While most people would agree that saving money is a wise choice, a survey in 2019 showed that 78% of American workers are living paycheck to paycheck. These workers are spending every bit of their paychecks on living expenses, leaving no leftover to put towards savings. But when it comes down to it, how much of your paycheck should you save?
Importance of saving
Saving money can sound like doing work, but in truth, saving money gives you freedom. Besides paying for major emergencies as they arise and saving for retirement, having money set aside gives you more opportunities. Regardless, it’s crucial to know how much of your paycheck you should save.
For example, if you need to quit your job or get laid off, the money you’ve saved can help you bridge the gap until you find a new one. If you need to take time off work but don’t have any vacation time, you have money set aside to help you pay for your expenses. You could save for a dream vacation or a down payment on a new home.
Money in the bank can give you the freedom to pay startup costs for a side hustle, pay for education to further your career, or help you make ends meet when other hardships arise.
Pay yourself first
If you want to save money, you have to make the conscious decision to do so. Most of us have a natural tendency to spend all our money without thinking about it. At the end of the month, there’s nothing left over to put into savings.
This is where the principle of “Pay yourself first” is important. Rather than saving the money you have left at the end of the month, it’s critical to decide how much you’ll save and save that amount before you begin spending on other items.
You may be able to ask your employer to direct deposit a portion of your paycheck into your savings account. Another option is to set up an automatic transfer from your checking to your savings account each month. Whatever you decide to do, make sure you save before spending. Your future self will thank you!
It can be tempting to believe that you’ll start saving more money once you get a raise. One of the issues that cause people to struggle with saving money is the tendency to increase our lifestyle as we earn more money. For example, we respond to a raise by eating out more often or eating at nicer restaurants, or by purchasing a nicer car or moving to a larger home.
By continually increasing our spending as our income goes up, we don’t gain any margin in our financial lives. This is why it’s essential to decide in advance that you’re going to save money and how much it will be.
Setting goals can help make saving money more fun and help you feel accomplished when you put money in the bank. Besides saving for an emergency fund, you could set a goal of saving to pay cash for a large purchase like a car, a vacation, or a significant home improvement. Having a goal gives you something to work towards, and the reward of making a large purchase using cash is something you can feel good about for a long time.
How much should you save?
You should be saving about 15% of your paycheck each month towards retirement. You may contribute to a 401(k), an IRA, some other retirement vehicle, or a combination of all three. The total you contribute should add up to about 15% of your income.
The amount you save over that is dependent upon your goals. Sit down and think about your short and long term financial goals. Do you need a set amount of money on a specific date? Is your emergency savings account fully funded? Are you nearing retirement age and need to save more for your retirement? Do you have a child’s college to pay for?
Many financial gurus suggest saving 20% of your income, but you may need to save more to meet your goals.
It can seem overwhelming to think about saving 20% of your paycheck, especially if you’re not saving anything right now. The good news is, you don’t have to start with that amount today! Once you sit down and make a budget, decide how much of your paycheck you should save. Move that money to your savings account at the beginning of the month and see how the month goes. After a few months, you’ll realize where you might be able to cut expenses and save more. Over time you’ll watch the amount in your savings account rise.
Any amount you can save is a step in the right direction, and while progress might be slow, the fastest way to save money is simply to start saving.