# What should I do with my first real paycheck?

By James Ustby, CFP®, APMA®. Canonical URL: https://jamesustby.com/start-what-to-do-with-your-first-real-paycheck

> Four things, in this order, and then stop thinking about it: collect the full 401(k) match, build one month of expenses in a savings account and keep adding until it is three, open a Roth IRA and automate a monthly contribution into a broad index fund, and get term life and disability coverage if anyone depends on your income. That is the entire plan for the first few years. Everything else is noise.

## The match is a raise you have to claim

If your employer matches 401(k) contributions, every dollar you skip is a dollar of salary you turned down. Set the contribution to at least the full match on day one, before you get used to the paycheck without it.

## Cash first, because the first emergency decides whether the plan survives

A car repair or a job gap in year two is what sends most people into credit card debt, and that debt is what keeps them from investing for the next decade. One month of expenses in a separate savings account, built to three, is the difference.

## The Roth IRA is the best account a young person can own

You pay tax on the money now, at the lowest rate of your working life, and it is never taxed again. A $500 monthly contribution from 25 to 65 in a broad index fund has, at historical average returns, grown to well over a million dollars tax-free. The amount matters less than the automation. Set it and do not touch it.

## Insurance only if someone depends on you

Single with no dependents: skip life insurance, but take the employer disability coverage. Married, a kid, a parent you support: twenty-year term life at ten times income is cheap at 27 and expensive at 47. Buy it while you are healthy.

## A worked example at $60,000

| Item | Amount |
|---|---|
| 401(k) to the full match, say 4 percent | $200 a month, employer adds $200 |
| Savings account | $300 a month until it holds three months of expenses |
| Roth IRA, automated | $250 a month to start, raised with every pay increase |
| Term life if someone depends on you | a few dollars a month at this age |
| Total | about 15 percent of gross pay, which is the number that makes everything else easy later |

The person who does this at 25 and never thinks about it again ends up far ahead of the person who reads about investing for ten years and starts at 35.

## Questions people ask next

### Should I pay off student loans first?

Collect the match first, always. Then compare the loan rate to what you would reasonably earn investing. High-rate loans get paid down before the Roth; low-rate loans can run alongside it.

### What should I buy inside the Roth?

For most people starting out, a single broad, low-cost index fund or a target-date fund. Simplicity is a feature. Picking stocks is a hobby, not a plan.

### Is it worth starting with $50 a month?

Yes. The habit and the account matter more than the amount. Raise it every time your pay goes up.

## Sources

- [IRS: Roth IRAs](https://www.irs.gov/retirement-plans/roth-iras)
- [Investor.gov (SEC): Compound interest calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator)

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Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.