Emergencies happen, and saving money for a rainy day can make them less financially stressful. However, many Americans don’t have much extra cash set aside.
The median non-retirement savings for Americans under 35 is $3,240, and $6,400 for those ages 55-64, according to the Federal Reserve’s Board Survey of Consumer Finances data. Sadly, one surprise car repair or medical bill could potentially wipe out this amount.
So, how much of your paycheck should you save? This post addresses the percentage of income to save based on popular budgeting advice and tips for stashing away money.
In This Article
How much of your paycheck should you save each month?
What you should save from each paycheck will depend on your financial situation, and using common budgeting strategies can help guide your savings plan.
The 50/30/20 rule is a guide for how to budget that says you should use 50% of your income on living expenses, 30% on nonessential spending and 20% on saving or paying off debt.
If you earn $3,000 after-tax per biweekly paycheck, here’s how the budget would play out:
- 50% (needs): $1,500 for housing, food, gas, insurance, cable, wireless, minimum payments for loans or credit cards and other essential bills.
- 30% (wants): $900 for nonessentials like takeout, entertainment and more.
- 20% (saving and debt): $600 for emergency and retirement savings or debt repayment.
Notice that you have some flexibility to split up the 20% saving percentage category based on your goals. If your emergency fund is running low, you might decide to focus a larger portion of that 20% on growing your rainy day fund. And if saving a full 20% is difficult, you can work up to that amount as you get raises, promotions, or grow your income through different side hustles.
How much should you save overall?
In total, experts suggest having at least six months of living expenses tucked away in case you lose a job.
For example, when you need $3,000 monthly for essential expenses, you should put $18,000 away for a rainy day. However, you should adjust that goal based on job security. Self-employed workers, for example, might want to save more due to inconsistent income.
Once you reach the amount of emergency savings you’re comfortable with, you could devote a larger portion of that 20% category to other goals like paying off a debt or saving for retirement.
It’s recommended to devote 10% to 15% of your pre-tax income to retirement (including employer contributions) each year. You can work up to that amount if you can’t save that much immediately.
Where should you put your savings?
The right place to put your savings will depend on what the savings is for. When it comes to saving vs. investing spare cash, it’s a good idea to keep a bit of emergency savings in an account where you can draw money quickly in a pinch without penalty.
For money you don’t need regular access to, investment accounts may provide you with a higher return on your money — but also note that investments in stocks, bonds or funds can lose value if the market takes a downturn. Here are the types of accounts to consider:
- High-yield savings accounts: Offer a higher-than-average Annual Percentage Yield (APY) than traditional savings accounts.
- Tiered-savings accounts: Offer an APY that increases incrementally as your balance grows.
- Certificates of deposit (CDs): Offer a fixed interest rate for a fixed term. CDs are good for savings you don’t need because withdrawing money early could result in a penalty fee.
- Retirement accounts: Tax-advantaged accounts like 401(k)s, IRAs or Roth IRAs are places to park long-term retirement savings and earn a return on money invested.
- Brokerage accounts: Taxable accounts don’t offer the same tax advantages as retirement accounts but could be another place to invest long-term savings for wealth building and other goals.
4 tips to figure out how much to save each month
How much of your paycheck should you save? Here are tips that can help you figure it out:
1. Check your savings balance
Review how much money you have stashed away. If you live with a partner, consider how much you jointly have in savings to cover emergency bills and long-term goals.
2. Set savings goals
Decide how much you want to save and set a realistic deadline. For example, if you’ve $5,000 in emergency savings and want to bump that up to $10,000 within six months. Over six months, you could plan to deposit about $833 per month (or $417 per paycheck) to savings. And if that’s not doable, you could spread out your goal to save $5,000 in nine or ten months instead.
3. Create a budget
Budgeting and tracking your spending throughout the month can help you find ways to cut down on spending so you can save more.
4. Decide where to put your savings
Saving money in an account that’s connected to your checking account can be convenient — but you could also be tempted to transfer money out for non-emergencies.
Shopping around for a separate high-yield savings account could help you earn a greater return on your money. And when money is in an account that’s less accessible, it could be easier to save without dipping into your cash.
Saving is a cornerstone of any financial plan
Managing savings is an important financial task because it provides a financial cushion and can help you meet short-term and long-term goals. If savings ever fall short, borrowing money could help you bridge a financial gap.
Getting a personal loan through Prosper can help cover personal expenses, including unexpected bills. Shopping around, comparing rates and prequalifying for loans are ways to review borrowing costs and determine if a loan makes sense to cover your financial emergency.
Written by Taylor Medine
Taylor Medine is a writer who’s covered personal financial topics from budgeting and saving to paying down debt for more than eight years. She got her start demystifying intimidating money topics for the everyday consumer on a personal blog, and has since been published on Experian, Forbes Advisor, Credit Karma, and more.
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