How Much of My Paycheck Should I Save?
Anyone who has experienced financial hardship understands how important it is to have emergency savings. Whether you’re trying to break bad habits, stick to a budget, or set aside extra cash for a major purchase, you’re probably wondering what percentage of your paycheck should go to savings.
Whatever your financial goals, we’ve got some helpful tips to build your savings account — even if you’re currently living paycheck to paycheck. Read on to learn how much of your paycheck you should save and what you can use those savings for.
Benefits of saving money from your paycheck
Building your savings account has many benefits. In addition to reaching those financial goals faster, you'll be better able to track your income for tax purposes. You'll also have funds on hand for major purchases and be financially prepared for emergencies.
But how much of your paycheck should you save?
What percentage of my paycheck should I save?
Ask 10 financial experts, “what percentage of your paycheck should you save?” and you’ll likely get 10 different answers. Many budgeting methods allocate 10% to 30% of each paycheck to savings.
The popular 50/30/20 method , for instance, recommends spending 50% of your paycheck on essentials and 30% on non-essentials. The remaining 20% goes to savings.
Ultimately, the percentage you can save depends on your household income, fixed expenses, and financial goals. The key is finding what works for you.
What to use the savings from your paycheck for
There are many reasons to contribute a portion of your paycheck to savings. Here are just a few things you can use your savings for:
An emergency fund helps eliminate the burden of unexpected medical bills, car repairs, home maintenance, job loss, and other unforeseen scenarios. Therefore, you should strive to set aside three to six months’ worth of expenses set aside in your emergency fund.
Paying off debt
Building your savings account can help you achieve a specific financial goal, such as getting out of debt. Plus, having a lump sum on hand can give you room to negotiate past-due bills.
Thanks to automatic deposits and employer-matched contributions, setting aside a portion of your paycheck for retirement is easy. Even so, it’s important to regularly assess how much of your income you contribute to your retirement account and adjust the percentage as needed.
Down payment on a house
Buying a house has long been considered the American dream. But with rising home prices and interest rates, saving a 20% down payment takes a lot of budgeting and discipline. The earlier you start to save, the better.
Your children’s education
Most parents would love to pay for their child’s college education. Developing a solid savings habit while your kids are still young improves your chances of covering their educational expenses down the road.
Where to put the savings from your paycheck
Having a dedicated savings account can help you avoid the temptation to spend your hard-earned savings from your paycheck. A regular savings account works, but it’s often too easy to transfer funds to your checking account for impulse purchases.
A high-yield savings account is a better option because it accrues interest at a higher rate, helping you reach your goals faster. In addition, many high-yield savings accounts are offered online, so they’re not tied to physical bank locations. That makes it less likely that you’ll withdraw the money before reaching your savings goal, but you can still withdraw the funds anytime you need.
Another savvy option is a certificate of deposit (CD). Certificates of deposit are low-risk investments that offer maturity bonuses. In other words, when you open a CD, you lock away the funds for a certain period until the CD matures. At this point, you can withdraw the funds along with the accrued interest. The great thing about CDs is that it eliminates the temptation of withdrawing your savings early.
A lesser-known type of savings account is a money market account (MMA). MMAs accumulate interest based on current money market rates. Banks typically require you to maintain a higher minimum balance in an MMA. Purchases and transfers are also limited, which can help you reach that savings goal.
How to save money from your paycheck
So, how can you get into the habit of saving money from each paycheck? Here are a few tips:
1. Evaluate your expenses
Before anything else, calculate your current expenses. You should have a clear picture of your fixed expenses to see if there’s room to cut costs. The more non-essentials you can eliminate, the more you can contribute to savings.
2. Create a budget
There are many budgeting methods out there, but they all boil down to knowing your take-home income, keeping track of monthly expenses, and adjusting the numbers if those expenses add up to more than your income. No matter which budgeting method you choose, the portion of your paycheck that goes to savings should be an essential part of your budget.
3. Automate your savings
Setting up an automatic transfer from your checking account to savings ensures you’re building that fund every month. Check with your current bank or credit union to see if they offer this option. Many allow you to establish automatic transfers at specified intervals, such as every two weeks.
4. Eliminate debt
Saving money is difficult when you have debts to pay. Depending on how much you owe, you may need to pay down your outstanding balances before freeing up money to put toward savings.
5. Earn additional income
If you’ve created a budget, cut expenses, and paid down debt — and you’re still left struggling to make ends meet — you may need to consider additional sources of income. For example, getting a second job, a side gig, or building passive income can make it easier to build your savings.
What to do if you need money before your next paycheck
Saving money takes time and effort. If you haven’t built up your savings account and need extra cash before your next paycheck, we can help! Advance America offers payday loans, personal lines of credit, title loans, and more. We can get you the funds you need to get started on the right track toward saving for a brighter tomorrow.