How Much Of Your Paycheck Should You Save?

Wondering how much of your paycheck you should save? The answer depends on your current financial situation – including your take-home pay, savings goals and any debts.

To figure out how much of your monthly income you should save to reach your goals, you’ll want to look at your budget as a whole and how it is divided between needs, wants and savings.

How Much Of Your Income Should You Save? (The 50/30/20 Method)

The 50/30/20 method is a budgeting rule of thumb that offers a good starting point. It's a relatively straightforward guideline that divides your income into three spending categories with corresponding percentages: your needs (50%), wants (30%) and savings (20%).

Set Aside 50% For Immediate Needs

Ideally, you’ll put 50% of every paycheck into a checking account to cover essential expenses. Essential expenses are things like rent or mortgage payments, utilities, transportation costs, groceries, health care bills and debt payments.

Treat Yourself With 30% Of Your Income

Once you account for essentials in your budget, the next 30% of your paycheck goes toward your nonessential wants. This includes clothes shopping, dining out, hobbies and entertainment.

Earmark 20% For Your Savings Plans

If you’re able to meet the guidelines for your needs and wants, the final 20% of your paycheck goes toward savings. This may include large savings goals, such as saving for a home, or revolving savings goals, like going on vacation. For example, if your paycheck amounts to $1,000, then you would dedicate $200 to savings. You can even use direct deposits to transfer this percentage of your paycheck into a high-yield savings account or a brokerage.

The 50/30/20 rule isn’t a hard-and-fast policy and may be difficult to meet depending on your income and whether you live in a high cost of living area. That said, it  provides a starting point for budgeting that you can customize it to suit your specific needs.

Where Should Your Savings From Each Paycheck Go?

Now that you know what percentage of your paycheck should go to savings, it’s time to determine what you’re saving toward. Dedicating a specific savings account at a bank or credit union for specific savings goals can help you better track progress.

1. Emergencies

Unexpected situations can arise, and it’s important to be prepared. An expensive vehicle repair, a medical bill or a job loss can cause a lot of financial strain. To provide a helpful cushion, you might consider opening a separate account for a designated emergency fund.

Experts recommend having enough to cover at least 3 – 6 months’ worth of living expenses. That way, if you lose your job or can’t work, you'll have less stress about paying your bills or having the money to cover groceries and other necessary costs.  

2. Retirement

Most financial experts encourage Americans to start contributing to a retirement account as soon as possible. The earlier you start setting money aside for retirement, the more financially secure you’ll be when you retire. While you don’t need to reach a definitive amount to retire, you might want to start saving as early as your 20s.

To make managing your retirement savings easier, you can choose different types of retirement accounts. Common retirement plans include individual retirement accounts (IRAs), like traditional and Roth IRAs, as well as 401(k), 403(b) and Simplified Employee Pension (SEP) plans.

3. Major Life Events

A good savings plan can also help fund large purchases or major life events. You can strive for a down payment on a house, a new car, your college tuition or an upcoming vacation.

Big purchases can take time, so consider creating a timeline for saving. Incorporate your savings goals into your existing budget. For example, if your goal is to buy a house within a few years and you want to make at least a 20% down payment on the house, you’ll have to factor this potential cost into your current budgeting plan.

Again, this might mean cutting back on spending in other areas – like dining out or attending concerts – to achieve your goal of homeownership.

4. Investments

You might also think about devoting a portion of your savings to investments outside of your retirement accounts. Think about evaluating the risks associated with different investment types before making any decisions. A low-risk investment means it’s unlikely you’ll lose money, but other types of investments have higher rates of return.

Some relatively low-risk investments include treasury and corporate bonds, preferred stocks, mutual funds and fixed annuities. When dealing with investments, it’s often smart to have an emergency fund as a safeguard for losses. Also consider talking to a financial advisor before investing.

How To Save Money From Each Paycheck

Budgeting strategies are not one size fits all, and you may find that some strategies fit your situation better than others. Here are a few general tips to help you meet your savings goals.

Stick To Your Savings Goals

Staying committed to achieving your savings goals is essential. While savings techniques like the 50/30/20 rule can be flexible to your changing needs, it can be easy to stray from your plan.

Using the Rocket Money app, you can easily set up a custom savings goal or use our Smart Savings feature to save automatically based on your spending habits. Using another method, you might deposit money from each paycheck directly from your employer into your savings account. If you struggle to make manual savings deposits, the automated savings route might be the best option for you.

Regardless of the method you choose, try your best to not dip into your savings when you need a little extra cash – especially if it’s for a want rather than a need.

Review Your Budget

Not saving as much money as you hoped? It might be time to revisit your budget. Look at the fixed and variable costs to which your income is going.

You can also easily set up a budget and view trends across spending categories using the Rocket Money app. Do you see expenses you could avoid or areas where you’re overspending?

To bolster your savings, consider cutting certain areas in your budget – like the money you set aside for streaming service subscriptions or dining out. It might also help to review your budget monthly or bimonthly.

Reviewing your budget is especially wise if you get a raise, start a new job or have some sort of change in your monthly bills, which could be a great opportunity to save even more

Minimize Credit Card Debt

You may find it difficult to save consistently if you have significant credit card EBT.

If you’re struggling to save money, after building up a small emergency fund, prioritize paying off your credit cards first. You'll not only reduce your overall debt burden but have more income over time to put toward savings once your debt-free. Plus, you won’t be throwing away money on interest payments every month.

FAQs: How Much Of Your Income To Save

Setting savings and budgeting goals can bring up a lot of questions. Here are the answers to questions people often ask about setting aside income for short- and long-term saving.

How much of a $1,000 paycheck should I save?

Under the 50/30/20 rule, a person with $1,000 of take-home pay should put about $200 toward savings. This can include saving for short-term goals and retirement. If your expenses are lower than 50% of your income, you might choose to save more than $200 of your paycheck for an added cushion.

What percentage of my paycheck should I put in savings?

Typically, saving 20% of your take-home pay is recommended. But if you have a higher income and find you can get by spending 70% of your income or less per month, you can consider saving more. This can set you up nicely for major life purchases or even an early retirement.

Is 20% of your salary enough to save?

Saving 20% of your income is a solid place to start, though whether this is enough to meet your goals will depend on your income and the size of your savings goals. Further, circumstances always change, so you can adjust the percentage according to your current financial situation. For example, if you get a raise, you might consider bumping the percentage up to 25%. If you have a financial emergency, you can also reduce it for a while.

What if I can't save 20% of my income?

Even if you can't save 20% of your income, save at least some consistent percentage and look at your budget to find opportunities to cut your spending. Turning some of those expenses into savings can bump your percentage up. Even if you've trimmed all your expenses and can't get to 20%, don't let that stop you from saving what you can.

The Bottom Line: Saving 20% Of Your Income Is A Great Start

According to the 50/30/20 budgeting strategy, you should put about 20% of your paycheck in savings. Of course, you can save more depending on your personal financial goals. For example, you might reserve a portion of this percentage for a retirement account, unexpected expenses, a family trip or a home purchase.

Managing your savings starts with a comprehensive understanding of your budget, spending habits and overall financial profile. Want to see all your finances in one place to help achieve your savings goals? Sign up for the Rocket Money app today.