How to Use Your First Paycheck to Build a Strong Financial Future

Your first paycheck can open up a world of possibilities. Planning for a financially secure future should be one of them. Here’s what you need to know about that first paycheck and how to use it effectively.

Key Takeaways

• A first paycheck is an exciting accomplishment, but you should be careful to use it wisely.
• Consider putting a portion of each paycheck directly into a savings account. Try to build three to six months of emergency savings.
• Pay down any high-interest credit card debt. If you have more than one credit card with balances, pay off the balance with the highest interest rate first while making the minimum payments on your other cards.
• Invest in your company’s 401(k) plan or open an individual retirement account. As a young investor, time and compounding interest are on your side.

Say Hello to Taxes

There’s a big difference between your gross salary and your net, take-home pay. One key difference is taxes. You’ll pay state and federal taxes on your salary, as well as any union dues or other expenses. These payroll deductions will be spelled out on your pay stub.

Another item is the taxes under the Federal Contributions Insurance Act (FICA), which pays for Medicare and Social Security. “FICA tax consists of 1.45% Medicare tax and 6.20% Social Security,” says Easton Price, a certified financial planner at Apella Wealth.

These federal payroll taxes wilmake your paycheck 7.65% smaller. With all those deductions, don’t be surprised if your take-home pay is a lot lower than you hoped.

“Young people certainly might find their net pay to be surprising. Between federal and state tax withholding, FICA taxes, health insurance premiums, or 401k savings – just to name a few examples – there are a lot of dollars potentially being taken out of your gross pay,” says Brittany Brinckerhoff, a financial advisor at Hilltop Wealth Advisors. “So, what you receive in your bank account might feel like a lot less than what you’re technically earning.”

Cost of Benefits

If you get health insurance from your employer, you’ll pay for this benefit out of every paycheck. And if your employer offers a 401(k) retirement savings plan, you should strongly consider contributing to it as well.

How much you put into a 401(k) plan is up to you, but 10% to 15% of your salary is a good guideline if you can afford it. Contributions to traditional 401(k) plans are made with pre-tax dollars and this will lower your taxable income, which you will appreciate come tax time. If you contribute to a Roth 401(k) plan, your contributions are taxed now but you get tax-free gains when you retire.

Above all, try to qualify for a matching contribution from your employer, if they offer one. Let’s say your employer offers a 3% matching contribution. That means if you contribute 3% of your salary to your 401(k), your employer will add another 3% for a total contribution of 6%. That’s essentially free money, which will be very helpful after you retire.

Important

There are annual limits to the amount you can contribute to a retirement plan each year. In 2025, the limit for 401(k) plans is $23,500, and the limit for IRA or Roth IRA plans is $7,000.

Smart Things to Do With Your Paycheck

After your payroll deductions have been taken out, you’ll be left with your net, take-home pay. The first step is to put some money into savings.

“One great ‘trick’ is to have a portion of your paycheck directly deposited into a savings account rather than straight into your checking account,” Brinckerhoff says. “This forced, automated savings can help you build up savings far quicker than if you have to manually put aside money – because it will feel like the money was never available for you to spend.”

Keep track of your spending by building and following a budget. You need to cover all of your monthly expenses, while putting aside enough for savings and occasional recreation.

“Another healthy habit to develop is the 50/30/20 budget,” Price says. “50% of your paycheck is slated for needs, groceries, rent/mortgage, utilities, etc., 30% for wants, entertainment, eating out, travel, etc., and 20% for future you. This can include your 401(k) contributions.”

Once you have a budget, the next step is building up an emergency fund with three to six months of living expenses. You’ll need this money if you have a big car repair, get laid off, or have another big expense.

Paying Down High-Interest Debt

If you have high-interest credit card debt, you’ll want to make a plan to pay it down. A big first paycheck can help.

“If you have a sizable credit card balance and you’re paying double digit interest on it, you should definitely use your first paycheck to pay down the balance,” advises Said Israilov, a fiduciary financial advisor at Israilov Financial.

If you have more than one credit card with balances, focus on paying down the card with the highest interest rate first while still making the minimum payments on your other cards. This is called a debt avalanche. Once the card with the highest interest rate is paid off, move to the card with the next highest interest rate, and so on until all your credit cards are paid in full.

Invest for Your Retirement

And if you have extra cash, you may consider opening a individual retirement account.

“If you have an adequate emergency fund and no debt, your next course of action should be prioritizing your retirement savings,” Israilov says. “If you’re not already contributing to your workplace retirement savings plan, e.g., 401(k), or your IRA or Roth IRA, you should immediately set these up.”

Unlike a 401(k), which is sponsored by an employer, you can open an IRA on your own through a brokerage.

By starting your retirement investing in your 20s, you’ll enjoy decades of compounding interest on your investments.

“People are often shocked by the power of compound growth,” says Gregory Furer, a certified financial planner at Beratung Advisors. “For example, saving just $100 per paycheck starting at age 22, assuming biweekly pay and an 8% annual return, could grow to over $570,000 by age 65.”

The Bottom Line

A first paycheck can be an exciting moment, but it’s important to spend it responsibly. Start by evaluating your net, take-home pay, and make a budget that covers all of your expenses.

Once your budget is in place and you meet all your current expenses, you can make plans for the money left over. If you have credit card debt, now is the time to tackle it. Afterwards, try building up an emergency fund and saving for retirement.