Are you ready to start saving money but find yourself asking, "How much should I save from my paycheck?" Maybe you remember the old days when saving 10% of your paycheck was a rule of thumb. Not that it was enough then, but it's definitely not enough these days in most cases.
However, saving something is always better than saving nothing! So remember that when you are trying to figure out how much should you save from your paycheck.
Every year I go over my savings goals and revise them for the upcoming year. To me, this is of utmost importance because I refuse to be the old lady who literally lives in her shoes (or a house built out of her shoe boxes). I also refuse to be the girl with the expensive designer handbag without a dollar in it to buy her own drink or pay for her cab home.
Reviewing my goals helps me figure out how much should I save from my paycheck! Setting goals is vital to figuring out how much you need to save. Now let's get into how much should you save from each paycheck and how to figure it out based on your goals!
How much should I save from each paycheck: A set amount or percentage?
When it comes to savings, it's not a one-size-fits-all. Again, it depends on your financial goals. It depends on if you are paid bi-weekly or get paid monthly. However, some people will choose a set amount or save a percentage of their paycheck.
For instance, with the 50-30-20 budgeting method, you save 20% of your income towards debt and savings. So, if you make $500 a week, you would save $100 each paycheck.
If you want to save a specific amount within a period of time, then saving a set amount of money from each check could make this easier. For example, let's say you want to save $10,000 in a year, and your pay cycle is biweekly.
You would need to save a set amount of $384.62 every paycheck. The important thing is picking the best method for you that will be simple to stick with. Use a "how much should I save per paycheck calculator" to make a savings plan that is best for you! (You can also read our article on average savings by age!)
How should I split my paycheck into savings?
Now you know how to figure out how much you should save from each paycheck. But you may be faced with the question "how should I split my paycheck?" Well, it's important to separate your savings into different accounts so you can be sure you are on track for each savings goal you have.
For instance, if you're saving $100 a paycheck, you would split that amount amongst your accounts. It could be $20 for each category or split up in different amounts depending on which one you are trying to build the fastest.
Here are the main types of savings you should be splitting your paycheck into:
1. Emergency savings
I keep my emergency savings in a separate account. It's kept liquid in the event I need to access the funds quickly. Similarly, your emergency savings should be easily accessible just in case of an unplanned situation.
So, how much should you save from your paycheck towards your emergency savings? Well, if you don't have any emergency savings in place, then your initial goal should be to save your first $1,000, especially if you have a high-interest debt to pay off.
Let's say you want to reach this goal in three months, and you get paid weekly. $1,000 divided by 3 is $333.33 a month, which equals about $83.33 a week. Once your debt is dealt with, the ideal amount of money to have saved for emergencies should be 3 to 6 months of your basic living expenses.
This will help cover things like loss of income due to a job loss and any unplanned expenses that may come up — rather than using a credit card and going into debt. Once you get past the situation, you can then plan to replenish your emergency savings.
2. Short-term cash savings
Another way to help you decide how much should you save from your paychecks is to figure out your short-term goals. Your short-term savings should be for things like planning a wedding, saving for a vacation, Christmas gift savings, etc.
It's basically money you need in less than 5 years. You'll want to have this money in liquid or semi-liquid form and easily accessible (think certificate of deposit).
Where you keep your emergency, and short-term savings is up to you. But it's a good idea to set it up where you cannot easily make transfers between these accounts and your checking account. This way, you're not tempted to dip into the accounts because they are convenient to access.
3. Retirement savings
Your retirement savings is for the long-term to fund your future lifestyle when you retire. To avoid your savings from being eaten away by inflation and to allow it to grow over time, investing your money is the way to go.
In the United States, examples of retirement accounts include the 401k, 403b, and IRA. These account types have several tax benefits and are offered by many employers. Or you could set up your retirement savings accounts on your own.
The best way to save for your retirement is to see if your employer offers a 401k match. This can double your savings and is basically free money for you! For example, let's say your employer offers a match of up to 5% of your pay, and you make $750 a week; they would match up to $37.50 per week if you contributed that much.
So you will be saving $75 a week rather than just $37.50! This can add up with compounding interest and help you build up your retirement accounts much faster.
4. Other investments
Consider other investments when deciding how much should you save from each paycheck. Outside of your retirement savings, other investment types to consider include non-retirement investing in the stock market, investing in real estate, or in small business.
Having multiple investment types is a great way to diversify your portfolio. But you want to be sure you do your due diligence and research any investment you choose to put your money in. Investing helps you build wealth faster, so do your utmost to save towards multiple investment opportunities.
5. Splurge and fun savings
Life can't be all work and no fun! But even so, it's important that you set aside money from your budget for fun. Things like travel savings, shopping, and other splurges go into this fun money account. While it's great to reward yourself, be sure to prioritize your main goals first.
If you do choose to reward yourself or make expensive splurges, ensure that they are not at the expense of your financial goals. Things like debt that needs to be paid off and saving for retirement should be first.
How much should you save from your paycheck depends on your goals!
So, you will need to figure out your budget and goals first when figuring out how much should you save from your paycheck. Once you have your categories and accounts all set up, you'll want to tie them to your financial goals and your budget. Then, start tracking your progress accordingly.
Remember, even if you can't save as much as you want, every little bit helps. Don't forget to use the "How much should I save per paycheck calculator" to help you figure out amounts easily!
After you pay off debt, or maybe get a raise, you can start working towards saving even more money each paycheck! Learn how to transform your money mindset, create financial goals, and a budget that suits you best with our completely free build a solid foundation course!