March 2, 2021

How Much of Your Paycheck Should You Save, and Why?

“Save more money!” countless advertisements shout at you. “Put aside part of every paycheck!!” your parents scold. “Save as much as you can, or you’ll regret it later!” your financially savvy friends advise.

Yeah, saving is important, but the above tips are remarkably unhelpful, aren’t they? You’re always left wondering, “How much of my paycheck should I save?” No one really seems to tell you the answer. 10%? 50%? What’s a good amount that will set you up for the future?

How much of your paycheck you put aside depends on your individual situation. There are no definite savings rules that will guarantee future financial stability, but let's go over a few guidelines that you’d be wise to follow.

How Much of Your Paycheck Should You Save?

So, the big question. When asking what percentage of your paycheck should you save, the general rule of thumb is that you should put aside 20% of each check. More is ideal, but anything is better than nothing if 20% isn’t possible for you. Try to stick to the 50/30/20 rule: 50% of your paycheck is for essential expenses, 30% is discretionary, and the remainder is for savings.

What Should You Save For?

Another big question is what kinds of things you should save for. “Savings” is pretty vague — the point is to have it in case you need to spend it, but what circumstances would require you to do so?

You should save for all sorts of expenses. Do you want to buy a new car but can’t afford one just yet? You’ll have to put a little bit aside every month until you can. However, it’s important not to drain everything you have, so you’ll need to save up enough that you’ll have a financial cushion left over.

A few other examples of expenses you should save for include:

  • Retirement;
  • Emergencies;
  • Education (for your children or yourself);
  • Vacations;
  • Transportation;
  • A home;

And other financial goals. Some of these expenses allow you to pay monthly, but you’ll need to have enough for a sizable downpayment. It may be in your best interest to have separate savings accounts, so you don’t overspend one or the other. You don’t want to be without your emergency savings because you opted for a more luxurious vacation.

What Kind of Savings Account Should You Use?

An important thing to remember is that not all savings accounts are the same. Most grow your money with interest, but some offer significantly higher rates than others.

For instance, your retirement savings should be in a traditional IRA (Individual Retirement Arrangement), a 401(k), or another kind of retirement account. Other plans exist, such as Roth IRAs and SEP plans (Simplified Employee Pension) that provide tax benefits or entail financial contributions from your employer. You want a retirement savings account that turns your regular contributions into a significantly larger sum that supports you when you stop working later in life.

Traditional savings accounts are what you are probably familiar with already. You can open these easily at any bank or credit union. The interest rates will be low, so don’t expect a small deposit to become much bigger in a few decades (maintenance fees may even cancel out any interest earnings), but they’re still safe places to store your money.

Money market accounts, however, offer higher interest rates, so you can earn more money just by depositing. They also allow you to write a limited number of checks per month and use an ATM card like a checking account. However, these kinds of accounts may charge monthly maintenance fees if you are below a certain balance, and they often require you to make substantial initial deposits.

Check out this link for other kinds of savings accounts.

How Long Will Saving Take?

How long it will take for you to reach specific savings goals depends on the size of your regular deposits (and, therefore, your income) and your annual interest rate. Depositing $200 a month into an account with an APY of .10% will get you to your goals much quicker than $50 a month with a rate of .05%. You can use this calculator to determine how long it will take you to save a certain amount of money based on your current balance and other factors.

Another complication is, well, remembering to save. An easy way is to set your online bank account to deposit part of your paycheck automatically. Another is to use financial apps that send you reminders. Earnin, for example, offers an opportunity called WeWin, where you could win major prizes simply for remembering to save a small amount of money every day.

Saving money can seem more complicated than it should be, and you’re not alone if you feel that way. If you don’t know how much of your paycheck you should save every month, start with whatever you can afford (preferably a minimum of 20%), and open your account as soon as possible if you haven’t already.


Photo by Micheile Henderson on Unsplash

Please note, the material collected in this blog is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or Services.

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