How Much Of Your Paycheck Should You Save Immediately?

how much of your paycheck should you save
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Most times people wonder how much they should save out of their paycheck; with most of their opinions hinged on the idea that the amount to be saved is normally determined by the amount earned and budget list. Well-well, that might be true.

Nonetheless, our team of financial experts has come up with an ideal answer to the question, how much of my paycheck should I save? Stay with me to find out.

Remember, what builds financial security is your personal saving rate and not necessarily your income and investment returns.

How Much Of My Paycheck Should I Save Every Month?

Many financial experts recommend saving 20 percent of your paycheck every month under the 50/30/20 rule.

According to the popular 50/30/20 rule, you should reserve 50 percent of your budget for essentials like rent and food, 30 percent for discretionary spending, and at least 20 percent for savings.

We agree with the recommendation to save 20 percent of your monthly income. But it’s not always that simple to suggest the right percentage of income for YOU to save.

You may be asking if we know how much you earn monthly and your monthly expenditure. Well, here’s the key point, the amount you save monthly will always be influenced by your income level and expenditure.

So, if your income is just enough to cover your basic expenses, you may want to look for ways to either increase your income or decrease your expenses.

Ideally, income minus expenses should equal a positive number which should make up as savings.

Why Should I Save 20% of My Paycheck?

As a 20 or 30-year-old earning a monthly income, the thought of a perfect retirement or enjoyable old age should be enough to spur you. Nonetheless, saving 20% of your paycheck will always benefit you.

According to Investopedia, Americans are notably bad at saving, and the nation has extremely high levels of debt. As of March 2022, Americans have $14.3 trillion in total debt, which includes $438 billion in credit card debt. The personal savings rate in 2019 was 7.6%, down from 11% in 1960.

Therefore, the 20% that goes to savings is designed to help people manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement.

Every individual and household should create an emergency fund account in case of unforeseen monetary costs or unexpected circumstances that will require money.

Therefore, you need to start saving at least 20% of your income to ensure a comfortable retirement.

How Do You Know How Much Of Your Paycheck Should Go To Savings?

Ideally, you need to monitor your expenses in line with your income for at least one full month. Afterward, break those expenses down into basic vs. discretionary costs and compare the amounts for each type of expense to your income for the month. Will it be galling to do?

For instance, let’s say your take-home income is $5,000 per month, and you discover that your basic expenses are $4,500 per month. In that case, 83% of your paycheck is going towards basic expenses, leaving you only 17% for both discretionary expenses and savings.

A reasonable savings percentage in that situation is 5-10%, depending on how much you feel you need for those day-to-day expenses.

Nonetheless, if your essential expenses are 83% of your paycheck, we might have to recommend you examine your expenses to find out where you might be able to cut those expenses down.

Let’s look at it from this other angle, if your non-discretionary expenses are $3,500 but your paycheck totals $7,000, you’re only spending about 42% of your income on basic expenses.

In situations like this, it won’t be bad if you put in more than 20% of your paycheck into savings and still have enough to serve as basic and discretionary costs.

Check out our top budgeting apps that will help you with more ideas on how to budget.

Where Should I Keep My Savings?

Interestingly, a good place for your savings is an interest-bearing account. This will not only help you separate your savings account from your day-to-day spending account but also accumulate interest as the savings pile up.

Keeping your savings in an entirely different account makes it easy to track how much you’ve managed to set aside. It also means you won’t unintentionally spend some of your savings on basic expenses.

Finally, earning a little interest is a nice way to increase your savings. You may want to check out how to save money at Starbucks.

Your non-retirement savings can go into any number of different types of interest-bearing accounts and financial products, from the regular savings account offered by many banks to high-yield checking accounts, certificates of deposit, money market accounts, and more.

Summarily, the best product for you will differ depending on your savings goals and needs.

RELATED POST: Money Market vs Certificate of Deposits: Which is better?

What Strategies Are Most Effective For Saving Money?

Money doesn’t come easily neither does the act of saving occur without personal commitment. To some, saving money can be a worrisome act especially when they feel they aren’t earning enough to match their essential expenses. Nevertheless, a success thinking individual is expected to save out of any amount that comes as income.

Our team of financial experts will walk you through the top five strategies to save money out of what you call meager.

Track your spending

If you need to create a savings plan, you need to know the amount that comes in and how you normally spend it. This sounds like budgeting, right? Of course, yes. In other words, you need a budgeting app to track your expenses.

Having firsthand knowledge of where and how you spend your money gives you an insight into how much you can save, how to make adjustments, and then how to set up a savings account.

Pay off your debts

If you fail to pay off your debts using the right method and at the right time, you’ll find out that you might spend a good percentage of your paycheck on clearing debts repeatedly which leaves you with little or nothing to save.

There are two basic strategies for paying debt: you can choose to pay off your highest-interest-rate debts first or pay off your smaller balances first. While the former makes more sense mathematically.

 Research shows that prioritizing your smallest balances, also known as the “snowball method,” is the most effective. Paying off the smaller debts while you make payments on the minimum debts makes it easier for you to pay off the bigger debts earlier than you thought while the smaller debts vanish.

On the other hand, if there are interest rates attached to any of the debts, your are advised to clear off the one with the highest interest rate.

When you pay off your debt, you free up your money for financial goals and savings.

See our 17 Brilliant Ideas to Pay Off Debt Faster than Ever.

Budget for savings

Once you have a clearer idea of what you spend per month on essentials, you can begin to organize your expenses in a workable budget and adopt a saving formula.

Your budget should outline how your expenses measure up to your income—so you can organize your spending and limit overspending.

Adopt a saving formula

This entails choosing a percentage out of your monthly paycheck that strictly goes to savings. Adopting the 50/30/20 principle will be a great one.

This will further help you in goal setting and budgeting.

Consider your savings first

The easiest way to do this is by making the payment into your savings account automatic. This will help prevent you from spending the money meant for savings on other essential things or even miscellaneous on your budget.

Therefore, set up a recurring transfer from your checking to your savings account every payday.

Almost all banks offer automated transfers linking your checking and savings accounts. You can decide when, how much, and where to transfer money or even cut your direct deposit so a portion of every paycheck goes directly into your savings account.

Final Thoughts

Saving is much more difficult than earning. By sticking to the 50-20-30 rule, individuals have a plan with how they should manage their expenses while creating room for savings.

In as much as life is meant to be enjoyed, a little percent to savings won’t hurt. It will always be there to save you.

When you have savings, you’ll look more comfortable and assured with yourself.

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