How Much of Your Paycheck Should You Save?

When you start looking ahead to your financial future, saving up money is often a key consideration for meeting your goals. And once your income covers your bills and other necessities with money to spare, you may find yourself wondering just how much of that surplus you should be setting aside for the future. Saving a percentage of your paycheck every month can help you build up an emergency fund, reach your savings goals, and invest in your long-term financial future. 

By understanding your income and expenses, you can create a budget using the 50/30/20 budgeting rule and determine just how much of your paycheck you should save or invest each month.

In this article, we’ll cover:

• Saving with the 50/30/20 budgeting rule
• When to break the 50/30/20 budgeting rule
• What to do with your savings
• Where to keep your savings

Determine your income and expenses

The first step to any savings strategy is to create a budget that will allow you to plan a specific amount to save after your expenses are covered each month. To get started, you’ll want to understand your income and expenses. That’s how much money is coming in and where it’s currently going. 

A good way to do this is to add up your income and expenses for the last two to three months, then calculate the average to get a sense of your usual monthly financial picture. Looking at a few months’ worth of financial records helps ensure you capture expenses that don’t come up every single month, and it’s especially important if you don’t make a consistent paycheck. 

To identify income, add up all the money you take home, which might include your paycheck, money from a side hustle, and payments from things like child/spousal support or government programs. Then take a look at your expenses: everything you’re spending your money on, including both necessities like bills and groceries as well as discretionary spending on things you want but don’t necessarily need. 

With a clear picture of your income and expenses in hand, you’ll be prepared to create your budget. 

Use the 50/30/20 budgeting rule 

The 50/30/20 budgeting rule can help you determine how much of your paycheck you should save by assigning every dollar you make to a bucket, determined by the percentage of income. 50% of your paycheck goes to your needs, 30% to your wants, and 20% to your savings/investments. 

What you consider a need versus a want is inherently personal and based on your unique situation and goals. For example, the nature of your work may require you to purchase a more powerful laptop. For you, that’s a need if you cannot do your work without it. Someone else may be able to accept a cheaper alternative, and a nicer computer would be considered a want.

Here’s how the buckets break down:

• 50% to needs: Everybody has different needs, but you can think about them as your necessary expenses. Typical needs often include rent or mortgage payments, utilities, insurance, car payments, groceries, debt payments, etc. Depending on your circumstances, needs also may include recurring medical costs, caretaking for a child or family member, education-related costs, public transportation, pet costs, tithing, and more. Look at your recurring expenses over the past few months to identify the expenses you have to cover each month and include them in your needs category. 
• 30% to wants: This category incorporates things like hobbies, vacations, dining out, streaming services, gym memberships, and recreational activities. The breakdown could end up encompassing many small expenses, like eating out, or a few larger ones, like a vacation or phone upgrade. Remember, it’s only a “want” if it isn’t necessary. For example, if you have to go to physical therapy to treat a medical condition, that’s a likely need, not a want. If you prefer the gym treadmill to running outside but could take the alternative, a gym membership may be just a want. It depends on what’s truly important to you.
• 20% to savings and investments: How you save and invest can also look different. You may want to focus on short- or medium-term saving goals like education expenses, a house or car, and building your emergency fund. Or you might want to invest for the long term with a brokerage account, an IRA or 401k for retirement, or an investment account for your children’s future education. Whether you’re saving for short-term goals or investing in your long-term financial future is very dependent on your situation. It is recommended that you start by building an emergency fund with enough savings to cover up to six months of expenses before moving on to other savings goals. 

When to break the 50/30/20 budgeting rule

Of course, how much of your paycheck you should save will depend on several factors, and the 50/30/20 rule doesn’t have to be exact. You may need more than 50% of your income to cover your needs, or you may need to save/invest more than 20% of your income to reach your goals. If you have a lot of debt or live in a high-cost-of-living city, for example, you may end up committing 60% of your income to needs, 20% to wants, and 20% to savings/investments. Or, if you’re saving for something important, you could rethink your breakdown and temporarily use a 50% needs, 20% wants, and 30% savings strategy. 

The 50/30/20 budgeting rule is a framework, and how you adjust it is dependent on your financial situation, lifestyle, savings goals, and needs. Here are a few specific scenarios in which you might want to allocate your income to categories a bit differently.   

High or low expenses vs. income

If your expenses are more than 50% of your income, you’ll need to adjust your budget strategy to compensate. First, identify what expenses are wants versus needs. If they’re mostly needs, adjust the 50% to cover the amount required. If they’re mostly wants, look for opportunities to reduce these costs to get closer to 30%. Even if you can’t commit 20% of your monthly income to savings/investing, you can still find ways to save money. Your priority is creating a realistic budget that works for you; saving 10% of your paycheck, or even just $10 or $20 a week, will build up over time. 

If your needs are less than 50% of your income, you have an opportunity to put more money into savings and investments. This is a chance to avoid lifestyle creep, which is when you artificially inflate your needs or wants to fit a higher income, and instead double down on achieving your financial goals. For instance, if you get a raise at work, you might consider putting some of that additional income toward your savings goals instead of increasing discretionary spending.

Large amounts of debt

If you have a lot of debt, especially high-interest debt, it may make sense to focus on paying down your debt before committing to saving 20% of your income. You’ll still want to maintain a healthy emergency fund, as emergencies can’t be avoided or predicted, but devoting more of your income to paying off debt faster will help you pay less in interest over time and could relieve some pressure on your budget. You can utilize the avalanche method, in which you pay your debts from the highest interest rate to the lowest, or the snowball method, where you pay down debts from the smallest to the largest amount. Once you’ve paid off your debt, you can re-adjust the framework and commit more money toward your savings goals or investing. 

Two-income households

How much of your paycheck should you save versus your partner or second-income earner? You can adjust your approach to the 50/30/20 budgeting rule to accommodate dual-income households. If both parties are earning roughly the same income, one earner could cover your household’s basic, necessary expenses in the 50% needs category. The second earner could commit their income to wants and savings/investing. This won’t work for all financial situations, but it can be a helpful framework for applying the 50/30/20 budgeting rule when sharing expenses. 

What to do with your savings

How you use your savings will depend on numerous factors. Emergency savings, a house fund, saving for education, and saving for your children or other family members are all common savings goals. There is no one-size-fits-all savings amount, and you should always factor in the stability of your employment situation and your lifestyle when setting your savings goals to ensure they’re realistic and achievable.

Build an emergency fund

First things first, focus on your emergency fund. The size of your emergency fund can depend on your current income, your existing savings and investments, how many dependents you have, and more. It’s recommended that you maintain an emergency fund with up to six months’ worth of expenses. That way, if you suddenly lose your job, your car breaks down, or you have a medical emergency, you don’t have to panic or go into debt to get by. 

An emergency fund is different from a rainy day fund; the latter is usually smaller and designed to cover more predictable, lower-cost things like car maintenance and your dog’s yearly vet visit. 

Set savings goals

Of course, determining how much of your paycheck you should save is only the first step; you still have to determine what you’re saving for. You’ll likely have short-term, mid-term, and long-term savings goals. Short-term goals are generally achieved in 12 months or less and might include things like planting a garden in the spring, saving for braces, upgrading your computer, taking a vacation, or saving for holiday gifts. Mid-term goals are a little further out: usually about one to three years. This can be something like putting a down payment on a house, moving to a different city, getting a new car, having or adopting a child, or having a wedding. Creating a sinking fund is best for these types of savings goals.

Remember, what you see as a short- or mid-term goal will depend on your income, other expenses, and timeline. Whatever the case, having specific saving goals can motivate you to stick with your plan and put that money aside instead of spending it.  

Invest for the long term

Long-term financial goals typically focus on retirement planning, wealth building, and financial freedom. These savings goals take a longer time to achieve but are well worth the work. They often look like contributing to a retirement account, building a diversified investment portfolio focused on long-term gains, or investing in an account for your child’s education. Often, people work toward these long-term goals by investing rather than keeping money in the bank, where inflation may outpace the interest earned. 

Where to keep your savings

While you technically can save your money in any account, there are some account types that amplify your savings because they earn interest or returns. When selecting what account to put your savings in, you’ll want to think about potential returns, how likely you’ll need to access that money, and how long you want it to stay in the account. 

• High-yield savings account: A high-yield savings account is best for short- to mid-term savings. These accounts act much like traditional savings accounts but pay more in interest. Like a traditional savings account, you may be limited to six monthly withdrawals, but your money can be accessed quickly if needed. A high-yield savings account can provide competitive returns, but remember that most interest rates are variable, so they could drop at any time.
• Certificates of Deposit (CDs): A certificate of deposit, or CD, is essentially a loan you extend to the bank. Your deposit earns a fixed interest rate for a set period of time. You’ll generally get higher interest than a traditional savings account, but you often can’t access that money without paying a penalty before the end date. The term length can vary from a few months to a few years. A CD can be a great place to store money you’re confident you won’t need to access before the term is up.  
• Retirement accounts: Retirement accounts like a 401k, IRA, or Roth IRA are for your long-term investments. These tax-advantaged investment accounts have deposit and withdrawal limits; typically, you can’t cash out your investments before age 59 ½ without incurring substantial penalties. You only want to invest money in these accounts that you won’t need to access before retirement. 
• Brokerage accounts: A brokerage account is a taxable investment account you use to buy and sell securities. Unlike a retirement account, you can invest as much money as you want and withdraw that money before retirement. A brokerage account can be a good vessel for mid- and long-term goals but comes with risks, as you can lose the money you invested. These accounts also aren’t tax-advantaged, so you’ll pay taxes if your investments receive dividend or capital gains payments, or if you sell securities that have gone up in value resulting in an investment gain.

Ready to start saving?

Once you’ve created a budget, you should be able to confidently decide how much of your paycheck you should save based on your personal circumstances. But your budgeting and savings journey isn’t over. The amount you save will likely shift as your income, expenses, and savings goals change. Budgeting and saving for young adults will likely look different from the approach that works for people in their 30s, 40s, and beyond. You can adjust your strategy to reflect your ever-evolving financial landscape by periodically asking “How much of your paycheck should you save?” with a fresh perspective.

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