How Much of Your Paycheck Should You Save?

Knowing how much of your paycheck you should save depends on several factors, including your income, your budget, as well as the personal and financial goals you’re working toward. And depending on what stage of life you’re in—e.g., in school, single/working/no dependents, raising children, approaching retirement—you may be able to save more in some years and less in others.

No matter your financial situation, we’ve gathered some good rules of thumb around how much you should be saving from your monthly paychecks.Plus, we share why saving consistently over your lifetime is an important part of your overall financial health, as well as tips to help grow your savings faster.

Why Building Savings Is an Important Part of Your Overall Financial Health

One of the biggest reasons for building up money in a savings account is to provide you with peace of mind – emergency cash you can fall back on to pay for unexpected expenses. Having enough in savings can come in real handy for those times when you, for example, get laid off from your job, lose a major freelance client, experience a medical emergency not covered by insurance, or need to replace all four of the tires on your car (average cost ranging from $600-750).

Having some emergency savings set aside can not only help you cover surprise bills and living expenses, it has the added benefit of reducing (or eliminating, if you have enough saved) the need to borrow money in order to deal with a financial setback.

How Much of Your Monthly Paycheck Should You Save?

A commonly recommended guideline is that you should be saving about 20% of your paycheck each month. This general rule of thumb is based on the underlying principle of both the 50/30/20 budgeting method and the 80/20 budgeting methods.

50/30/20 budgeting rule

The 50/30/20 budgeting method recommends setting aside 50% of your income to needs (essential expenses), 30% to wants (non-essentials), and 20% to savings and investments. Based on this basic rule, you can calculate 20% of your monthly take home paychecks to come up with what you should be stashing into savings each month, like this:

Monthly paychecks x 20% = Savings amount per month*

For example, if you receive a paycheck for $2,000, multiply by 20%, and direct that amount, $400, into a savings account each pay cycle. Assuming you are paid on a bi-weekly schedule, this would translate to stashing away roughly $800 each month.

*If you contribute to a workplace 401(k) retirement plan, take into consideration the amount
you’re already having deducted from your paycheck and factor that into your 20% savings allotment.

80/20 budgeting rule

With the 80/20 budgeting rule, the strategy here is to pay yourself first by putting 20% of your take home pay into savings and spend the rest. Considered a simplified version of the 50/30/20 rule, this rule of thumb is favored by those who don’t like budgeting, tracking spending, or are just getting started with the concept of budgeting.

Regardless which budgeting rule you choose to follow, both the 80/20 rule and the 50/30/20 rule recommend saving at least 20% of your paycheck.

What if you don’t make enough to allocate 20% of your paycheck to savings?

Regardless of what budgeting rules may say about how much of your paycheck you should be saving, stashing away 20% of your paycheck each month could simply be out of reach at the moment.

How much you’re actually able to budget for and save from your monthly paychecks could also fluctuate depending on certain temporary life circumstances. If you’re between jobs, live in an area where housing costs are higher than average, or paying for all of your dependent and medical expenses out of pocket, the amount you can realistically save from your paycheck each month will need to be balanced along with other financial obligations.

So,if saving 20% of each paycheck is more than you can handle right now, it’s perfectly reasonable to start much lower, say at 1%, 5% or 10%, then increase how much you contribute to your savings on an incremental basis, or when your financial situation improves.

On the other hand, if you’re at a point in your career where you’re in a position to save more than 20% of your monthly paychecks, congratulations.Increasing your savings contributions will help your savings balance grow that much faster.

No matter which position you find yourself in, once you’ve built up enough savings to cover the unexpected, you could talk to a financial advisor about how and where to invest your savings. Or, you could consider diverting some of those extra savings to other long-term goals you may have, such as a down payment on a home.

6 Ways to Save More of Your Monthly Paycheck

Saving up thousands (or hundreds of thousands) of dollars in a liquid or retirement savings account can feel next to impossible when combined with all your other financial responsibilities. That’s why consistently setting aside a small (but relatively significant) portion of your paycheck each month can help your savings balance grow steadily over time, without it impacting your overall budget.

Here are six more ways to save even more cash to help supercharge your savings goals:

1. Downsize your housing expense.

Keeping a roof overhead accounts for 26% of the average American’s household expenses. If you’re in a position to downsize your housing to reduce your rent or mortgage expense (by taking in roommates, renting out a room or garage, or moving to a lower cost housing market), it could free up a significant amount of cash that could be directed toward building up your savings at a much faster pace, improving your overall financial picture.

2. Increase your income.

Even if you keep a strict budget, sometimes there still isn’t much money to save. In this case, increasing your income by negotiating a raise, taking on freelance work, finding a higher paying job, or turning a hobby into a side business can significantly boost your ability to save more money at a much faster pace.

3. Negotiate your bills.

Depending on your coffee habit, eliminating take-out coffees from your daily routine may or may not make a big dent in your budget. However, negotiating big bills such as your auto insurance or rent, or smaller bills like cable and internet could help you lower your costs and allocate more to savings.

Also, look at any excess you could cut back on in these spending categories: entertainment, dining out, exercise classes, grooming, and leisure. While going to the gym and vacations are arguably necessary in many ways, just try to pinpoint any excessive spending trends or habits. Because spending less means more can go into savings.

4. Send cash windfalls directly into savings.

If your budget allows, allocating some, or better yet, all of your work bonuses, tips, commissions, tax refunds, or other cash windfalls into savings can help grow your savings faster. When your savings balance grows exponentially after depositing money from a cash windfall, it could provide the motivation you need to continue saving.

5. Automate your savings.

Consider automating your savings deposits each month. This simple step could help you save on a more consistent basis without having to remember to make each transfer. One automation option could be choosing to divert a percentage of your paycheck direct deposit to savings each pay period. You could also set up an automatic transfer of money from your checking account to savings account each month to grow your emergency funds.

6. Use savings apps.

Small amounts of money saved over time can add up to a lot. Some savings apps will round up your bank account purchases to the nearest dollar and “save” the change for you. Other apps will review your bank accounts to identify money you don’t need for bills and can be set up to save that amount for you automatically. Tools like these can be an easy way to top up savings, however, watch for any fees that would end up reducing your savings.

Guidelines for How Much You Should Have In Total Savings

How much you should be holding in total savings depends on what you’re saving for, and can be influenced by your income and how much time you’ve had to save.

Emergency savings

Most financial advisors recommend having at least three to six months’ worth of living expenses in liquid savings (money that you can access easily and quickly) to cover unexpected, emergency expenses. Money held in most checking accounts, high-yield deposit accounts, or money market accounts is generally considered liquid.

If the costs to cover your basic necessities, such as housing, food, clothing, transportation, and insurance, total up to $4,000 per month, for example, you would work toward a goal of setting aside anywhere from $12,000 to $24,000 in total liquid savings. If you’re self-employed, you might consider saving even more given the greater risk of potentially experiencing more months of unstable income.

Retirement (and large purchases)

In addition to building your emergency savings, it’s prudent to plan and save for big-ticket purchases, and, ultimately, for your retirement. So whenever you’re ready to buy that new kitchen appliance, put a down payment on that new car, or stop working full time, the money you’ve saved up for these purposes would be available and ready to draw from. Especially when it comes to planning and saving for retirement, it’s never too early to start.

Generally, most financial planners agree you will need about 70-80 percent of your preretirement earnings annually to support a comfortable retirement. According to the Social Security Administration, the average worker should plan on social security checks replacing only about 40 percent of annual preretirement earnings. And today’s youngest workers should expect to spend more years in retirement than previous generations. Saving for retirement is a lifelong endeavor and something that a financial planner can guide you in learning more about.

What If You Don’t Have Enough in Savings Yet?

If you face a financial emergency before you’ve built up your savings to the recommended level, there are other options that can help you make ends meet. Outside of borrowing the money from a friend or relative, a personal loan, for example, could help you pay down accumulated medical bills, car repairs, and high interest rate credit card balances.

Personal loans are installment loans that typically have fixed monthly payments and can be a more affordable way to borrow money than using a credit card.You can often prequalify for personal loans without a hard inquiry, so you can check rates, loan terms, and monthly payments without it affecting your credit score.

The Bottom Line

Knowing how much of your paycheck to save starts with knowing how much is coming in versus how much is going out, followed by sticking to a realistic budget. A good rule of thumb is to put at least 20% of your paycheck into savings each month. But if doing that isn’t possible right away, start by saving 5% or 10% of your paycheck each month instead, gradually increasing what you contribute to savings account over time as your income improves. Whenever possible, allocate a majority of any windfall paychecks or bonus money to savings.

However much of your paycheck you’re able to save, the idea is to establish a habit of saving consistently, and increasing the amount you save over time as your income grows. Savings provides peace of mind and is an important part to improving and achieving your overall financial health.