Photo by Micheile Henderson on Unsplash
“Save more money!”
countless advertisements shout at you. “Put aside part of every paycheck!!”
your parents scold. “Save as much as you can, or you’ll regret it later!” your
financially savvy friends advise.
Yeah, saving is important, but the above tips are remarkably unhelpful, aren’t
they? You’re always left wondering, “How much
of my paycheck should I save?” No one really seems to tell you the answer. 10%?
50%? What’s a good amount that will set you up for the future?
How much of your
paycheck you put aside depends on your individual situation. There are no definite savings rules that will guarantee future
financial stability, but let's go over a few guidelines that you’d be wise to
follow.
How Much of
Your Paycheck Should You Save?
So, the big question.
When asking what percentage of your paycheck should you save, the general rule
of thumb is that you should put aside 20% of each check. More is ideal, but
anything is better than nothing if 20% isn’t possible for you. Try to stick to
the 50/30/20 rule: 50% of your paycheck is for essential expenses, 30% is
discretionary, and the remainder is for savings.
What Should
You Save For?
Another big question
is what kinds of things you should save for. “Savings” is pretty vague — the
point is to have it in case you need to spend it, but what circumstances would
require you to do so?
You should save for
all sorts of expenses. Do you want to buy a new car but can’t afford one just
yet? You’ll have to put a little bit aside every month until you can. However,
it’s important not to drain everything you have, so you’ll need to save up
enough that you’ll have a financial cushion left over.
A few other examples
of expenses you should save for include:
● Retirement;
● Emergencies;
● Education (for your children or
yourself);
● Vacations;
● Transportation;
● A home;
And other financial
goals. Some of these expenses allow you to pay monthly, but you’ll need to have
enough for a sizable downpayment. It may be in your best interest to have
separate savings accounts, so you don’t overspend one or the other. You don’t
want to be without your emergency savings because you opted for a more
luxurious vacation.
What Kind
of Savings Account Should You Use?
An important thing to
remember is that not all savings accounts are the same. Most grow your money
with interest, but some offer significantly higher rates than others.
For instance, your
retirement savings should be in a traditional IRA (Individual Retirement
Arrangement), a 401(k), or another kind of retirement account. Other plans exist, such as Roth IRAs and SEP plans (Simplified
Employee Pension) that provide tax benefits or entail financial contributions
from your employer. You want a retirement savings account that turns your
regular contributions into a significantly larger sum that supports you when
you stop working later in life.
Traditional savings
accounts are what you are probably familiar with already. You can open these
easily at any bank or credit union. The interest rates will be low, so don’t
expect a small deposit to become much bigger in a few decades (maintenance fees
may even cancel out any interest earnings), but they’re still safe places to
store your money.
Money market
accounts, however, offer higher interest rates, so you can earn more money just
by depositing. They also allow you to write a limited number of checks per
month and use an ATM card like a checking account. However, these kinds of
accounts may charge monthly maintenance fees if you are below a certain
balance, and they often require you to make substantial initial deposits.
Check out this link
for other kinds of savings accounts.
How Long
Will Saving Take?
How long it will take
for you to reach specific savings goals depends on the size of your regular
deposits (and, therefore, your income) and your annual interest rate.
Depositing $200 a month into an account with an APY of .10% will get you to
your goals much quicker than $50 a month with a rate of .05%. You can use this calculator to determine how long it will take you to save a
certain amount of money based on your current balance and other factors.
Another complication
is, well, remembering to save. An easy way is to set your online bank account
to deposit part of your paycheck automatically. Another is to use financial
apps that send you reminders. Earnin, for example, offers an opportunity
called WeWin, where you could win major
prizes simply for remembering to save a small amount of money every day.
Saving money can seem
more complicated than it should be, and you’re not alone if you feel that way.
If you don’t know how much of your paycheck you should save every month, start
with whatever you can afford (preferably a minimum of 20%), and open your
account as soon as possible if you haven’t already.
This article originally appeared on Earnin.
Please note, the material collected in this blog is
for informational purposes only and is not intended to be relied upon as or
construed as advice regarding any specific circumstances. Nor is it an
endorsement of any organization or Services.
