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Getting that first paycheck as a full-time professional can feel so empowering, especially if you’ve never made that much money at one time before. Though your first inclination might be to treat yourself to a shopping spree or do a little celebrating, by the second paycheck, the best gift you can give yourself is to start establishing some smart financial habits.
As more real-world expenses and new financial responsibilities arise as you plan your future, acquiring knowledge about how to budget effectively, manage debt and leverage various financial products early on can put you on a direct path toward building wealth and financial security.
Consider this your essential guide to creating your first adult budget at the start of your career.
Know Your Numbers
Before you can create a budget, you need to understand how much money you have coming in and going out.
1. Understand your income
When you think about how much money you make, you might cite your gross salary. But in daily life, the more important number is your take-home, or net, pay. That’s the amount you have to work with to pay bills and put toward your future goals.
With direct deposit, you may not look at your pay stub often, but it’s a good idea to regularly review it in detail so you know exactly what’s coming in and what’s being taken out. It's also a good way to make sure there are no errors with your tax and benefits deductions.1
2. Track your expenses to see where your money is going
The next step is to identify where each and every one of your earned dollars is going. To do this, you’ll need to track all your spending. Begin with your fixed expenses (those that are the same each month) like rent, utilities, debt payments (student loan, auto loans), savings and online subscription services.2
You’ll also have to track the daily spending you do on groceries, food, entertainment, transportation and miscellaneous shopping.2 Even small purchases like coffee or a bus ticket should be included when tracking your expenses.
Credit card spending counts, too, since your goal should be to pay off that balance in full each month to avoid paying interest.2
Why Savings Should Be Part of Your Budget
Instead of thinking of savings as what you do with your leftover money, take the “pay yourself first” approach and treat it as a fixed expense.3 Then, if you still have extra cash on hand, you can make an additional deposit if you’d like.
3. Begin building an emergency fund
Your first order of business is to open and regularly contribute to a separate savings account that is strictly earmarked for emergencies. The reason is that having to pay for emergency expenses when you’re on a tight budget leads many people into debt. Having ample cash saved up means less harm to your financial health.
Experts recommend saving until you reach three to six months’ worth of expenses, which can cover you in case you lose your job, have a medical emergency or need to take time off.4 Start with smaller goals, say $1,000, and work your way up.4 The key is that you should not touch this money unless you absolutely need it. And if you do dip in, replace it.
High-yield savings accounts are a good option for emergency funds since they typically earn a higher interest rate. Then, all you have to do is set up automatic monthly or per-paycheck deposits into this account the same way you autopay other bills.4
4. Save for longer-term goals and retirement
Your most important long-term financial goal is saving for retirement. With many years to go before you retire, let that time work in your favor by taking advantage of compound interest.
It’s crucial that a portion of your paycheck is allocated toward retirement investments. That's easy if you have an employer-sponsored 401(k), since the funds will automatically be taken out of your paycheck pre-tax. Contribute at least enough to qualify for any employer match offered but aim higher if you can afford it.5
You may also open your own retirement account, such as a Roth IRA (Individual Retirement Account) or traditional IRA.5 Investing on your own can be overwhelming at first, so consider consulting with a financial advisor or using a robo-advisor when starting out.
Once you get your emergency fund to a level that can cover minor unexpected expenses and you're saving for retirement, you can simultaneously start funding separate savings accounts for other important big-ticket items, such as a new car, a home down payment or a wedding.
Think About Your Values
With your dollar data in front of you, now it’s time to do some analyzing. Some questions to consider:
- When you subtract your total expenses from your take-home pay, how much money is left over?
- Are you paying yourself first and saving enough?
- Did you discover that you are spending too much in a given category, or you're above your means in general?
- Are there ways to reduce some of your expenses?
- Do you have a good balance between saving for your future and living in the present?
- What are some financial goals that are important to you and how can you prioritize them?
What these questions have in common is that they all involve thinking about your needs and your wants — and finding a healthy balance.
5. Establish needs vs. wants
To prioritize how to use your hard-earned dollars, start by dividing your budget into what you need and what you want.6
Needs are things required for you to live and work safely and comfortably: housing costs, utilities, food, debts such as student or car loans, medical expenses and savings.
You might also have some expenses that are required to do your job, such as paying for a strong internet connection to work from home or commuting costs.
Other spending typically falls into the “wants” or the “nice to have” column. These are things like new clothing, entertainment, travel and subscription services. It’s totally reasonable to include all of these things in your budget — you’re young and need to live life, after all. But where people early in their careers get tripped up is when they don’t set any spending limits on their wants.
Some financial advisors recommend giving yourself a cap of no more than 30% of your overall budget on wants, but this figure could be higher or lower depending on your finances.7 The key is to spend mindfully.
Get Budgeting
With a good handle on your income, expenses and savings goals, it’s time to put it into practice by creating a budget.
6. Choose a budgeting approach you can live with
There are a few ways to create a budget, from using special programs or apps to help you track your spending to making your own expense-tracking spreadsheet using a program like Microsoft Excel or Google Sheets to going old school and writing down your expenses by hand. Choose whichever way you're most likely to stick with.
7. Test out budgeting apps to see if they help
If you enjoy using apps in other areas of your life, give budgeting apps a try as they can help simplify things and provide a visual snapshot of your financial progress. Look for popular ones that make inputting your expenses simple, such as importing purchases made from linked bank accounts or credit cards, or that have graphic features that help you visualize your goals and progress.8
Make Budget Improvements
Once you get the hang of budgeting, you can look for some ways to free up more disposable income so you can make faster progress on your goals. Here are some to try.
8. Manage debt with a strategy
If you’re starting out with debt as many young workers do, one of your goals should be to pay it off as quickly as possible. Mathematically, it makes the most sense to target your highest-interest debt and work your way down — this is sometimes called the debt avalanche method.9
For example, say you’re carrying a balance on one credit card with an APR (annual percentage rate) of 24.99% and another with a 19.99% APR, and you have a student loan with a 5% interest rate. The debt avalanche method says to make the minimum payments on the second credit card and the student loan while throwing all of your extra income toward the first card's balance.
When you get the first card down to zero, then you can shift your extra funds toward the second card. After you paid off all your credit card debt, you can focus on making extra payments toward your student loan to pay it off faster and with less interest.
The other popular debt payoff strategy to consider is the debt snowball method, where you tackle your smallest balance first (regardless of interest rate). The idea is that by eliminating those smaller debts quickly, you can reduce your monthly obligations and stay motivated.9
9. See where you can reduce spending
One of the biggest budget drains for young professionals is food, whether it’s take-out, high-priced daily coffee or quick-grab convenience items at grocery stores. Planning a menu for the week based on what’s on sale, prepping the majority of your meals and drinks at home and batch cooking can help you reduce your food bills dramatically.10
You can also limit unnecessary spending by setting a specific limit on entertainment, clothing, electronics or other desired items each month.
Another budget buster is subscriptions. Take inventory of how many streaming services, digital subscriptions and premium apps you're signed up for, and cancel or downgrade any that you aren't using.10
Other ways to save:10
- If you typically drive to work, consider using public transport or setting up a carpool with coworkers.
- Always search for sales, discounts and coupons.
- Negotiate with insurance companies, cable providers and cellular carriers for better rates.
- If you’re managing credit cards well, use rewards cards that earn cash back.
School Yourself on Other Big-Picture Money Matters
Once you have your budget under control, get educated about other financial issues that can impact your bottom line.
10. Know how taxes work
Go over your paycheck to make sure enough taxes are being taken out. If you're self-employed or have a side gig, be informed on what you will owe in taxes and budget accordingly.11
For more complex tax questions, consider meeting with an accountant who can help you with tax planning.
11. Think carefully about renting vs. buying
Deciding if it’s better to rent or buy has many layers of complexity beyond just comparing mortgage payments to rent payments. Be sure to research other housing costs including property taxes, insurance and maintenance.12
If you do decide that buying is right for you, you'll need to incorporate saving for a down payment into your budget.12
12. Learn about your health and dental insurance plans
Understand the out-of-pocket costs you may have to cover for medical and dental visits. There could be a deductible, coinsurance and copayments, and you might have to stay within a specific network of healthcare providers to get discount pricing.13
Even with good insurance, a twisted ankle or cracked tooth can end up costing a few hundred dollars, and many who are just starting out aren't prepared for that, as CareCredit’s Lifetime of Healthcare Costs study found. It revealed that 50% of Gen Z, on average, said they would consider postponing nonurgent medical care if the cost is between $500 and $999; 25% said the same about nonurgent medical care costing less than $500.14
If you do face a high medical care cost that’s beyond what your emergency fund can cover, having a health and wellness credit card with a promotional financing offer can give you time to pay off the bill.
Reevaluate Your Budget Periodically
Your budget is not a fixed document. It is meant to be improved and tweaked as your needs, wants and goals change over time.6 Revisit your budget to reflect income changes, lifestyle changes (like getting married, buying a home or having a child) or mindset shifts.
Learning how to budget may seem daunting at first, but it will quickly become part of your routine. As you progress through your career and get closer to reaching your financial goals, you may come to find it rewarding — and even a little fun.
Managing Health and Wellness Costs With the CareCredit Credit Card
If you are looking for an option to help manage your health and wellness costs, consider financing with the CareCredit credit card. Get the care you want or need with easy, flexible financing options that allow you to pay for out-of-pocket expenses over time.* Use our Acceptance Locator to find a provider near you that accepts CareCredit. Continue your wellness journey by downloading the CareCredit Mobile App to manage your account, find a provider on the go and easily access the Well U blog for more great articles, podcasts and videos.
Your CareCredit credit card can be used in so many ways within the CareCredit network including vision, dentistry, cosmetic, pet care, hearing, health systems, dermatology, pharmacy purchases and spa treatments. How will you invest in your health and wellness next?
Author Bio
Dawn Papandrea is a journalist with more than two decades of experience covering personal finance and consumer issues. She has written for leading financial publications and organizations, including U.S. News & World Report, Investopedia, Bankrate and others.
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