It sounds so simple to save a portion of your paycheck each month. In theory, that’s super easy to do. However, saving your paycheck is much more difficult to do in real life if you don’t have a strategy and a goal in mind.
How much you should save each time you get a paycheck will be different for each person. There’s no answer that fits all people and all financial situations. So instead of asking how much you should save, we recommend instead asking yourself “Why should I save?” and “How will I save?” This can make a big difference on how much you can ultimately save out of your paycheck.
Why Should You Save Your Paycheck?
So, why should you save a portion of your paycheck? There are many different reasons, and you’ll ultimately have to decide for yourself why saving money is worthwhile to you. Lots of people want to save money to be able to afford something that they can’t buy outright. These can be items that might take months to save up for, like new electronics, appliances, vacations and more! People also save for things that may take years to save up for, like a new car, education, a wedding, or a down payment for your first house. These will always be personal to you and what matters most for you.
People also save money to have just in case of emergencies. This is a smart financial move if you want to have a safety net for the future, no matter what it holds. It can be more challenging to save for something that is so unknown. We can’t know for sure what kind of unexpected emergencies will happen and how much they cost. All we can do is save up as much as we can before that emergency happens.
How Should You Save Your Paycheck?
Next, you need to ask yourself how you’ll save a portion of your paycheck. It's important to have a money-saving strategy that works for your circumstances. What works for your neighbor or your friend might not work for you and that’s okay.
Think about what your specific financial strengths and weaknesses are. If a budget can work for you, make savings part of your budget and stick to it. If you know you’ll spend the money when you see it in your checking account, set up an automatic deposit for your paycheck each month to a savings account that’s separate from your other funds.
If you’re not sure where to start, the 50/30/20 rule is a pretty standard savings method that you might have heard of before. This rule is that each month (or each paycheck) should be split up. 50% of that money should go toward your needs – housing, utilities, food, etc. Then, 30% of that money should go to your wants – this is anything that you can live without if you absolutely had to. Then, that last 20% is put into savings.
What if I Can’t Save 20%?
The 50/30/20 rule sometimes gets bad press because, while it’s very simple, it’s honestly not always realistic for the average person. A lot of this is because housing in some areas can be more than 50% of a paycheck and rising inflation can affect the cost of gas and groceries. So, what do you do if saving 20% is unrealistic? The simple answer is to just start saving what you can now. If you’re currently not saving any money from each paycheck, then even saving 1% of your paycheck is a step in the right direction. You can always increase it over time as you get more comfortable with your finances.
We do, however, caution you that unrealistic and uncomfortable are two different things. It’s unrealistic to save 20% of your paycheck because your housing makes up more than 50% of your needs. It’s uncomfortable to save 20% of your paycheck because your wants take up more than 30% of your paycheck. In this example, the savings goal is uncomfortable because your wants are taking up too much of your paycheck and you’ll have to make hard choices about what you can realistically afford if you want to make savings a priority. So you need to be really honest with yourself about what’s holding you from saving money from your paycheck each month.
Our advice: Go back to the reason why you’re saving. Is that “why” more important than the wants? Only you can decide.
How to Save Money from Your Paycheck
- Deposit Savings First: Save your money before you make any other purchases with your paycheck. This ensures that you aren’t spending the money you have for savings before it even makes it to your savings account. If you want savings to be a priority, you need to put it before your other expenses when you can.
- Automate Your Savings with Direct Deposit: Automatically deposit the portion of your paycheck you’re saving each month. This way, you never actually see the funds, and you’ll hopefully be less tempted to spend them. This can be maximized if you’re depositing into an account that’s completely separate from your day-to-day checking account.
- Create a Budget: A budget is the best way to keep your spending in check. Find a way to make budgeting work for you. If a spreadsheet or pen and paper doesn’t work, find an app or computer program to help. There are a lot of different ways to keep a budget, but only you can decide to stick to that budget and make it a priority.
- Minimize Debt & Unnecessary Expenses: It can be challenging to save a lot of extra money if you have a lot of debt you’re trying to pay off. Keep track of your debt and prioritize paying that off, in addition to saving a little extra if you can. If your debt keeps growing, look at ways that you can cut down on the unnecessary expenses that might be contributing to your balances.
- Find Ways to Earn Extra Cash: You don’t need to apply for a second job to add a little extra cash to your income – and savings. Instead, you can sell items you don’t need or use anymore. You can find ways to make your hobbies, such as art, music, or sports into financial gain by giving lessons, selling your work or coaching.
Where Should I Put My Savings?
- Savings Account: A traditional savings account can be a great option because it’s a place to hold your funds separate from your checking account. Savings accounts also earn interest, which can help you increase your savings over time. There are other types of savings accounts that can offer even better interest rates to help you maximize your savings goals.
- Emergency Fund: While you can use a savings account to hold your emergency fund, the key here is to have a fund only for emergencies. This means that you don’t withdraw from it until an emergency hits. Ideally, this account is kept separate from both your checking account and any other savings account if you have one for other savings goals.
- Retirement Account: If the reason you’re saving is for retirement, there are retirement accounts that can be a huge benefit to you. You should do your research on the different retirement savings options available to you so you can choose which one will be best for your specific needs.
Finding a way to save your paycheck each month takes strength and perseverance. But if you can find the resolve for why you want to save and how you plan to save, you should do it. Take the time to review your current savings habits and use the tools included in this article to maximize your savings so you can reach your goals.