How much of your paycheck should you save?

You have big dreams for the future. Maybe it’s buying a home with a drool-worthy, airy kitchen. Maybe it’s an early retirement so you can jet off with your S.O. and see the world.

Regardless of the future you imagine for yourself, you probably know that you should be saving but might be wondering if you should get more aggressive with your plan. Questioning just how much of your paycheck should you save?

Well, the answer to that question depends on your personal financial situation. According to a recent survey, 21% of Americans don’t save any of their annual income.

Yes, saving money can be difficult, especially if you feel like you’re just barely making ends meet. But saving is an important part of a well-rounded financial plan.

It could be worth asking how much to save from each paycheck to find an amount that will allow you to reach your goals.

That could include figuring out how much you want to have saved by a particular age, but you also need to know what to do with that money once you put it aside.

What’s the Right Percentage?

When it comes to what percentage of your paycheck you should save, financial advice can vary depending on where you look. Some suggest saving as little as 10% while others might suggest 30% or more. According to the 50/30/20 budget, saving 20% of your income for future expenses is optimal.

However, the answer to how much to save from each paycheck will depend on your income, your fixed expenses, and your financial goals. For example, if you want to retire early, you should be putting more of your income towards retirement every month than the average worker.

One way to calculate your ideal savings rate is to start with your financial goals.

One way to calculate your ideal savings rate is to start with your financial goals. How much money will you need to save to reach them and what type of timeline are you working with?

Use this information to work backwards and determine how much money you need to save every month (or week, or at any interval that works for you).

If you want some assistance, consider consulting a financial planner. While a credentialed professional could provide valuable insight, know that they generally charge a fee for their service. The great news is that SoFi members have complimentary access to credentialed financial planners.

Once you have planned out how much you need to buy a home next year or retire at 55, you’ll have an idea of how much of your paycheck should go to savings, and hopefully be able to hit that goal.

This amount might be more than you think or more than you can save. If that’s the case, you could consider modifying your financial goals or find a few ways to increase your income in order to reach them.

What Should You Do with the Money You Save?

Deciding how much you want to save each month (or week) is just the first step. The next decision you’ll have to make is where you want to save the money. Depending on the financial goal you are working toward you can consider a few options.

Perhaps one of your goals is paying off high-interest debt. If that’s the case, you’ll funnel a portion of the money you save toward that debt. You could also consider putting money for short-term goals into a cash management account, like SoFi Money®. With SoFi Money you can save, spend, and earn all in one place.

Also, some financial priorities are more critical than others because of their short or long-term impact on your net worth, so it could potentially be helpful to prioritize your financial goals.

Then you can allot portions of your savings toward different financial goals. Here are a few savings goals that could be worth working toward:

Potential Savings Goals to Work Toward

Saving a Crisis Fund

Consider building a crisis fund—enough money for at least one month’s worth of expenses that is easily accessible in a savings account or other cash equivalent.

This might offer a layer of financial protection in case of an emergency or sudden job loss. Having a store of money you can rely on in an emergency could give you the means to avoid taking on credit card debt.

Taking Advantage of Your Employer’s Match

Does your company offer a 401(k) with matching contributions? If the answer is yes, it makes sense to take advantage of it. The policy is determined at the company’s discretion, so check in with the HR team at your office to confirm what your office offers.

Protecting Your Income with Insurance

Let’s face it, life can be unpredictable. No matter how well you plan and prepare, there are no guarantees. Since uncertainty is a reality it can be helpful to protect your family with the appropriate insurance policies.

Depending on your personal situation you may want to consider things like disability insurance and life insurance. Insurance can protect you against bad things that might derail your financial future.

While many employers provide full-time employees with both disability and life insurance policies, some people may consider taking out additional policies. Depending on the plan offered by an employer, it may or may not provide substantial coverage.

This could mean that even with the company’s disability or life insurance plan, your family could still potentially struggle financially if something goes wrong.

Paying Off ‘Bad’ Debt

The next thing you could consider doing with your savings is paying off any ‘bad’ debt you might have. Bad debt is any debt that has high-interest rates—think anything higher than a 7% interest rate.

Two common debt payoff strategies are the debt snowball method and the debt avalanche method. With the debt snowball method, you start by paying off the bad debt with the smallest balance and put all your extra payments towards that until it’s paid off. After that, you go after the debt with the next highest balance. This gives you a sense of accomplishment which will motivate you to continue your aggressive repayment.

The debt avalanche method involves putting all your extra payments towards the debt with the highest interest rate.

Since you are concentrating on the debt with the highest interest rate, this strategy could end up being the most cost-effective.

The fireball method combines the best of both the snowball and the avalanche to help you blaze through debt. It suggests targeting bad debt while making minimum payments on good debt—those debts with interest rates less than 7%.

Building an Emergency Fund

Once you have a plan in place to deal with bad debt, another focus can be building an emergency fund. Ideally, an emergency fund will have enough money to cover your expenses for 3 to 6 months.

The actual amount you save is completely up to you. If you are a couple with a dual income and no kids, you might only need enough to cover 3 months of expenses.

If you have kids or if you’re single, you may consider building a more robust emergency fund. It helps to keep the money in an account you can access easily, since you never know when you might need to rely on it.

Saving for Retirement

Sometimes, saving in your 401(k) isn’t enough to meet your retirement goals. Take a look at your current retirement savings and do some math to see how much more you need to save before you can comfortably retire. Then check in and see if you’re saving enough.

Some sources recommend saving at least 15% of your income to stay on track for your retirement goals. But, again, exactly how much of your paycheck should go to savings will depend on your retirement goals.

In addition to a 401(k), you could consider other investing vehicles like a Roth or Traditional IRA. Both types of IRAs have different tax benefits. When you invest in a Roth IRA the money is taxed at the time of contribution but then in retirement, you can withdraw it tax free. Contributions made to a Traditional IRA might not be taxed at the time they are made but are taxed when they are withdrawn in retirement.

There are a variety of factors that will influence which account is right for you, including how close you are to retirement and your income level and other financial situations. Other vehicles for saving for retirement can include a Health Savings Account (primarily used for medical costs), permanent life insurance (primarily used for death benefits), and other investment accounts.

Saving for Other Goals

Retirement savings and crisis and emergency funds can help you build a layer of financial security. After you’ve established plans for all of those, consider working toward your other financial goals, like buying a house and saving for your child’s college education.

How much of your paycheck should you save for these goals? It all depends on what you want to accomplish. Obviously, the more you save the more money your kids might have for college and the sooner you can buy that home, build that cottage, or go on that trip around the world.

Finding Peace of Mind

While it might feel overwhelming to read about all the things you need to do to ensure a bright financial future, know that you don’t have to accomplish them overnight. You can tick off these goals one at a time over a number of years or decades.

What’s important is that you take things one day—or one paycheck—at a time. That starts with figuring out how much of your paycheck you should save and starting to put that money aside each month. Knowing that you’re working towards a brighter financial future will give you peace of mind.

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