Disclaimer: Upstart is not a financial advisor. The following content is for informational purposes only.
If you ask 5 different financial experts how much of a paycheck you should save, you’ll likely get 5 different answers. The amount of money you should save from each paycheck is something only you can decide. Why? The amount you save depends on your financial goals, income, and living expenses.
How much should you save from each paycheck?
To help you decide how much to save from each paycheck, consider using the 50/30/20 rule. With this rule, you divide your net income from each paycheck into three categories: living expenses, wants, and savings. Using these categories will help you create a healthy balance between obligations, goals, and splurges.
Each payday, 50% of your paycheck should go toward living expenses, 30% should go toward wants, and 20% should go into savings. For example, if you make $3,000 after taxes per paycheck, you’d use $1,500 for your living expenses, $900 for wants, and $600 for savings.
What if I can’t afford to save 20%?
It’s important to keep in mind that the 50/30/20 rule is a helpful starting point. However, it may not be the right fit for everyone. Some people may be able to save more than 20%, while others may struggle to save anything.
To figure out what you can afford to save, use a budget planner to compare your monthly spending and saving goals with the 50/30/20 budget figures. If you’re unable to save 20%, start by saving a few dollars each week. Just $10 per week will help you save $520 a year, which is a good start for an emergency fund.
Savings goals to work toward
“Savings” is a pretty broad term. So what exactly does it mean? Generally, money allocated to the savings category of the 50/30/20 rule goes into emergency funds, retirement savings, and other accounts earmarked for short- and long-term savings goals, like going on vacation or buying a home.
An emergency fund
An emergency fund is money you set aside to pay for large, unexpected expenses like a medical emergency, home appliance repair, car repair, or job loss. Having an emergency fund can help you stay afloat when in need. That way, you won’t have to rely on credit cards and take on more debt in the event of a large, unexpected expense.
You should aim to have enough money in your emergency fund to cover your living expenses for three to six months. However, the amount you need to save depends on your situation. For example, a parent supporting children will need to save more money to cover six months of household expenses than a single individual.
Paying off high-interest debt
In addition to saving for an emergency fund, consider using some of your savings to pay off high-interest debt you may have. Two debt payment methods you can use include:
- The debt snowball method: With this approach, you prioritize paying off debt with the smallest balance first. Make extra payments towards the lowest balance until the debt is completely paid off. To be clear, you pay off this debt while you continue to pay the minimum on your other debts. Then, you target the debt with the next smallest balance and continue the process.
- The debt avalanche method: With the debt avalanche method, you put any extra payments toward the debt with the highest interest rate. Similar to the debt snowball method, you do so while you pay the minimum on your other debts. When you’re done paying off that debt, you move onto the debt with the next highest interest rate.
Saving for retirement
The amount you should save from each paycheck for your retirement depends on your age and when you aim to retire. Ideally, you should save 15 to 20% of your annual pre-tax income for retirement.
High earners should aim for the top of that range, while low earners should aim for the middle. If you’re currently contributing closer to the bottom of the range, keep in mind that Social Security may replace more of your income later on.
How to save money every month
Whether you want to start saving money from each paycheck or want to make it more of a habit, here are some tips and tricks to help you:
- Pay yourself first: This is a financial strategy that you can use to ensure you continue saving. Each time you get a paycheck, you immediately transfer a portion of it to savings before you can spend it on other expenses.
- Automate it: To help you make saving more of a habit, schedule an automatic transfer from your checking account to your savings account each time you get paid. Simply select an amount and set it to reoccur so you don’t have to worry about forgetting in the future.
- Talk to a financial professional: Consider talking to a financial advisor if you feel overwhelmed. They can partner with you to assess your financial situation, establish financial goals, and create a budget or plan to help get you on track.
Reviewing your income and financial goals to understand how much you should save from each paycheck can feel daunting. However, it’s not something you need to accomplish overnight. You can accomplish your financial goals over the course of a few years.
Start by thinking about what you want to save for. And remember, there’s no one-size-fits-all answer. The amount you’ll need to save from each paycheck will depend on your income, expenses, and goals. You’ve got this!