5 Things Every College Graduate Needs to Know Before Their First Paycheck

You got the diploma. 

You got the job.

Now what?

In this episode of Women, Wealth & What Matters, Tracy Byrnes breaks down the financial lessons most graduates never learn in college, including:

·      How to fill out a W-4 and understand your paycheck

·      Why a 401(k) match is free money

·      Whether a Traditional or Roth 401(k) makes more sense

·      How an HSA can become a powerful long-term savings tool

·      Why every graduate needs an emergency fund and good credit

·      The investing habit that can potentially add hundreds of thousands of dollars to your future wealth

Whether you're a recent graduate or the parent of one, this episode is packed with practical advice explained in plain English.

Because financial success isn't about being perfect.

It's about getting started.

 One smart decision at a time.

Hosted by Tracy Byrnes, MBA, CDFA
Vice President, Women & Investing, Lebenthal Global Advisors

If you've got a question, a topic suggestion, or just want to say hi, shoot us an email at TracyByrnesWealth@gmail.com!

Follow us on:

X: @TracyByrnes
Instagram: @TracyByrnesWealth

Transcript

SPEAKER_00 0:03

Hi everyone, welcome back to Women, Wealth and What Matters. I'm Tracy Burns. Today's episode is for every college graduate who just landed their first job. Woo-hoo! And in this environment, that actually is a huge, huge accomplishment. So congratulations. But honestly, this is also for every parent who has ever looked at their child and thought, how did you graduate and still not know how things work in this world? I have those thoughts in my head, and I actually say it out loud all the time. Because let's be honest, college teaches calculus and chemistry and literature and all the fabulous things. But nobody teaches these kids how to read their paycheck, how to save for retirement, how their credit score works, why it even matters, how health insurance works, how to enroll in benefits. To be honest, I'm mid-50s, I still struggle with enrolling in benefits. They can't make that any more complicated, by the way. All right, and of course, what to do with your first real paycheck. So today we're going to fix that. We're going to walk through five money moves every graduate should make, should know, should understand when they start their first job. So if you're 22 and listening, congratulations. But this is a really great way to get you set up for the rest of your working years. And if you're a parent, send it to your kid or just regurgitate it to them. But five things, nice and simple. Number one, your paycheck, this is the worst. I even feel bad saying it. Your paycheck is not your salary. It's just not. Understanding your W4 and your paycheck is very important. So let's talk about this. Every graduate, they get that first paycheck. You know what you settled on, right? You know what you the salary you settled on was, and then you get home and you're like, huh? What the heck happened? I know, I know. Happened to all of us, happened to my kids, happened to me. So, your question, of course, is where did all the money go? Let's let's use a very simple example here. Your new job pays you $60,000 a year. Most people think $60,000 divided by $12,000, $5,000 a month. Look at me. Technically, it's true, but sadly, you're not taking home that $5,000, right? So before that money gets to you, a bunch of things have to happen. Money comes out. I know. Four federal taxes, you have to pay taxes to the federal government. That means the entire country. Then you pay state, depending on where you live. Florida, Texas, Wyoming, not so much. But everybody else, Jersey, New York, you're paying state taxes as well. You could also be paying city taxes if you live in a place like Manhattan. Social Security comes out. Yes, I know it sounds ridiculous that at a very young age you are paying into Social Security, but you are. Same with Medicare. If you are getting health insurance, that comes out. And yes, yes, yes, your retirement contributions come out, whether it's your 401k or 403B, we'll get to that. So all that comes out before you even get to go buy a glass of wine. So that $5,000 monthly paycheck might end up looking more like $3,700, $4,100, depending on how much money comes out. That's totally normal. This is where your W4 comes in. So think of this W4, and you're gonna get this. You sign, you get a job, you know, and you have this orientation, first day you get all this paperwork, you're gonna get this thing called a W4. It basically gives your employer instructions on how much money to keep from your paycheck and send to the taxation parties. So you can instruct it to take a lot or a little, depending. Every time you get paid, that means every time you get a paycheck, whether it's once a month, twice a month, four times a month if you get paid weekly, taxes will come out, and that's what that W4 is. Now remember, the goal is not to get a big refund in April. That is not what we want. We don't want the government to have your money all year long. We want you actually to be able to live on your money too. At the same time, you don't want to be underwithheld because then you will owe a penalty. So the idea is to be to find this not too hot, not too cold space, right? The goal is to be reasonably accurate here. Again, getting a big refund isn't winning. I know you think it's great because you'll have money to go on that next vacation, but it just means the government had your money. Parents, if you're listening now, and we're gonna, I'm gonna age us all. The old we remember the old W4 where it was you claimed like zero or one, and you added up all these ones to figure it out. It's not like that anymore. Thank God, quite frankly. Um, the IRS redesigned the forum, the W4, a few years ago, actually. Now, most graduates basically, when they sit down, they get the forum. Really, they'll just have to fill out their filing status, which is single or or not, but most likely single, whether they have another job, and whether they have any special conditions, deductions, credits, which most for most of them they don't. No kids. The form is pretty simple. The biggest mistake isn't filling it out wrong. The biggest mistake is rushing through it without understanding what it does. So just tell them take your time, read it. It just tells the employer how much to withhold from each paycheck. We don't want to withhold too little, we don't want to withhold too much. So answer the questions honestly. That's it. No more zeros, no more ones. I know. I remember them. It would confuse the heck out of me. Benefits. Let's talk about benefits. Most then gratif newly employed will get a big packet from HR with all the benefit information. And human nature will say to ignore it because it's just too much stuff. Please don't ignore it. Inside that packet, you have some important decisions to make. Health insurance that pays your medical expenses. And the thing is, you get a better rate when you do it through your employer. Everybody thinks they could do it better, go out, pay for it themselves. No shot. You get a better rate. Medical expense insurance is very expensive. Make sure you have a job that gives you medical benefits. I can't stress this enough because I think kids don't get it. They don't get it because they're young and they're healthy and they just can't imagine. And we all know there has been a time where we were like, I mean, I was saying novenas, thanking God that I had medical insurance. Dental insurance is the same way, pays for those cleanings and stuff. Tell the kids to get it, tell the kids to get vision. It's not a big lift. You know this. And of course, life insurance. Now, why they don't think they need life insurance. Again, it's that God forbid, God forbid something happens. I hate to say covers funeral costs, or they might want to leave something to a sibling. There's it's not, just do it. And and lastly, I'd say disability insurance. Nobody talks about this, but tell them to take it. Again, if they work for a company, it's not that much. Your biggest asset at 22 is not your car, it's not your apartment. It's your ability to earn income. If someone takes that away and something happens, God forbid, that's a problem. So I would say yes to the disability insurance. Read the packet, take the insurances. Way cheaper than on your own. Don't just click buttons though, ask for questions. Don't just cross your fingers and hope for the best. Okay, that's one. Number two, take the free money. I've said this, I think, now in three podcasts. Take the free money. If you have a 401k, Roth 401k, HSA, all the things, these things are essentially giving you some freebies. So put it to you this way if your employer offered you a 50% discount on investing, would you take it? You know, I'm gonna I'm gonna give you Apple shares at half off. Would you say no? No, of course you would take it. That's essentially what the proverbial 401k matches. We have to talk about this. We have talked about this, but we start with the basics again. A 401k is a retirement account offered through your employer. If you are in the uh a school system or healthcare, it's a 403B. Same thing. Named after a section in the tax code. Money again comes out of your paycheck even before you touch it, but no taxes are applied to that number. So the money comes out, you allocate it to your 401k, so this decreases your overall tax bill, but it is savings that you're starting at a ridiculously young age. I love it. Take it and at a minimum, please contribute up to the match. If your company says, I will give you 50% of the first 6%, you damn well better contribute that 6%. Because then you get that free 50% or 3% from them. Please, please, please, at least to the match. I get if you live in a high, you know, high expensive city like New York, LA, you need as much money as you can to pay that rent. Please try at least to get to the match. That is ostensibly part of your compensation package, if you think of it that way. As part of your salary, the match, it increases your wealth going forward. Please, please, please. Always contribute enough to get the match. Now, 401k versus Roth 401k. You know, I I said before, if you are young, the Roth 401k is the way to go. I could full stop here. But, but just to think it through, a regular 401k, you get a tax deduction now, meaning the money comes out, no taxes today, so it lowers your tax bill, but you do pay taxes later. So the idea being that when you're old and gray and decrepit, not that like that's gonna happen anymore because we're all gonna live to like 102 to thanks to all the longevity stuff. Um, you'll pay taxes then. The idea being you're in a lower tax bracket then. Roth 401k, though, you do pay tax on that money now. So the money is taxed and then it goes in the Roth 401k. The beauty to me of that though is when you are doing the cold plunge when you're 100 years old to stay alive longer, you will not owe taxes on any of those distributions. It's genius. I think that deserves very serious consideration. You may never be in a lower this low of a tax bracket again in your life because you're gonna be wildly successful. So, why not pay tax now as opposed to later? Just saying. Just think about it. You're basically making a deal with your future self. If you have a Roth 401k option, just consider it. That's all. Last thing I'm gonna talk about is that HSA account, a health savings account created to help people save for out-of-pocket healthcare costs. Just do it. You don't even have to understand it, just contribute to it. Many professionals, for uh financial professionals like myself, we consider this one of the most powerful accounts in the whole tax code because triple tax benefits. You get a tax deduction when the money goes in. That means you do not pay tax on the money when you put it in. It grows tax-free while it's invested. It's growing and growing and growing and growing. You don't pay a time. And then if you pull it out for medical expenses, still no tax. What? Let it go. It's incredibly rare. Use it. Use it, use it. It is unlike a flexible spending account. That's also something you'll see when you apply for a new job if you want to put money in a flexible savings account or an FSA. These are used for child care or um other uh health child health care costs, out-of-pocket costs, daycare, things like that. This though, this flexible uh spending account is a use it or lose it. If you don't finish it or use all the money up by like, let's just say December 31st, the plans have different uh year-end dates, you lose it. Literally, it's gone. It doesn't come back to you, which is crazy to me, by the way. HSA does not have those kind of rules, it rolls on to the next year and the next year and the next year, and you keep the money and you let it grow. If you contribute to an HSA and you leave the money alone as a 22-year-old right out of college, you are potentially building a substantial pool of tax advantage money for healthcare expenses later in life. I think it's brilliant. Okay, use it. Think of it as a special healthcare savings account that gets VIP treatment. Please, please, please. If you're off if your employer offers one, consider using it. Now, let's talk about number three, building your financial foundation. The rest of these are less, less uh mind-boggling on your brain. These are easy, just follow me. Checking, savings, emergency fund. Every graduate basically needs two basic accounts a checking, and they don't even know what checks are. I understand that, but people still need checks. Copies of voided checks. Just humor me. Get a bunch of checks. You also need a savings account. Your checking account, use it for spending, pay your bills out of it, do all the things. Saving is for emergency. That's it. The biggest mistake young people make is treating their checking account like it's their emergency fund. It is not. We need to segregate things. Get it out of the way. You know how human nature is. If you don't see it, you forget about it. Your checking account, keep the checking account, rent, groceries, transportation, entertainment, like everyday life stuff, right? Emergency funds are for life's WTF moments. Trust me. Even young people have them. Their car breaks down, the laptop dies, and God forbid, some somebody loses a job. It happens. These young people, like it's so unsettled out there for them right now. They need, or got you know, they're not, they don't live near you and they need that unexpected flight home. Things like that. That is the emergency fund. They need to start to save. And this is these are these are things that you you will train your brain, they will train their brain to do for the rest of their life if they start now. Save a thousand dollars, that's it. You can even help them out if you want. Give them the thousand. Start with the thousand and then start to save for that one month of full expenses. Just one month. Just one month. And once you do that, you celebrate the win, and then you try to keep going. Three to six months of expenses, ideal. Your emergency fund is not an investment, it's protection. And again, emergency fund, I've talked about this before, does not need to be under your mattress. Oh no, no, no. Put it in something that is earning. You want to put it in a high yield savings account, you want to put it in a money market fund, put it in something that you can get to very quickly if you need it. That's earning something. Match under the I don't even actually know if kids understand when I say that now. I should stop saying put it under your mattress, right? Because they don't, they don't do that. They never did do that. They didn't have a grandparent that did that, I should say. Anyway, put it in something that is yielding something. Number four, your credit score actually matters way more than you think it does. Nobody cares about their credit score until they have to care about their credit score. And then it's everything, and then it affects everything you do, whether you can get an apartment, a car loan, a mortgage. It affects your insurance rates. I mean, pick a thing, it affects it. Employee screenings nowadays. Employers now are asking for credit scores, which is crazy. I know people that are going on dates asking about credit scores. I think that's actually really amazing. Um, back then, no one would have dated me though. That's it. Good credit means you could save money. Bad credit actually can cost you money. Why? Because if you have bad credit and you go try to get a loan, people are gonna think you're a flight risk and the interest rate is going to be higher because they're like, well, we gotta charge him or her a lot more interest just in case they don't pay. You understand what I'm saying? So you want a good credit rating, and this is really simple to do when you're young. Pay every credit bill on time. Full balance, full balance, pay it on time. Keep your balances low. That's it. This is very simple. I understand that we as adults need to be reminded of these things too because I would be lying if I didn't say that I went through times where credit card bills got way ahead of me. It happens to all of us, especially as we're raising kids and there's things all over the place, like it happens. But let's all get back to the basics. Don't open a load of accounts either. You do not need multiple credit cards. And I will say this to my girls out there: always keep one card in just your name alone. Even when you get married, even when you're blissfully in love and you're sharing everything and you're gonna ride off into the sunset happily ever after. One credit card with your name on it. Always, always, always have credit in your name singularly. I've told my express story before. I got divorced, I had no credit. I couldn't, I I couldn't, I had no credit. I literally went to practically begged Express, the clothing store, to issue me a credit card, and I would, and my I think my limit on it was like $100. It was a joke. And um I bought a shirt and I paid it off. Then I bought another shirt and I paid it off, and then my credit went up. They expanded, they gave me more, and I kept paying it off and paying it off. And next thing you know, I had I had a credit score, but I didn't even have a credit score, is my point. Because all those years I was home with the kids, just saying pay attention to it. Pay attention to the balance on your credit card, the interest rate. It's cray cray. Pay attention to it. Understand what you owe at a minimum every month. Same with student loans. Know these numbers. Most kids have student loans and they they don't even know. Interest rate, repayment schedule, all the things. What? Just what? You feel it felt like free money when you were in college. It's legit now. It's legit. And it's like that come to Jesus moment where you're like, wow, this is gonna take me 20 years. Understand it. It's like driving a car without knowing how much gas is in it. You would never do that. Although we've all been there. Okay, and lastly, do not let lifestyle inflation steal your future. This is where so many people, kids get in trouble. That first paycheck, then there's a new apartment and there's new furniture, and of course, now we need a new wardrobe, and depending on where you live, you need a new car and subscriptions, vacations, and you are living high. It's amazing. You should be enjoying your money. You worked very, very hard to get there. But every raise should not automatically become new spending. The habit I want every graduate to develop is very simple. If you get a raise, put a portion of that raise in your retirement in your savings, whether it's your emergency fund, your retirement, something, pay yourself first before you splurge on the new restaurants, that big vacation, before you add more things to your Amazon car, before you decide to upgrade. Just save first, invest first, spend what's last. Even it's 50 bucks. I didn't care. Pay yourself first. You deserve it. Your future just self deserves this. You do not necessarily need that new handbag. Just saying. You know that. Don't let social media convince you otherwise. It's poison. Alright, imagine two people. This is a good example. Two people both invest $200 a month. I know that's a lot of money for a college grad living in Manhattan. You're all shaking your heads at me, but stay with me. $200 a month. One kid starts at $22, the other starts at $32, 10 years later. The person who started at 22 has clearly a 10-year head start. So 22, let's assume both earn an average annual return of 8%. Let's just say. And they are disciplined enough to keep doing this $200 a month until age 65. The person who started at 22 ends up with approximately, let's call it 900 grand. The person who waited 10 years to start is at 387,000. Do you see that difference? 10 years. One has about 900, one has about 390,000. Just saying. Just saying. Same amount every year. Earn the same return. We're talking about compound interest, compound investing, letting your money work for you. The earlier the better. Like it's like a $50,000, $500,000 difference. It's about it's time in the market. Let your money grow. Give it time. It's the magic of compound growth. I love it. I think it's the coolest thing. Money earns money, and then that money earns money, and that money earns, and then it just keeps earning. And you're not doing anything. You're just working hard. Don't worry about investing. Just start. Don't worry about what to invest in. Just start. If you start at 22, time is your greatest asset. Not your choice. Time is your greatest asset. Think of it like planting a tree. The best time to plant it was a bunch of years ago, because now it would be really, really big. Second best time to plant that tree? Today. All right, lastly, three things I wish someone told me at 22. Nobody cares more about your money than you. Learn to participate in the decision making early. Early. Ask questions. No question is dumb. Start investing before you feel ready. Number two. So number one, nobody cares about your money but you participate. Number two, start investing even before you feel ready. No one feels ready. Everyone's freaked out. The market's crazy. Just get in. You gotta be in it to win it. That's what the latto says. And number three, financial success, most financial success isn't really math, it's behavior. It's consistency. It's like going to the gym. You go to the gym every day, eventually you are going to look in the mirror and be like, damn, girl. Same thing. The people who build wealth consistently aren't necessarily smarter, they are consistent. I'm telling you, consistency wins every time I've said that my entire career. So let's review. Understand your paycheck and your Forum W4. Get that full 401k match and consider the Rothbard 1K if your company offers you one. Pay attention to that HSA, health savings account. Huge! I know the dread the dreaded words, but please build an emergency fund. Build your credit. Ladies, build and keep your credit. And finally, avoid that inflation lifestyle. Avoid falling sucker to oh my god, I live in Manhattan, I have to dress super trendy. Please don't fall for that. The decisions you make in the first few years of work may not feel important, but they can impact 40 years of your life. Alright, the good news, like I said, you don't need to know everything. You just need to start. Financial success is not being perfect, it's just about getting started one decision at a time. Okay. If you know a graduate starting their first job, please send this to them or tell them to call me for that matter. Or explain these things to them. It's super valuable. You and I both know they don't teach this stuff in college. So share this, please. You can find us on Spotify, Apple Podcasts, Amazon Music, and of course YouTube. And if you want to continue, just reach out, tracyburnswealth.com. I'm at TracyBurns on X, at TracyBurnsWealth on Insta, and at TracyBurns on LinkedIn. But as always, I'm hearing from Emy. So please, please reach out. I'll see you next time. Labenthal Financial Services Inc. is a FINRA registered broker dealer. The content of this podcast is intended for informational purposes only and is not intended to be investment advice. The views expressed in this podcast are subject to change based on market and other conditions. Information about the qualifications and business practices of Labenthal Global Advisors LLC is available on the SEC's website at www.advisorinfo.sec.gov. Information about the qualifications and business practices of Labenthal Financial Services Inc. and its representatives can be found on FINRA's broker check website, which is brokercheck.org.