Saving money is important. Everyone knows that. But how much should you actually save from each paycheck? That is a bit trickier to figure out. And that’s because it depends on your income, expenses, and other factors. This article will discuss how much you should aim to save each month and why it’s so important. I’ll also provide some tips on how to get started!
In This Article
Why you can’t save
Saving money is one of the most important things you can do for your future. But unfortunately, it’s also one of the most challenging things to do, and unless you have strong enough reasons, you will never be able to save money.
So, why should you make saving a priority? Is saving money really important in life? Shouldn’t you just spend and enjoy your money instead of saving it? Here are six important reasons why you should start saving money today.
- For emergency purposes
- For retirement
- For financial freedom
- To pursue a dream career
- To take advantage of rising interest rates
- To save for a house down payment.
To understand why these reasons are so compelling, read more about them here.
So how much should you save every month?
The most popular suggestion among financial advisors is to save 20% of your income. The advice comes from the 50-30-20 rule, which proposes spending 50% of your salary on needs, 30% on wants and 20% on savings.
While it’s excellent advice, you should also note that there’s not a one size fits all answer and that it’s not suitable for everyone. The amount you should save from each paycheck is unique to your lifestyle.
Nonetheless, there are three strategies to choose from, to help you get started with saving.
- Use the 50-30-20 rule
- Save based on a goal
- Save based on your income and expenses
Let’s look at each strategy to determine which is best for you and how you can get started.
Read More: Why am I broke all the time? 10 Reasons why and how to fix it.
1. The 50-30-20 Rule
The 50-30-20 rule is a popular budgeting method that many experts and financial advisors recommend.
The rule suggests that you spend:
- 50% of your income on necessities like rent/mortgage, food, and other bills
- 30% on wants or discretionary spending like eating out
- and 20% on savings.
The savings category is broad and includes
- emergency fund contributions
- retirement contributions
- other short-term savings, e.g., a holiday, a down house payment
The money you put into savings can also be used to pay high-interest debt like credit card debt.
Read More: How To Protect Your 401(k) From A Market Crash in 2022
How to allocate the 20% savings
As an example, let’s say you earn $3500 after taxes, you should aim at saving 20% of it, which amounts to $700 every month.
If you put 6% of your income towards your 401(k) retirement contribution, that adds up to $210, and it means that you still need to put $490 into your savings account.
Beyond these allocations, you have an opportunity to save money to achieve financial independence and retire early.
While working till 65 is still an option, consider if you might want to retire earlier and enjoy life before you’re too old.
Expert analysis shows that if you can start saving 20% from each paycheck as soon as you enter the workforce in your 20s, you have a good chance at achieving financial freedom before the traditional retirement age.
The 20% savings rule, while great, is just a general guideline and is not suitable for everyone. The next best option is to save towards a particular financial goal.
2. Save based on a goal
You might never be successful at saving money if you save just for the sake of it or if you’re chasing a vague idea of ‘saving more.’
What works better is having a goal attached to your saving. A goal that you really want to achieve will help you stay motivated and maintain laser focus on your saving plan.
For example, let’s say you’d really like to build an emergency fund just in case you lose your job. That’s a compelling enough goal to warrant creating a savings plan that you can stick to.
So here are the steps that you’d take to achieve that goal:
- Decide on a goal (e.g., starting an emergency fund)
- Determine how much you need to achieve the goal (e.g., $18000)
- Set a savings deadline (e.g., 12 months)
- Calculate how much you should save each month (e.g., $1500)
- Automate your saving
- Track your progress until you accomplish your goal
The above steps help you break down the goal into smaller, achievable goals that you can accomplish each month.
For instance, while the goal of saving $18,000 into your emergency fund might seem unachievable at first, when you break it down into savings of $1500 a month for 12 months, the goal suddenly looks achievable.
So, let’s take a look at each of those steps and make it even easier for you to get started with your savings goal.
Read More: How to Set and Achieve Any Financial Goal. 4 Easy Steps.
Decide on a goal
I’m sure there was a time in your life when you wanted something really bad. But, in order to get it, you needed to look at exactly what that goal would cost and whether or not you had the means to reach it. If this sounds familiar, congratulations! You’re probably a financially responsible adult.
The same rules apply to your savings goals. How much you save is dependent on the goal you set and how much money you’re able to put away each month or paycheck.
Examples of financial goals that you can strive to achieve are:
- Start saving in an emergency fund
- Saving for retirement
- Paying off debt (credit card debt, student loan, car loan)
- Saving for a house down payment
- Investing in college education (for you or your child’s)
- Saving for a vacation
- Saving for a major expense (renovation) or a major purchase (car, TV, computer)
Determine how much money you need to accomplish your goal
Using our example of saving for a rainy day, you need to determine the total amount you’d like to have in your emergency fund.
As a general rule, you should have about six months worth of expenses in your emergency fund. So let’s say your expenses add up to $3000 each month. Your goal would be to have $18000 saved in your emergency fund.
Set a savings deadline
Next, set a deadline for your goal. To do this, you might have to ask yourself the following questions:
- Do you have a time limit for your goal? For example, how many months or years do you have to accomplish the goal?
- How long do you think it should take you to get there?
Some goals are short-term, while others are long-term. For example, if you want to buy a car by the end of next year, that should be a short-term goal, while saving for retirement will be a long-term goal as you’ll need to save up more money and may need to plan for it at different points in the future.
Coming back to our example of starting an emergency fund, let’s say you’re anticipating that the economy might turn for the worse in about a year, and so you’d like to have your finances in order by then. That would mean setting a savings deadline of 12 months.
Setting a timeline for your savings goal sets you up for success.
Calculate how much you should save from each paycheck
Now that you’ve determined your savings goal, the total amount needed, and your savings deadline, calculating how much you should save every month should now be effortless.
Assuming you’ll be saving from each paycheck every month, all you need to do is divide the goal’s total amount by your savings deadline(no. of months).
Using our example, the total amount needed is $18,000, and the deadline is in 12 months. Dividing the two results in $1500.
$18,000/12 = $1500
So, in short, $1500 is how much you should save every month to reach your financial goal.
Automate your saving
It can be challenging to stick to a savings plan, and one would require a great deal of discipline to avoid overspending. Studies show that relying on willpower doesn’t always work. We are all human beings, and we tend to make decisions based on impulses. We reactively respond to circumstances instead of proactively doing what’s best for ourselves.
While it might seem trivial, this step is one of the most important things you can do to set yourself up for success in your saving journey.
Automating your finances is the best strategy to help you stick to your savings plan. Automation will ensure that the savings amount is automatically transferred from your checking to your savings account every month. You won’t even miss it, and you’ll be surprised at how much money you can save over time!
To do this, you’ll need to set up an automatic transfer through your bank’s website.
Track Your progress
Keep track of your progress so you can assess where you are and celebrate your accomplishments. When you see your progress, you’re more inclined to want to keep going. And, of course, once you’ve achieved your goal, that feeling might motivate you to work on your other objectives — and to create new ones.
One way to track your progress is to use a budgeting tool like Mint, or YNAB (You Need A Budget). These tools connect to your bank account and help you see how much money you’re spending and how much you’re saving.
Another way to track your progress is to set up a spreadsheet or use a notebook. This can be a little more time-consuming, but it’s a great way to get more detailed information about your savings goals.
Once you get the hang of it, savings can even become addictive. It’s exciting to watch your savings accounts grow over time as you continually make contributions.
3. Save based on your income and expenses
“So, what if I can’t save 20% of your income, let alone put aside any money into an emergency fund?” I can already hear you asking.
Well, don’t fret. Don’t worry if saving 20% of your income is not reasonable for you. It’s okay to start small. After all, saving any amount is better than not saving at all.
Besides using the 50-30-20 rule and saving based on a goal, you can choose to save based on your income and expenses.
The only thing you need to do is identify how much you can afford and make sure it’s a number you can stick to. This may mean setting aside just $10 or $20 per paycheck at first.
With this strategy, how much you save each month depends on how much you earn and how much remains after taking care of all expenses.
To maximize your savings, you’ll need to create a budget and determine what expenses are necessary and which ones can be reduced or eliminated.
Here’s how you can go about saving based on how much you can afford.
Read More: How to Gain Control of Your Spending. 3 Simple Steps.
Figure out your net salary by subtracting taxes and other deductions from your gross pay
When you’re figuring out how much you can afford to save each month, it’s important to know your net salary – that is, your take-home pay. This number will differ from your gross income, which is the amount you make before any taxes or deductions are taken out.
To figure it out, you need to subtract taxes and other deductions from your gross pay.
Figure out how much you’re spending
In addition to your take-home pay, it’s equally important to know how much you spend each month on essential expenses as it will give you a better idea of how much money you have leftover to put toward savings.
There are two ways you can go about it. The first option is to add up your expenses manually on a spreadsheet by listing all your bills and discretionary expenses. The other option involves using a tool like Mint or YNAB (You Need A Budget) to track your spending and tell you exactly how much you spend each month.
Once you know how much you earn and spend, you can quickly figure out how much you have left to save.
Commit to saving what’s left from your budget
Now that you realize how much you can afford to save, it’s crucial to commit to sticking to your savings plan, no matter how small the savings amount is. This means setting aside the money each month and not spending it on unnecessary items.
If you find that you’re struggling to meet your savings goal, consider using a budgeting app(YNAB or Mint) or tracking your expenses so you can see where your money is going. By being mindful of your spending, you’ll be more likely to stick to your savings goal in the long run.
Also, consider automating your savings so that the money is transferred directly from your bank account to a savings account immediately after you receive your paycheck.
Make it a habit to review your finances every month.
Reviewing your finances every month will not only help you stay on track with your savings commitment but will also keep you motivated when you see your savings grow.
Additionally, it will help you figure out whether some expenses can be reduced or eliminated to free up cash for saving.
Celebrate each milestone
Finally, I’d encourage you to celebrate each milestone along the way, like when you hit your first $1,000 saved or when you’ve saved up to six months’ worth of living expenses. It will help keep you motivated and make the process of saving for the future more enjoyable.
Read More: 6 Budgeting Tips that Really Work!
So, how much should you save from each paycheck?
Following the 50-30-20 guideline and saving 20% is the ideal path to take when determining how much you should save every month.
But remember, it is only a general guideline. You may be able to afford to save more or less depending on your income and other financial commitments.
The important thing is to make sure you’re putting money aside regularly so you can reach your savings goals.
Don’t delay saving because you think you don’t have enough money. You can start with as little as $10.
Read More: How to Stop Living Paycheck to Paycheck