s 401(k) plan at the max rate.

Saving for retirement is extremely critical. There will be an article dedicated solely for this topic, but for now, take advantage of your company’s 401(k) plan if one is offered. My rule of thumb is to contribute at the maximum rate that your company will match you. For example, your company contributes/matches 50% up to 5% of your monthly contributions. Let’s say you invest 5% of your gross (pre-tax) income each month, your company will contribute 2.5% leaving a total of 7.5% contribution each month! That’s the definition of “free” money that you can save for retirement and take out when “the time is right.” Is there a catch? Yes. Most, if not all companies have something known as a vesting period which basically means you have to stay there a certain amount of time to lock in their contributions to your 401(k) plan. Either way, it’s a win-win situation. You can’t really go wrong by saving for retirement. There is some market risk with almost every investment such as a 401(k) plan, but nothing too extreme to worry about. Again, a topic for another day, but something to think about now.

3. Invest in another profitable investment vehicle.

Now that almost half of your check is probably gone, it’s time for phase 3. Most people are blessed enough to get to this phase, so if you’re still here, congrats! Phase 3 requires the most research as it is time to really test the market. Investment vehicles such as stocks, bonds, permanent life insurance, etc. are very good to start out with. Stocks have the highest risk according to experience, but also have the highest returns. Dividend-paying stocks are my personal favorite. Bonds are another good investment as they are considered to be “safer” than stocks due to their guaranteed payment aspect known as interest. Permanent life insurance tends to get overlooked, but is an excellent tool that combines investing with insurance. With all of these vehicles/tools comes a great deal of research that needs to be done. There will be an article solely for this topic that can help steer you in the right direction, but once again, this is something good to think about now if you want to build some portfolio income. You should include investing as part of your budget once you establish a formal budget.

4. Save.

Phase 4 may seem obvious, but many people seem to forget how important this phase is. Saving money is very important as most of us know. By now, you should already have a savings account and each check should have some portion of it deposited into your savings account(s). A rule of thumb is to save about 50% from what's left from paying the necessary bills (phase 1). You should also include saving as part of your budget once you establish a formal budget.

5. Give back.

If possible. Even if it’s something really small. Whether it’s to your church, your college/university, or your local Boys and Girls Club, giving back is something that can pay huge dividends down the road. Not only will you feel good about yourself, but you will most likely benefit a good cause. Plus there’s tax benefits that you can take advantage of (a topic for another day).

So there goes all of the recommendations for the first check. It can also apply to the second, or even the third one. It’s your ultimate decision on what to do with your money that you’ve worked so hard for at the end of the day. There are many other rules of thumb to follow, but I hope this helps. Please let me know if you have any questions.

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