How Much of Your Paycheck Should You Save?
When trying to get your finances in order, there are a few questions you want an answer to. One is how much of your paycheck should you save.
How Much Money Should I Save From a Paycheck?
The answer? There is no one size fits all approach to saving. There are many different options to choose from but not one of them will suit everyone. You have to personalize your way of saving according to your goals and your life.
We are going to address factors that can help you answer the question of how much of your paycheck should you save, how you can reach that amount, where to save it, and how to find the money to save.
“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
What Are Your Goals?
To determine how much to save, this is the absolute first question you must answer. Not having the answer can be likened to taking a cross country trip without GPS. Sure, it can be done but it will take longer to get there - a lot longer and with a lot more mishaps along the way. So, let’s not ignore the importance of this step.
Take some time to think about it: What do you want to do with your life? What do you want six months, six years, and six decades from now? Do you want to start a business? Buy a house? Send your kids to college? Go on vacation every year? Pay cash for your wedding? Retire by 40? Travel the world?
Take the time to write it all out. Make sure, though, that the things you put down are things you actually want to do. Otherwise, you will be pouring time, energy, and money into the wrong things.
Don’t Forget the Necessities
If emergency funds and retirement are not included in your goals, you need to add them. These are two essential categories of a financially stable life, so you should not overlook them.
Basic Savings or Emergency Fund
You need money put away for “just in case” because, if you haven’t noticed, “just in case” almost always becomes a reality. You do not want to be thrown off due to an unexpected expense as it can take years to get back on track.
Instead, start right now building your emergency fund. It should be at least three to nine months of your regular monthly expenses - the more you can put away, the better.
You need money put away for “just in case” because, if you haven’t noticed, “just in case” almost always becomes a reality. You do not want to be thrown off due to an unexpected expense as it can take years to get back on track.
Retirement
Everyone wants the freedom to retire someday but that will not happen if you are not prepared. It was once said that you needed at least $1 million put away for retirement, but in the last few years, there have been a lot of people saying that will not be enough.
Sadly, none of us know what will happen when we retire, but most of us have an idea of what we want during retirement. Some want to finally travel the world. Others want to start a business from a hobby they enjoy. And some simply want to be available to their grandkids and just relax.
The life you want to live and the activities you want to partake in will play a role in how much you need for retirement, but there is another factor as well. When do you want to retire?
Most of us don’t want to wait until our 70s or 80s to retire, but the younger you hope to retire, the more money you will need to have saved.
Approaches To Saving
After you have decided what you want to save money for, you have to figure out how to do it. There are different approaches to saving that you can use. I find it easiest to use more than one method, depending on what I am saving for. I’ll explain in greater detail as we go.
Percentages
Sometimes, it’s easiest to decide on a certain percentage of your paycheck to go to savings. Personally, I think that percentages work best for retirement and other long term savings.
You can choose any percentage you want, of course. If you feel you can only do 1 percent at this time, start there. If you can do more, great.
You might also consider the following suggested methods:
1. 50/30/20
With this method, no more than 50 percent of your income should go to necessities, 30 percent or less should go toward discretionary spending, and at least 20 percent should go to savings. This means for every $1,000 you make, $200 should go to savings.
This is a great idea in theory, but not everyone can afford to put up 20 percent - at least not at this time. In fact, most people I know cannot afford this - it’s a big chunk of change. When I reach the point that I can put that amount up without stressing out, I will feel as though I have accomplished something.
Now, that’s not to say that it is impossible. If you like this concept, you can make it happen. It will just take a little extra work. In a moment, we’ll get into ways you can do that.
2. The 11 Percent Rule
A recent idea is that you should strive to put away at least 11 percent of your income. This is certainly more doable than 20 percent. However, when you seem to be squeezing your paycheck for everything it’s worth already, this may still be a struggle. If you can afford it, though, it is a good jumping-off spot.
Specific Amount
Some people forego saving a certain percentage and instead choose a specific amount to save. It might be $5, $10, or $100 each month or each paycheck.
This is one of the best ways to save for specific items. You use this method by taking the amount you need and dividing it by the amount of time you have to get it.
For instance, if you want to save for a vacation a year from now and need $1,200, you will need to save $100 each month. Or if you need $2,000 for a down payment for a car in five months, that means you need to save $400 each month.
You can then break your monthly savings total down into the number of times you paid each month to get the amount per paycheck.
When To Start Saving
Right after asking how much of your paycheck should you save is another popular one: When should I start? The easiest answer is, “Now,” but that is not always possible. And it’s not always the wisest move.
Some people do not have enough left over after paying bills to save. If this is you, don’t worry. We’ll get to solutions in a moment.
There are then people who owe a lot of debt and wonder whether to pay it off first, to start saving first, or focus on both at once. I can tell you this from experience: Trying to work on two big financial tasks at a time is counterproductive. It will have you moving at a snail’s pace, making it feel as though you are not making any progress at all. It might even make you feel like you should just give up.
The Right Time To Start Saving Is NOW.
Take Care of Your Debt
Fret not, though. There is a way to get both done effectively. First, before you do either, you need to be sure your emergency fund is built up. This should be your priority before making any other moves.
Next, in my opinion and experience, you should work to pay off debt. I know that saving probably seems like the smarter idea, but I don’t believe it is, and I’ll share why:
1. If you have debts that come with interest, that interest is just going to grow, costing you more than you should have to pay. What good is a ton of money sitting in your savings if you are earning that same amount in interest?
2. Even debts that do not have interest can cost you for years to come. They get sent to collections agencies, which report all of this to the credit bureau, knocking your score down lower than it is.
3. A lower credit score can hurt you in ways you might not even imagine yet. It does not just affect your ability to get credit. It can also:
Affect your monthly insurance rates and any bills that charge interest because lower scores get higher interest rates.
Keep you from getting some jobs (not all places check credit with applications, but the ones that do will not hire if you have a low score).
Keep you from moving - this may not be a problem right now, but if you ever need to move, a good score can help you get a decent place without having to sell a kidney.
In short, your credit score can impact the amount of money you make, the amount of money you have to spend out, and so much more. By taking care of debt first, you are freeing up more money to save. So, build your emergency fund, pay off those debts, and then you can start saving freely.
Where To Save
Where you decide to save your money can impact your financial success. Emergency funds need to be accessible for when emergencies arise. Some people keep it in cash in a safe. Others have a separate savings account or checking account for it.
The bottom line is that you want it separate from your other money and accessible enough to get to when you really do need it.
Short term savings should be accessible in the idea that when you finally reach your goal, you don’t have to wait too long to make your purchase. At the same time, you don’t want it so accessible that you are tempted to spend it.
One idea is to put it in a savings account that you can only access on weekdays during business hours. Be sure you have to go into your bank’s branch to get it. This gives you time to make sure you actually want to spend the money. The inconvenience of having to go to a bank and stand in line should discourage any impulse spending.
Long-term and retirement savings need to go into accounts that will multiply your money. Stocks and mutual funds are good ideas, but it is typically best to consult a financial advisor. They can help you choose the best investment steps to help you reach your goals.
How To Find the Money To Save
By now you should know - or at least have a very good idea of - the answer to how much of your paycheck should you save. Now, it’s time to get started but...
Talking about how to save is one thing. Actually doing it is another thing entirely when you have nothing to save. Let’s see if we can fix that.
There are three main ways to fix this problem: Make more money, cut expenses, and sneak money.
Make Money
You already have a job or you would not be trying to decide how much of your paycheck should you save. However, I’ll assume that since you are still reading this post, your regular paycheck simply is not enough.
You can fix this problem by trying to work some extra hours, getting a second job, or doing a side job like babysitting or yard work. Even just a few extra hours each week or month can help you reach all of your savings goals.
Cut Expenses
Decreasing your personal monthly expenses is actually one of the easiest ways to put money away. It typically does not require you to do anything extra - at least nothing compared to having to work extra.
Sometimes to find the money, you have to completely overhaul your finances. Then, there are other times when just a couple of tweaks will make it work.
Take out your budget and consider every expense on it. You might find some subscriptions or memberships you can cancel or a way to cut back on your cable package or grocery allowance.
Sneak Money
You can also sneak money away - this is one of my favorite ways to save money. You’re not sneaking it away from anyone else. You are sneaking it away from yourself. There are a few ways I do this that have proven pretty effective.
First, when I go to the grocery store, I get a little cash back - usually, no more than $20 - but I get it broken down in two $10s or four $5s. I cannot always afford to put the full $20 away, but I can usually put $5 away and forget about it.
I also like to move the money out of my checking account quickly. I have it set up to automatically round up my purchases so that a little change is constantly going to my savings. I also keep all of my loose change in a jar. When I have enough, I cash in the change and deposit it into my savings.
Most banks let you set up automatic transfers so on payday, a certain amount of your check goes straight to your savings. You can also usually set up automatic transfers to go to investment accounts. I love automatic transfers because it all happens before I even see the money hit my account. Out of sight, out of mind.
Choose Your Mix
Now, you get to design your own savings mix. Decide how much you want to save.
Will you use percentages, specific amounts, or both to save that amount?
Where will you save money?
What steps will you take to create or find the money you need to save?
Conclusion
We have hit on a lot of information here, and putting it all to work will take some time. When you find the answer to how much of your paycheck should you save, you may not yet be in the position to save that much.
The most important thing at this moment is that you get started. Get your emergency fund in place, take care of debt, and then start saving. Even if all you can put away is $5 a week, for the time being, do it.
You will also find that you have to adapt your plans throughout your savings journey due to changes in your life or in your goals - and that’s okay. Life changes. We have to be willing to change with it.