October 3, 2024

How Much of Your Paycheck Should You Save? A Guide

When payday rolls around, you have bills to pay and groceries to buy. After that, it’s fair if you want to treat yourself a little.

You work hard for your income, and you deserve to splurge here and there — but how much of your paycheck should you save? It's a constant question, whether you're new to the workforce or a seasoned veteran.

Saving is critical for being prepared for rainy days and having funds growing for retirement, but that's not all there is to it. Knowing how much to save and where to save it is the key to building a strong foundation for your financial goals.

This guide will give you the tools you need to develop smart saving habits so you can manage your finances like an expert.

How much of your paycheck should you save?

Deciding on a savings plan is the first step toward taking control of your finances. While there's no budgeting rule that works for everyone, having a general guideline can help you start out on the right foot.

One of the most popular approaches is the 50/30/20 rule. This simple strategy recommends different percentages of your paycheck to save by dividing your after-tax income into three main categories:

50% for needs. This covers essential expenses like rent or mortgage, groceries, utilities, and basic transportation.
30% for things you want but don't necessarily need. This includes all non-essential spending like entertainment, dining out, and hobbies.
20% for savings and debt repayment. This portion goes toward building your savings and paying off debts.

The 50/30/20 rule is a great starting point, but it's important to remember that everyone's financial situation is unique. Your ideal saving percentage might change based on several factors:

Your income level. If you earn a high salary, you might be able to save more than 20%.
Cost of living in your area. Regardless of your monthly paycheck, living in an expensive city means you may need to adjust your percentages to spend more on living expenses.
Your financial goals. Saving for a down payment on a house or planning for early retirement may require you to save more.
Your current debts. If you have high-interest debts with significant balances, you may need to allocate more toward debt repayment than savings or investments.

If the 50/30/20 budgeting plan doesn't appeal to you, you can also look into other strategies like the cash envelope system, where you divide your money into different spending categories (originally actual physical envelopes) to control your spending and stick to your budget.

Paying yourself first

Another helpful saving strategy is "paying yourself first." This means treating your savings like any other important bill and setting that money aside before you start spending on other things. You can achieve this by automatically transferring part of your paycheck to a savings account as soon as you get paid, prioritizing your financial health. Using this method can make meeting a 20% saving goal easier.

Use EarIn’s Tip Yourself feature to put aside up to $50 a day and start building your rainy day fund. Plus, you can have up to five Tip Jars at once to create slush funds for different saving goals, like a vacation or a big purchase. There’s no minimum amount or fees, and your funds are FDIC protected.

What should you save for?

Smart saving means setting clear goals for your money and focusing on the key areas that build financial security. Here are four of the most important:

Emergency fund. Your emergency fund is your financial safety net. It's money set aside for unexpected expenses or situations, like a sudden car repair or a job loss. Aim to save enough to put away three to six months of living expenses. This fund can help you avoid debt when life throws you a curveball.
Retirement. It might seem far away, but saving for retirement is a good idea at any age. The earlier you start, the more time your money has to grow. Even small contributions to a retirement account can add up over time, thanks to compound interest. Whether it's through a 401(k) at work or an individual retirement account (IRA), your future self will thank you for setting that money aside.
Investing. Investing can help you grow your savings over time — and it's not just for the wealthy. Even small amounts can provide good returns down the line, especially compared to a regular savings account. Consider investing in stocks, bonds, or mutual funds. The key is to start small, learn as you go, and think long-term.
Major purchases. Whether it's a new car, a down payment on your dream house, or the vacation of a lifetime, big purchases require planning ahead. Setting specific savings targets for your saving goals can help you avoid taking on unnecessary debt and reach your goals faster. Try breaking down your goals into smaller monthly savings targets to make them more manageable.

Where to keep your savings

Once you've decided how much to save, the next step is figuring out where to put your money to maximize your growth rate. Different savings options serve different purposes, so let's explore some popular choices:

Savings account

This is the basic account offered by most banks. It's a safe place to keep your money, especially for your emergency fund or short-term saving goals. While interest rates are usually low, your money is easily accessible whenever you need it. Plus, these accounts are insured by the FDIC, which means your savings are protected up to $250,000.

High-yield savings account

This is like a turbocharged version of a regular savings account. High-yield accounts offer better interest rates, which means your money grows faster. They're great for goals that are a few years away, like saving for a down payment on a house, or for holding emergency funds.

IRA or 401(k)

These special accounts are designed for retirement savings. A 401(k) is offered through your employer, which may match your contributions, while you can set up an individual retirement account (IRA) on your own. In both cases, your contributions are typically invested in different assets like stocks and bonds.

The big advantage here is tax benefits: These accounts let you either reduce your taxes now or avoid taxes on your withdrawals later. Traditional accounts give you a tax break today by lowering your taxable income, while Roth IRAs and 401(k) accounts allow your investment gains to grow without being taxed, and you won't have to pay taxes when you take the money out in retirement.

However, withdrawing from an IRA before the age of 59½ results in a penalty of 10% of the withdrawal, making these accounts less suitable for things like emergency funds that require quick access to cash.

Money market account

A similar option is a money market account, which is like a mix between a savings account and a checking account. While it requires a higher balance, it also usually pays more interest than a regular savings account. Plus, you can write a limited number of checks from this account every month, and you may receive a debit card, too.

Certificate of deposit (CD)

Getting a CD is like making a deal with your bank. You agree to leave your money untouched for a set period, and in return, the bank gives you a higher interest rate than a regular savings account. Like high-yield savings accounts, CDs can be a good idea for money you know you won't need for a while. However, like IRAs, you may have to pay a penalty if you need to take your money out early.

Each of these options has its own strengths and weaknesses, so consider mixing and matching based on your financial goals and how soon you need the money.

5 tips for saving more money

These budgeting tips can help you optimize your savings plan:

1. Create a realistic budget. Start by tracking your spending to see where your money goes. Use budgeting apps and calculators to avoid mistakes and make the process easier. You might be surprised by where your money goes, which is the first step to redirecting it to better spending categories.

2. Set up automatic savings. Take the guesswork out of saving by setting up automatic transfers from your checking to your savings account every payday. This way, you're paying yourself first before you have a chance to spend the money.

3. Negotiate your bills. Don't be afraid to shop around or ask for better rates on recurring expenses like insurance, phone plans, and streaming services. A few phone calls could save you a good chunk of change each month, and it never hurts to ask.

4. Cut expenses. Look for areas where you can reduce spending without sacrificing quality of life. This could mean cooking at home more often, finding more free or low-cost entertainment options, or canceling subscriptions you don't use.

5. Regularly review and adjust. Your financial situation and goals can change over time. Make it a habit to review your budget and savings plan every few months. Adjust as needed to stay on track and make the most of your money.

Grow your savings faster with EarnIn

Wondering how much of your paycheck you should be saving? With EarnIn, you can use our Cash Out tool to gain better control over your finances by accessing your earned wages — up to up to $150 a day or up to $750 every pay period — when you need them and tracking your savings goals more effectively. Whether you're setting aside funds for an emergency or building up your savings, EarnIn empowers you to make smarter financial decisions.

Start taking control of your paycheck today with EarnIn!

Please note, the material collected in this post 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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