What to do with first paychecks

Byron R. Moore, CFP®
The News-Star
October 9, 2004

Question: I will graduate from college in May and I am pretty sure I will have a job offer paying me about $50,000 a year. What are the things I should do to make the most of this?

Answer: For the past few years Dr. Bill Jordan, my long-time friend and an engineering professor at Louisiana Tech University, has invited me to be a guest lecturer to his senior level engineering seminar. The seminar is designed to prepare engineering students for life in "the real world."

Usually the first thing we do is introduce the concept of gross income vs. net income. Often these young engineers have never realized that when they earn money, they’re going to have to share a chunk of it with their Uncle.

A single person earning $50,000 a year will pay about $3,800 in Social Security and Medicare taxes. Then he’ll pay another $8,000 to Uncle Sam in federal income taxes. Then Baton Rouge will ask him for another $2,000 in state income taxes. You get to keep about $36,000.

Admittedly, those calculations can vary widely depending on marital status and any deductions you may have. But many a single wage earner earning $50,000 sees about $14,000 a year fly out of his paycheck in the form of taxes.

So what do you do to make the most of what you get to keep?

Save first, budget later. I do not mean to disparage budgeting. It is a great thing to do, even though 90% of the American population refuses to do so.

But I see too many people treat budgeting like a Santa wish list, loading it up with as much stuff as possible only deleting from it when mom says they have to.

Such budgeting usually leads to meager savings habits.

There will never be an easier time for you to save money than now, in your twenties. Yes, your income is likely to grow over time, but so will your financial obligations.

And the clock is ticking. If you give up the opportunity to save and invest in your twenties, you will have given up the most productive savings years of your life. Consider this: what you save in your twenties can double the amount of money you have to retire on. Double.

So determine you are going to save 15% of your gross income, then spend what is left over. Period.

Get a good used car. Only buy a new car when you can afford to pay cash for it. Otherwise, buy a reliable used car and keep it until the wheels fall off. My wife and I drove a Honda Accord and a Ford Taurus each for over 235,000 miles each. Change the oil regularly and you’ll be good to go.

Do not max out your 401K. This is the most overused rule of thumb I have ever heard. Before putting money into an account you cannot touch until twice as many years as you have presently been alive, save some money into available accounts.

Put six months living expense in a bank savings account first. Then start saving to fund your next automobile purchase. And don’t forget about that down payment on the house you’re going to want some day.

Get adequate insurance. Your primary asset now is your ability to earn an income. You must protect that asset. The best way to do so is to purchase an individual disability income policy. Get expert help to sort out the complexities.

Save and invest wisely and flexibly. You may be in your thirties before you reach this stage, but that’s OK.

One day you’ll be older, wiser and likely be earning more income. But today, you have time. If you will let a whole lot of time and a little bit of money combine to work for you, you’ll find yourself at the head of the class when it comes to post-collegiate "real-world" finance.