In a NutshellHow much paycheck you should save depends on your lifestyle and financial goals. Following the 50/30/20 rule is a great start.
Realistically speaking, saving can be hard once your paycheck hits your bank account. Bills, necessities and extra wants may slowly consume your hard-earned money. If you struggle with putting money into your savings first, you’re not alone.
According to a 2023 study, 60% Americans are living paycheck to paycheck, compared with 64% in January 2022, which suggests that spending cutbacks improved financial situations for some.
If you want to retire early, start your own business or buy a house, your savings account is a key ingredient. Keep reading to find your own answer to “How much of my paycheck should I save?”
- How much money should you save each month?
- How to save for each goal
- Where to put money for savings
- How to save more money: 5 tips
- What’s next: Start saving today
How much money should you save each month?
Based on the 50/30/20 rule, 20% of your income should go to savings and retirement. The remainder of your paycheck is then divided between necessities and wants, with 50% going toward necessities, like rent and groceries, and 30% toward your wants.
Want to get a better idea of where your money is going? Use one of our financial calculators to get an idea of how to better distribute your funds.
How to save for each goal
After putting 20% of your income toward savings each month, you may increase your allocations to reach bigger financial goals. For instance, if you want to buy a house in the next year, you may want to reduce how much you’re dedicating toward your wants to save extra to meet that goal.
Read more to find out what you should consider putting toward different types of savings goals:
1. Emergency fund
Sometimes an unexpected event comes up and you need a little extra financial padding to help you get back on your feet. Generally speaking, you should try to have at least three to six times your living expenses stored in your emergency fund. If that seems like a lot, set a smaller goal of $400 to $1,000 to get you started. Remember that this can fluctuate depending on your lifestyle and goals.
2. Retirement fund
Years down the line, you’ll be grateful for your retirement savings. How much you should save for retirement largely depends on your personal circumstances and goals.
As a general rule, you should save around 10% to 15% of your income into retirement accounts like a 401(k), a Roth IRA or an employer investment match account. Set up automatic payments each paycheck to ensure you’re setting your future up for success.
3. Investment fund
If you have extra financial flexibility, consider upping your investments a bit if you can afford it. Low-risk investments, index funds and bonds are a few options. Before making an investment, evaluate which options could benefit you and your bank account most in the long run. Keep your investment time horizon and risk tolerance in mind too.
4. Big purchase fund
When you’re saving for major purchases, start by breaking down your savings goals. Sit down and write out your top savings goals and what steps you need to take to reach them. Working toward major goals like a car or college tuition by creating a specific, measurable, attainable, realistic and time-sensitive (SMART) action plan to get you there.
Where to put money for savings
Different savings goals may be best suited in different savings accounts. Investment savings are generally recommended for long-term goals (five years to 10+ years). You might consider putting short-term savings (anything up to five years) in general and high-yield savings accounts. These can include CDs, government bonds and money market accounts.
Strategically planning out your savings goals can help you maximize your investments and avoid penalties. Explore the different options for putting your savings away below:
General savings account
A general savings account is normally used for emergency funds and short-term savings goals. These accounts are easily accessible in an emergency and can help grow money you’re not using.
High-yield savings account
High-yield savings accounts offer a higher interest rate than general savings accounts. These are best for short-term savings since they typically have low or no minimum deposit requirements.
401(k) or investments
Investing in your 401(k) can help set you up for retirement. 401(k) contributions can potentially grow your investments and lower your monthly taxable income. If your employer offers a 401(k) plan, it’s generally a good idea to contribute to it, especially if they provide a matching contribution.
Other investments that you can consider include stocks, bonds and individual retirement accounts (IRAs).
How to save more money: 5 tips
You may wish to save your whole paycheck, but everyday living expenses like rent and groceries are common necessities. Whether you’re saving for a house or your emergency fund, save what you’re able to. Below are a few tips on how to save money to make room for your savings goals:
1. Budget for your lifestyle
Learning to budget can be a useful skill and can help you determine your cost of living. Take the time to sit down and see where your money’s going. Highlight unnecessary expenses that you could cut out of your budget.
You can use a simple budget calculator to identify where you’re overspending.
2. Make a change jar
Dig for a jar or old cup in your kitchen. Set it on your counter and tape a paper “Savings” label to the front of it. Every time you have spare change or a $5 bill, add it to the jar. Take your jar to the bank each month to see what extra savings you rounded up.
3. Practice a frugal mindset
Evaluate your life to see what you could do away with. Post old items and furniture online to see how much extra money you could earn. Also, consider using less energy to help reduce your electricity bill. You may find that you can easily adjust to a more minimalist lifestyle.
4. Pay savings, then yourself
Once you’ve determined how much of your paycheck to set aside based on your lifestyle, set up automatic payments to your savings on payday. This can help ensure you’re setting aside money for savings with some left over to spend how you wish.
5. Diversify your income
Creating different revenue streams provides a safety net in case you lose your main source of income. If you have extra time to spare each month, consider starting a passive income project. Creating a YouTube channel or writing a blog are a few ways to invest time into your passion and diversify your income.
With these tips in mind, regularly review your savings goals and track your progress. Consider celebrating milestones along the way to remain motivated during your money-saving journey. Seeing your savings grow can reinforce positive financial habits.
What’s next: Start saving today
When determining how much of your paycheck to save, there is no one-size-fits-all answer. The ideal savings rate can vary depending on your financial goals, income level and current expenses. Even though saving can sometimes be hard to start, it’s a key factor in living a lifestyle with a solid financial foundation.
By consistently setting aside a portion of your earnings, you’ll be on the path to building a healthy financial future and achieving your goals.
- According to a recent study, 60% of Americans are living paycheck to paycheck. Lending Club (February 2023)