How Much of Your Paycheck You Should be Saving Each Month
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Whether you just received a tax refund or you’ve made it a goal to take savings seriously this year, planning for your financial future is something everyone should be working towards.
If you’re new to saving money, you might not know how much of your paycheck to put aside each month. Even if you’ve been saving for years, adjusting your savings amount as your salary grows is important.
While the amount you can save will vary depending on your expenses, financial goals, and salary, I’ll walk you through the top financial advice on how much you should try to save each month.
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How much are Americans saving?
Since the pandemic, Americans’ financial priorities have pivoted. As a result, our savings and spending habits have also changed. Before the pandemic in February 2020, the average personal savings rate in the U.S. was around 8.3%. Flash forward to April of 2020 and the average savings rate hit an all-time high, at 33.7%.
This rate slowly de-escalated throughout the rest of 2020 and 2021. We were then faced with inflation that has still not normalized. The rate of inflation as of June 2024 is 3.36%, and while it is slowly coming down, it has eaten into people’s savings. The current savings rate in the U.S. is 3.6%.
Historically, however, personal savings rates in the U.S. do not fluctuate often. In June 2015, the average U.S. savings rate was 7.4%; in June 2017, it was also 7.4%; and in June 2019, it was 7.1%. During the pandemic, however, the lowest rate at which this savings rate dropped was 12.5%. However, inflation has greatly impacted households, and the savings rate hit the lowest of 2.7% in June 2022.
While this rate will likely even out as the economy improves, many Americans will likely place a higher emphasis on savings going forward.
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How much do experts recommend putting away each paycheck?
Now that you understand recent personal savings trends, let’s examine what financial planners recommend. Advice typically ranges from placing 10% to 20% of your monthly income into savings.
But what does savings mean? Expert advice varies slightly on the breakdown, but generally, it’s recommended that 50% to 75% of your savings amount go towards retirement goals. The other 25% to 50% go towards building an emergency fund and short-term goals.
This means that if you make $4,000 in take-home pay each month, you should put 10% to 20% into savings. This would be between $400 to $800 each month. Let’s say you’re saving more aggressively and putting 20% into monthly savings. You’ll then split this up into a retirement plan (50% to 75%) by diverting between $400 and $600 to your retirement fund and placing the remaining $200 to $400 into an emergency or rainy day fund and other savings goals.
Of course, this amount can also fluctuate depending on the specific goals you’re planning for right now. For instance, if you’re buying a house in the next year or two, you may opt to put 50% of your savings towards this down payment and, afterward, divert 75% of your savings to your retirement savings and 25% to other goals.
You can also use this retirement calculator to determine better how much you need to save for your ideal retirement scenario.
Retirement Calculator
I’ll break down a few crucial savings buckets below to give you a better idea of how to prioritize your savings.
Why an emergency fund is vital
If 2020 taught us nothing else, having an emergency savings fund is crucial for covering unexpected expenses. Suze Orman, a leading financial expert, once recommended having an 8-month emergency fund, which was much higher than traditional financial advice of having a 3- to 6-month emergency fund on hand.
However, after the pandemic hit, Orman changed her views on how much money individuals and families should have saved in case of emergency. Now, Orman recommends building a 12-month emergency fund to ensure you’re always financially prepared.
important: Before the pandemic, Suze Orman recommended an 8-month emergency fund. Now she recommends 12 months.
While you don’t have to build an emergency savings fund as large as Orman suggests, it’s become increasingly important for many Americans to have a nest egg to draw from in case of unemployment, job cuts, or pay decreases. I recommend working towards a six-month emergency savings fund and continuing to build from there.
Take advantage of high interest rates by storing your emergency fund in a high-yield savings account.
Don’t wait to plan for retirement
While ensuring you can afford your expenses (rent, utilities, food, and childcare) is a pressing financial goal, planning for retirement now is also important. Building an emergency fund should be the priority, but if you’re able also to put money towards retirement, you should. If not, once you have a 6-month emergency fund, begin diverting monthly savings toward your retirement account.
I recommend placing 60% to 75% of your monthly savings into retirement funds, particularly if you have an employer-match 401k or IRA. Take advantage of workplace plans that allow your employer to place money into your retirement fund while you can. Not all workplaces offer this option, so if yours does, contributing as much as you can afford will boost your employer’s match.
You can also open a Roth IRA on your own. Opening a separate IRA is rarely a bad idea, even if you have a workplace retirement fund. Contributing regularly is key. If you have to trim down your contribution while working towards other savings plans or during challenging financial situations, feel free to do so. Just be sure to boost your contribution down the road as your finances improve, or your expenses/savings goal requirements decrease.
Related: Best IRA Accounts
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Paying down debt while growing your savings
Debt is another topic that can be tricky to manage when calculating savings goals. Many leading financial experts offer conflicting advice on managing debt vs. growing savings. Overall, I recommend striving for both — maintaining at least your minimum debt payment, if not more, while continuing to save.
There are many ways to manage debt repayment, but I typically focus on paying down debt with the highest interest rates first. This often includes credit card debt and personal loans.
If you’re very focused on paying down debt, you can also stall adding to your savings until your debt has been minimized. If you go this route, I’d recommend at least having a small emergency fund ready, just in case.
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Tips to help you save more
Budgeting
One of the best ways to help you stay on track with your savings goals is to create a budget. It’s important to know how much money is regularly going in and out of your account and what those income sources and expenses are.
I recommend combining your previous month’s transactions and identifying what you are spending your money on. Essential categories should include rent/mortgage, insurance, groceries, utility payments, food, and transportation costs. Non-essential spending categories might include streaming services, restaurant bills or takeout, non-essential clothing, entertainment, travel, etc. Once you have these numbers, set a budget that makes sense for your lifestyle and track your spending daily or weekly.
Related: Best Apps to Save You Money
If you’d prefer to stick to a more rigid budgeting philosophy, the 50/30/20 method is a great one that’s perfect for beginner budgets. The premise is simple — 50% of your monthly income should go towards essentials, 30% towards non-essentials, and 20% towards savings.
This strategy is also easy to tweak if you live in a city with a high cost of living, in which case your budget might look more like 60/20/20. Or, if your housing is more affordable and you often have extra cash, you may be able to save more, so your budget might be closer to 40/30/30.
There are dozens of different budgeting techniques available – Reverse Budgeting, Zero-Based Budgeting, the Envelope Method — I recommend reviewing the top methods and deciding which one best suits your lifestyle and tendencies the best.
Related: 6 Common Budgeting Methods
Automate savings
When you’re new to saving money, it can be hard to part with 10% to 20% of your paycheck. Moving that money into a savings account can make you feel like you’re losing some of your income, even though you’re building towards a savings goal down the line.
If this sounds familiar, I recommend setting up automated savings rules (if your bank offers them) to move money to your savings account each time you get paid. This makes the savings process seamless, and you won’t feel like you're missing out on any of your paychecks.
You can automate your savings in other ways, too. Some checking accounts allow you to round up purchases and move your spare change to savings automatically, while others allow you to set up small withdrawals throughout the week to help slowly build your savings account. You can also try apps that analyze your spending habits and move money daily or every few days to your savings account without you noticing.
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Cut your expenses
Sometimes, no matter how well you stick to your budget, your savings goals are just out of reach. When this happens, you must analyze your spending habits and decide what services or purchases you can reduce or eliminate.
For instance, if you’re struggling to save money each month but spend this same amount eating out at restaurants, you might decide to compromise and reduce your nights out to supplement your savings. You should also review your cable, internet, cell phone, and other utility bills to determine if you can save by switching providers. The app Rocket Money is a great tool in that it finds all our subscriptions, shows you how much you spend each month, and can even close the unwanted ones.
Lastly, take a hard look at your living expenses (rent or mortgage) and decide if the amount you're paying is worthwhile. If you live in a city with a high cost of living and put most of your income towards rent, you might not have enough money to enjoy the attractions your city has to offer. Consider moving to a more affordable home or getting roommates to decrease your cost of living.
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Boost your income
It’s worth mentioning that increasing your annual income is always an option worth considering when you’re trying to meet savings goals. If you haven’t received a raise (or a substantial raise) in years, consider talking to your boss and noting why you deserve to make more money. In most cases, employers won’t pay you more if you don’t ask, so ask for the number you deserve to be making.
If a raise isn’t an option, consider taking on side work or working part-time to earn more money to boost your savings. I don’t recommend this as a long-term strategy, but it can be a good way to quickly fund a vacation trip, pay down debt, or build an emergency fund.
Shop around for savings accounts
Lastly, take advantage of the best savings account rates on the market to ensure your money gains the maximum amount back in interest. You don’t even have to switch bank accounts if you’re fond of your current financial institution, but it’s worth noting that some banks even offer you interest on your checking account balance.
I’ve had a main checking and savings account with a national U.S. bank for years, but that’s not where I keep the majority of my money. I switched to an online bank to manage my freelance expenses and noticed a difference in the interest I was earning at the end of the year. Now, I keep all of my long-term savings in this account.
Savings account APYs will change as the market fluctuates, but typically, online savings accounts like Ally Bank, Chime, and Capital One constantly boast some of the highest rates available.
Related: 11 Best Savings Accounts
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- No-fee Overdraft Coverage.
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The bottom line
Ultimately, you should decide how much of your monthly paycheck goes to savings. However, if you want to plan for retirement and other long-term goals, saving at least 10% is recommended, though 20% is better. Lastly, be sure to build an emergency fund before you start saving for other priorities, like a down payment for a house or a vacation.
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Writer
Courtney Johnston is a freelance writer, specializing in finance, travel, and health. She has written for The Chicago Tribune, Benzinga, BestReviews, Mashvisor, Fundera, MoneyGeek, and The Culture Trip. She also teaches writing instruction at the University of Indianapolis. Courtney currently resides in Indianapolis.
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