Most people want to save for the future, whether that means a short-term goal like a vacation in Bali next year or a longer-term aspiration, such as retiring by age 50. To fund these dreams, many experts recommend putting aside at least 20% of your paycheck.
However, each person’s financial situation is of course different. One person might have student loans they are paying off on a lower income while another might be earning a lofty salary with minimal debt. And yet a third might have a moderate income, some student loans, and they just closed on a home and are spending on major renovations.
So exactly how much you should save will depend on a variety of factors, such as your goals, your current income and debt, and your cost of living. Here, some guidelines to help you know exactly how much of your paycheck to save.
What Percentage of My Paycheck Should I Save?
Most of us know that saving money is important, but how much should you regularly whisk out of your checking account and into a savings vehicle? When it comes to what percentage of income to save for future expenses, financial advice can vary depending on where you look. Some experts suggest saving as little as 10% of each paycheck, while others might suggest 30% or more. A figure of 20% often seems a comfortable compromise.
The 50 20 30 Rule
According to the 50/30/20 rule of budgeting, 50% of your take-home income should go to essentials, 30% to nonessentials, and 20% to saving for future goals (including debt repayment beyond the minimum).
The right amount for you to save from each paycheck will depend on your income, your fixed expenses, as well as your short- and long-term financial goals.
For example, if the cost of living is high in your area, you may need to spend more than half of your take-home pay on living expenses, making it hard to put 20% of each paycheck into savings.
On the other hand, If your goal is to buy a home in two years, you may need to put more than 20% percent of your paycheck into savings in order to have your down payment in that timeline. If you want to retire early, you may need to put more of your income towards retirement every month than the average worker.
💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.50% APY, with no minimum balance required.
The Pros and Cons of Saving More or Less
While 20% is a good guideline, how much of each paycheck to save is a personal decision.
If you are trying to decide just how much of your paycheck to save, consider these points. Being aggressive with savings can have its benefits. You might also consider these the advantages that you miss out on if you save less.
• By saving more, you reach your goal faster.
• By maximizing the money you put away, you may rein in your spending and manage your money better in general.
• If your company offers a match for retirement savings, you can basically get free money by saving at the stipulated rate.
• Some savings vehicles offer tax advantages.
However, there are also downsides to saving as much as possible. You could avoid these by saving less. In other words, these are the benefits of saving less.
• By saving less, you might avoid living paycheck to paycheck, which is stressful.
• You can put more money towards paying down high-interest debt which can enhance your financial situation.
• You have more money for discretionary spending and enjoying your life.
Here’s how this stacks up in chart form:
|Pros of Saving More/Cons of Saving Less||Cons of Saving More/Pros of Saving Less|
|Saving more means reaching financial goals faster||Saving aggressively can lead to money stress|
|Saving more can rein in spending and lead to better money management||Saving more can mean less money free to pay down debt|
|Saving more can potentially reap a company match via employee savings plan||The more you save, the less you may have for discretionary or “fun” spending|
|Saving more can mean tax advantages|
Recommended: Cost of Living Index by State
4 Potential Savings Goals to Work Toward
Socking away money can be a good idea, but it is undoubtedly difficult to save. It can be helpful to really think about what it is you are saving for. Having a few specific goals in mind can help you determine how much you need to save each month and also help keep you motivated to maintain the discipline it takes to save.
Here are some common savings goals that can help you build financial wellness.
1. An Emergency Fund
Do you have a healthy reserve of cash you could tap to get through a difficult time or cover a large, unexpected expense?
If not, you may want to start saving up for an emergency fund that could help you handle a financial curveball, such as a job loss, medical emergency, or big ticket car or home repair.
Having this back-up fund in place can help ensure that you never have to rely on high-interest credit cards to make ends meet.
Ideally, an emergency fund will contain enough money to cover your living expenses for three to six months, but how much you’ll want to put aside will depend on your situation.
If you are married with no children, for example, you may only need to cover three months of expenses. If you have kids or you’re single, you may want to have an emergency fund that could cover at least six months’ worth of expenses.
It can help to keep the money in an account that earns more interest than a standard savings account, but allows you to easily access your money.
Some good options include: a high-yield savings account (online banks tend to offer good rates) or money market account.
2. Paying Off High-Interest Debt
Another important thing you could consider doing with your savings is paying off any “bad” or high-interest debt you may have. Some ideas for a debt management plan:
• A debt payoff strategy you may want to consider is the debt snowball method. With this approach, you start by paying off the debt with the smallest balance and put all your extra payments towards that until it’s paid off (while continuing to pay the minimum on your other debts).
You then put extra payments toward the debt with the next highest balance, and so on. This can give you a sense of accomplishment which can help motivate you to continue your aggressive repayment.
• Another approach is the debt avalanche method. This Involves putting all your extra payments towards the debt with the highest interest rate, while paying the minimum on the others.
When that debt is paid off, you then focus on the debt with the next-highest interest rate. Since you are concentrating on the debt with the highest interest rate, this strategy can end up being the most cost-effective.
3. Saving for Retirement
One of the key things to save for each month is your future. Exactly how much of your paycheck should go to retirement savings will depend on your age and when you want to retire.
If your company offers a 401(k) with matching contributions, it can make sense to put aside at least as much of your paycheck as your company will match (since this is essentially free money).
If you don’t have access to a 401(k) or want to contribute beyond that fund, you may want to open a Roth or Traditional IRA. Both types of IRAs have different tax benefits.
When you invest in a Roth IRA the money is taxed at the time of contribution but then in retirement, you can withdraw it tax free. Contributions made to a traditional IRA might not be taxed at the time they are made but are taxed when they are withdrawn in retirement.
When choosing how much of your paycheck to put into retirement savings, you may want to keep in mind that the IRS sets restrictions on how much you can contribute to your retirement funds each year.
4. Saving for Other Goals
After establishing plans for debt repayment, an emergency fund, and retirement savings, you may also want to consider working toward your other financial goals, like buying a house, saving for your kids’ future education, or going on a great vacation.
How much of your paycheck you should save for these goals will depend on what you want to accomplish and when you want to accomplish it.
When you’re saving for a big purchase, for example, you may want to start by determining how much money you’ll need and when you want to have the money.
You can then break that dollar amount down into the amount you need to save each year and month. This can help you determine how much of each paycheck you may want to put aside to help you achieve that goal.
• For savings goals you want to accomplish in the next three to five years, you may want to consider putting the money in a safe account that earns higher-than-average interest (such as a high-yield savings account or a CD).
• Longer-term savings goals, such as your children’s college education, can be invested more aggressively, since you’ll have more time to ride out the ups and downs of the securities markets. For college savings, you may want to consider opening a 529 savings plan.
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Saving a Percentage vs. an Amount
There are different ways to look at saving: Some people follow the percentage method, while others prefer to think in terms of a dollar amount that gets socked away.
For many people, a percentage is a good way to go.
• That percentage can be “set it and forget it.” It can help guide you if, say, you get a raise. The amount you are saving will automatically rise with your salary.
• Similarly, if you are a seasonal worker, the amount you are saving will go down during your slow season. Say you earn $15,000 a month during the busy season and save 20%. That would be $3,000 a month. If your pay dips to $5,000 during the quiet season, only $1,000 per month would go into savings.
However, other people may find that putting aside a set amount, perhaps $1,000 a month, is a good way to save.
• That might make it easier for them to calculate and track their savings. It can be a way that people feel they are in control of their money.
• When their income rises or falls, they would have the opportunity to be hands-on with their money and determine whether to adjust the amount or not.
Here’s a look in chart form:
|Saving a Percentage||Saving an Amount|
|“Set it and forget it” convenience||Can be simpler to remember and track|
|Automatically adjusts savings when your income changes||Can get you to check in with your money and adjust your savings amount regularly|
💡 Quick Tip: When you feel the urge to buy something that isn’t in your budget, try the 30-day rule. Make a note of the item in your calendar for 30 days into the future. When the date rolls around, there’s a good chance the “gotta have it” feeling will have subsided.
Starting to Save With SoFi
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Better banking is here with up to 4.50% APY on SoFi Checking and Savings.
Is it good to save 50% of your salary?
If you can afford to save 50% of your salary, that can be a habit that can help you reach financial stability quickly. However, many people will save less than that, with 20% of one’s take-home pay being a solid figure to aim for.
Is saving 10% of your paycheck enough?
Saving 10% of your paycheck is a good start and is certainly better than not saving at all. If you are just starting out, have a high cost of living, or have considerable debt, it can be a good move to start with 10% as your savings goal. However, many financial experts encourage people to save at least 20% of their take-home pay.
What is the 50 20 30 rule?
The 50/30/20 budget rule is a formula to help people manage their finances. It says that, of your take-home pay, 50% should go towards basic living expenses (the needs in your life); 30% should go to spending (the wants in life); and 20% should go towards saving for the future (including debt repayment beyond the bare minimum).
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