You’ve always heard it’s important to save as much as you can, but what does that really mean? Realistically speaking, saving can be hard once your paycheck hits your bank account. Bills, necessities, and extra wants may slowly diminish your hard-earned check.
If you struggle with paying into your savings first, you’re not alone. It turns out, many Americans live paycheck to paycheck, and 65 percent don’t know how much they spend on a monthly basis. With considerations like these in mind, how much of your paycheck should you save?
In the first chapter of our retirement savings series, we discussed how much you need to retire and how to save for retirement, but now we’ll be going over how much of your paycheck to save.
If you want to have a solid retirement fund, it’s important to start saving as soon as possible. Creating a financial plan that details how much of your check you should save each month will help you better prepare for retirement. To find your ideal savings goal so you can have a retirement budget you’re comfortable with , keep reading or use the links below to navigate the post.
Why Is It Important to Contribute to Savings Every Month?
The earlier you contribute to your retirement savings, the more you’ll have saved up when it’s time to clock out for the last time. It’s also easier to save for retirement when you’re young and have less responsibilities. You want to aim to have a high savings rate, which usually means you’ll either be able to retire earlier or have more money during retirement.
There are many benefits of contributing to savings every month, such as:
- Compounding interest: Compound interest will add significantly to your retirement savings, especially if you start saving early on. Compound interest is the process of earning interest on your original earrings and then continuing to earn interest on top of that.
- Peace of mind: Contributing to your retirement savings each month will also give you peace of mind that you’ll have enough money saved up, especially if you’re planning on early retirement.
Now that you know the why of it, we’ll help you answer “how much of your paycheck should you save?”.
How Much Should You Save Each Month?
So, how much should you save from each paycheck to prepare for retirement?
Based on the 50/30/20 rule, 20 percent of your income should go to savings and retirement. The remainder of your paycheck is then divided up between necessities and wants, with 50 percent going towards necessities, like rent, and 30 percent towards your wants.
While you should at least strive to put 20 percent of your income towards debts and savings, try saving upwards of 30 to 50 percent. You may never know when extra savings could come in handy.
|How Much of Your Paycheck Should Go Where?|
How Much to Save for Every Goal
After putting 20 percent of your income towards savings each month, you may increase your payments to reach bigger financial goals. For instance, if you’re wanting to buy a house in the next year, you may want to save extra to meet that goal.
1. For Emergencies
If your tire blows out or your roof starts leaking, you may need some extra cash to get you back on your feet. Typically, you should have at least three to six times your monthly income stored in your emergency fund. If that seems like a lot, set a smaller goal at $400–1,000 to get you started. Keep in mind, this can fluctuate depending on your lifestyle and goals.
2. For Retirement
Years down the line, you’ll be grateful for your generous retirement savings. As a general rule of thumb, you should allocate 15 to 20 percent of your income for retirement. Retirement accounts include a 401(k), Roth IRA account, or an employer investment match account.
Set up automatic payments each paycheck to ensure you’re setting your future up for success. The answer to “how much of your check should you save for retirement” will differ for every person and their financial situation, but you can also use a retirement calculator to help figure out a number based on your income and age.
Having a 401(k) is crucial when it comes to retirement savings. Typically, an employer will offer a 401(k) retirement plan, and you may want to take advantage of it, especially if they will match your contributions. There are some 401(k) contribution limits, which essentially states the maximum amount of money you’re allowed to contribute to your 401(k) plan every year. The average 401(k) balance you should have differs for each age group.
3. For Investing
If you have extra financial flexibility, consider increasing your investments as your income grows. Low-risk investments, index funds, and bonds are a few investment options. Before making an investment, evaluate which purchase could benefit you and your bank account most in the long run. Keep your investment time horizon and risk tolerance in mind, too. You’ll want to avoid making common investing mistakes that could limit the potential of your portfolio and lose you money unnecessarily.
If you want to start investing as a way to save money for retirement, there are a few essential investment accounts that are ideal for retirement savings, like a 401(k) or IRA.
These accounts are all examples of tax-deferred savings, which essentially means you don’t have to pay taxes on the money until it’s withdrawn, which typically doesn’t happen until after retirement.
4. For a Big Purchase`
When you’re saving for a big purchase, start by breaking down your savings goals. Sit down and write out your top savings goals and what steps you need to take to reach them. Are you wanting to save for college or buy a new car? Put those goals in motion by creating specific, measurable, attainable, realistic, and time-sensitive (SMART) action plans to get you there.
Where Should You Put Your Savings?
Different savings goals may fit different savings accounts. Long-term savings (5–10+ years) typically benefit you the most in investment and retirement accounts. Short-term savings (0–5 years) may be better suited for savings accounts. Strategically planning out your savings goals can help you maximize your investments and avoid penalties.
- Checking account: Not all checking accounts offer growth opportunities. These accounts are used for everyday purchases like your rent, WiFi, and groceries.
- Savings account: Savings accounts are interest bearing and are often used for short-term savings goals. These accounts are easily accessible in case of an emergency and help grow money that’s not being used.
- Money market account: Money market accounts typically offer higher yields and fluctuate with the market itself. These accounts often have minimum balance and other maintenance requirements. In some cases, higher balances could unlock higher yields as well.
- Contribute to your 401K: Investing in your 401K sets you up for retirement. 401K contributions have the potential to grow your investments significantly and lower your monthly taxable income.
- If you’re tempted to cash out your 401(k) early as a way to pay off debts, it’s very important to weigh the pros and cons as doing so can cut your investment earrings and push back your retirement date.
- Roth IRA: A Roth IRA account is an individual retirement account that is typically not taxed upon distribution. A Roth IRA might be better for you than a 401(k) if you expect to be in a lower tax bracket later in life or if you want to receive a tax deduction now.
What If You Can’t Save as Much as You Want To?
You may wish to save your whole paycheck, but everyday expenses like rent and groceries are common necessities. Whether you’re saving for a house or your emergency fund, save what you’re able to. Below are a few ways to make room for your savings goals:
- Budget for your lifestyle: Having a budget is an important part of planning for financial success. Sit down and see where your money’s going. Highlight unnecessary expenses that could be cut out of your budget. Instead of getting takeout coffee every day, treat yourself to a weekend coffee to spare your budget. You also may have to make some changes for where to retire so that you don’t use up all your retirement savings just so you can afford to live in a particular area. You can also use a budget tracking template to help get your budgeting in order.
- Make a change jar: Dig for a jar or old cup in your kitchen. Set it on your counter and tape a paper “Savings” label to the front of it. Every time you have spare change or a five dollar bill, add it to the jar. Take your jar to the bank each month to see what extra savings you rounded up.
- Practice a frugal mindset: Evaluate your life to see what you could do away with. Do you still have that extra chair taking up space in your living room? Post it online to see what extra money you could earn and what stress you could alleviate.
- Pay savings, then yourself: Set up automatic payments to your savings on payday. After a while, you may treat this budget adjustment like a regular bill that needs to be paid each month. This is called the pay yourself first method, and it can help you prioritize savings for retirement and other financial goals.
- Diversify your income: Creating different revenue streams provides a safety net for any money sources that dry up. If you have extra time to spare each month, consider starting a passive income project. Creating a YouTube channel or blog are just a few ways to invest time into your passion and diversify your income.
- Sell items you don’t need: A quick solution if you find that you can’t save as much money as you wanted to is to sell items you don’t need. This can be anything from clothing to furniture– pretty much anything that’s worth some value but that you don’t use anymore.
Making Retirement Savings a Priority Now Is Essential
Deciding how much of your paycheck you should save can be difficult. However, even though saving can sometimes be hard to start, it’s one of the key factors of living a financially free lifestyle. Whether you’re wanting to leave your high-stress day job or retire early, your savings is what gets you there. The amount you should save each month should be no less than 20 percent of your income. Yet, if you have bigger goals, you may want to save more. Download our app to set your savings goals and ensure you stay in-tune with your progress.
If you feel like we’ve answered “how much of my paycheck should I save?”, you can move onto the next chapter in our retirement series, which is about how to make a budget to save for retirement.
Sources: United States Census Bureau
This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.
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