Money 101 for New College Grads – A Guide To Understanding Your Pay, Benefits and Expenses

money 101

You are about to embark on your post-graduation life. The future is full of possibilities, options and opportunities for you to make your mark. Having strong financial fundamentals is a critical skill you need to make a successful transition to independence. Unfortunately, it’s unlikely your college curriculum included Money 101.

The transition to adulthood comes with new territory to navigate, such as paying taxes and rent, and buying food, all things you’ve likely taken for granted until now.

Learning these few simple tips about understanding your pay, benefits and expenses will help you make better choices and develop money-wise habits early in your financial life.

Just to be clear, nowhere in what follows is advice on how to call your parents to ask for money. You want to pilot your own ship, right? Then listen up.

Gross Salary vs. Take Home Pay

When you are offered a job, the salary the employer quotes you is your gross salary and it’s a far cry from what you will actually see in your bank account each payday. You’ve probably experienced this if you’ve had a summer job or internship. Understanding the difference between gross and net pay is one of the fundamentals of managing your money.

Gross salary is your salary before any deductions. Net pay is how much you get to pay bills, spend or save. has a great salary tax calculator app for understanding what you’ll take home after the tax bite. Your net pay will be substantially lower than your gross pay, often by 25% or more. Factors reducing your gross salary to your net include where you live and what “contribution” you make (code for: the portion you pay) to the mostly employer-paid benefits, such as healthcare. Also in the mix is money you may be able to save through an employer sponsored savings plan such as a 401k. More on that later.

Taxes and Cost-of-Living Considerations

Knowing which states are the best bargains can help you decide which offer to take or where to focus your job search. You need to consider your expected salary with the impact of taxes and cost-of-living, both of which vary by city and state.

Currently, seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two states, New Hampshire and Tennessee, only impose income taxes on dividends and interest, which essentially means they are tax-free for a recent college grad. Tennessee compensates for no state income tax with the highest sales tax in the nation, whereas New Hampshire has no sales tax. Sales taxes tend to hit lower income earners (that means you, college grad) disproportionally more, as you spend a greater percentage of your paycheck on consumables.

Unfortunately, the hot spots for new college grads come with high state income tax: California ranks number one in the nation for state income tax rate, a hefty 13.3%. Washington D.C. and New York, two other perennial favorites, rank 8th and 9th, respectively, with tax rates of 8.95% and 8.82%. If you combine state and local taxes, New York City comes in at number one for total tax bite. That coveted Wall Street job needs to pay a lot.

Beyond taxes, other factors impact how affordable a state or city will be: housing, transportation and food costs all impact the cost of living. New York is notorious for its astronomical apartment rents. Goodbye, beer money.

Understanding the true cost of living can help you to evaluate how attractive that job offer really is. A $50,000 offer in Boston will yield you a better standard of living than a $70,000 offer in Manhattan. Sites such as  and’s cost of living wizard are great tools to help you understand the real value of an offer.

A Few Words About Rent

Now that you’re an expert in take home pay and cost of living (which includes housing), a deeper understanding of how much rent you really can afford is warranted. It’s best to do this before you start looking at apartments and fall in love with the one with a doorman, indoor fitness center and off-street parking -none of which you can afford at this stage of your life.

It’s wise to think of your monthly rent in the same vein as a mortgage payment. That is, it’s non-negotiable, always due on the 1st of the month, and not paying it is not an option. Eviction is real and showing up for work after sleeping in your car is not cool.

Property managers use your gross salary to qualify you for an apartment you want to rent. The numbers work or they don’t. Just because you love it doesn’t mean that the owner will rent it to you if it’s clear you can’t afford it.

The general rule of thumb is that your monthly rent should equal no more than 25% of your monthly gross salary. If your annual salary is $45,000, then you can likely afford a monthly rent payment of $937.50. Sites such as and offer rent calculators that make it easy to see how much you can afford. I strongly advise sticking to the lower end of the scale – always round down.

This is also a good time to get realistic about roommates, because, depending on where you want to live, it’s likely you’ll need to have a few.

The Savings “Perks” in Your Paycheck

Let’s move on to benefits and why you shouldn’t ignore your company’s 401k plan, no matter how distant retirement seems and how broke you think you are today.

Employer 401k plans are the best benefit after healthcare. Yes, better than free food and foosball tables. Here’s why and an overview of how these plans work.

Your 401k contributions come out of your gross salary, so they are tax-free at the time you contribute and lower your tax bill. This is the first reason it makes sense to participate.

For every $100 you contribute, you save approximately $25 off your tax bill, depending on your tax rate. That alone is a great incentive to save, but it gets better.

Many employers offer a matching contribution (FREE MONEY), usually at a percentage of what you contribute, up to a maximum contribution percentage. Let’s look at the following example and how quickly the savings add up.

Your company matches every $1 you contribute with a $1 up to 5% of your salary. If your gross salary is $45,000, then at 5%, you contribute $2,250. This amount then is matched, dollar for dollar, by your employer, resulting in $4,500 in savings. Add in the tax savings outlined above, and you’d save $562.50 at a 25% tax rate off your tax bill. Your $2,250 investment has effectively yielded $5,062.50 in one year! Real. Free. Money.

You can learn more about 401K plans at

Bottom line – find a way to contribute as much as you can to maximize the employer matching contribution. Skip the lattes and Uber if you have to.

You will work hard for your money your whole career. Taking smart steps now to get money-savvy can ensure your money works as hard as you do.





About Lisa

Chief Career Catalyst @C2C, former Fortune 500 businesswoman, dog lover, avid skier, mediocre tennis player, golfer, new SUPer, aspiring surfer, cyclist, yoga & exercise enthusiast, happy wife & home chef. I am a regular contributor to the Bangor Daily News, and have appeared on WCSH6 where I offer career advice for college students, recent graduates and young professionals.
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