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How Much of Your Paycheck Should You Save?

Saving money is a big part of financial freedom, but how much is enough savings?

Justin Cupler

Contributing Writer at Tally

September 24, 2021

Saving money from each paycheck is an important part of personal finances and can help break the cycle of living paycheck-to-paycheck. With the right savings plan, you can build an emergency fund that protects you from credit card debt or potentially damaging your credit score. When you start saving, you can also begin a retirement fund that puts you on the path towards financial independence. 

But there's more to saving than just throwing money in a savings or checking account. The key is compound interest

While your money’s in a savings account, money market account or retirement account, it collects interest, and the balance grows. As time passes, you start gaining interest on earned interest, known as compound interest. 

Compound interest and time are the secret ingredients of saving. That’s why it's so important to start saving as much as you can as soon as possible.

But how much of your paycheck should you save? We explore this topic and other savings tips below. 

How much of your paycheck should you save?

The quick answer here is, "it depends." 

Many variables come into play when determining how much of your paycheck to save. Some personal finance experts say 10%, but others say 30% or more. 

How much you should save will depend on your budgeting style, income and the cost of living in your area. 

For example, if you use the 50/30/20 budget, the rule of thumb is 20% of your take-home income goes toward savings, assuming all your debts are paid. If you haven’t paid off high-interest debts, this 20% goes toward them.  

Also, keep in mind that this budget and its savings rate is flexible. For example, if you live in an area with a high living cost, you may have to decrease the savings or debt repayment percentage and set aside more funds to cover the higher monthly expenses. In this case, you may end up with a 60/20/20 budget.

If you work with a zero-based budget, put your remaining amount of money into savings once all your main budgeting buckets are fulfilled. 

What should you be saving toward?

How much of your paycheck should you save: woman using a calculator

When you start saving a portion of your income, set savings goals, so you have something to work toward. There's a wide range of goals to save toward, but here are some you may want to consider. These goals can set you up nicely for future financial success. 

Nothing — pay off your debt instead

Saving toward something is great, but saving money is counterproductive while accumulating high-interest credit card debt. 

Instead of rolling any extra cash into a savings account or investments, consider using it to pay off your high-interest credit cards. Generally, your credit cards will have an interest rate of at least 13%, and some can even exceed 30% interest

Most bank accounts pay little to no interest, and the stock market, on average, delivers a 10% return annually. So, if you're paying 13% interest on a credit card and investing all your extra cash in the stock market, you may be losing 3% net interest or more annually when you could be paying off your high-interest debt.

Building your emergency fund

An emergency fund acts as a cushion in the event of financial struggles. Whether it's an unexpected car repair, a job loss or a significant pay cut, your emergency fund will help get you through. 

An emergency fund should be enough to cover three to six months of living expenses. Some savers with significant debt issues may want to start working on their debt ASAP but also need emergency savings. 

In this case, you can build a $1,000 emergency fund initially, then start tackling your debt. Once you've paid off the high-interest debt, you can shift your savings back to your emergency fund until you have the full three to six months of expenses saved.

Meeting short-term financial goals

Next, you may want to save toward your short-term financial goals. These are typically goals you want to meet within the next two to five years. These short-term savings goals can be for a wide range of items, including: 

  • Down payment for a house

  • Down payment for a new car

  • Wedding expenses

  • Home remodeling or repairs

  • Consumer gadgets

Setting aside cash to pay for these big-ticket items will help keep you from reaching for your credit card. 

Paying college tuition

If you have young children and want to set them up to attend college debt-free, start tucking away a portion of your savings to go toward their college education. You can pull this off in several ways. 

First, determine the amount your kids will need to obtain at least their bachelor's degree. A college tuition calculator can help you estimate. Then, divide this estimate by the number of months until your child graduates high school to determine how much of your monthly salary you'll have to save to pay for their college. 

Second, many states now offer prepaid tuition programs and tuition savings plans you can pay into monthly to cover your kids' future tuition. If your state offers this, the program website will outline your monthly cost. 

Keep in mind that while it's good to help your kids go to college without incurring debt, this shouldn’t override your future retirement plans. If you determine the cost of saving for college is so great that it'll negatively impact your retirement plans, you can skip this step and help your kids later by paying their student loans for them. 

Reaching retirement

How much of your paycheck should you save: elderly couple going through their finances

Retirement is the ultimate long-term financial goal for many, so making it a key part of your savings plan is instrumental. After paying off high-interest debt and meeting any pressing short-term financial goals, you can turn your focus toward funding your retirement accounts. 

To reach a comfortable retirement nest egg, you might diversify your retirement accounts, allowing you to maximize contributions and mitigate any losses in a particular account. 

Here are some retirement funds to consider and why. 

Employer-sponsored 401(k)

First start with contributions to retirement savings in your employer's 401(k) plan. Not only are these easy ways to invest pre-tax dollars via direct deposit, but many employers also match a portion of your contributions. 

A common employer match is 100% of your contributions up to 6% of your salary. In this case, your employer is willing to add up to 6% of your income to your 401(k) for free. If you earned $50,000 per year and contributed 6% of your salary, your employer would match this, giving you a free $3,000 per year. 

At the very least, work toward meeting the maximum employer match. Still, you should also aim to contribute the maximum amount the IRS permits if your income allows. In 2021, this contribution cap is $19,500 per year. If you're over 50 years old, you can contribute an extra $6,500, bringing the cap to $26,000.

Not only are your contributions taken before taxes, lowering your current tax burden, but they gain interest tax-free too. You only pay income tax when you start taking distributions from your 401(k). 

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Roth IRA

A Roth IRA is another retirement account. It's similar to a 401(k), but you own it instead of your employer, and the contributions you make are from your take-home pay. 

Because you fund this account with post-tax dollars, the account grows tax-free. Plus, if you make qualified distributions, you don’t pay income taxes on those either. 

Since Roth IRA's aren't funded with tax-advantaged dollars — pre-tax income — there are no limitations on when you can withdraw from it. If you withdraw from a Roth IRA before 59.5 years old, the only fees you’ll pay are income tax and a 10% penalty on any interest earnings.

Just like there is an annual maximum that you can contribute to your 401(k), there is also a maximum annual contribution to an IRA. As of 2021, the maximum Roth IRA contribution is $6,000 — $7,000 if you're over 50 years old.   

There are also income restrictions to Roth IRAs. For single tax filers and those filing as head of household, your contribution limits start falling if you earn over $125,000. At $140,001, you're no longer eligible to participate in a Roth IRA. 

For married taxpayers filing jointly, the Roth IRA phase-out runs from $198,000 to $208,000. At $208,001 and higher, you can no longer participate in a Roth IRA if you or your spouse is eligible for a workplace retirement plan. 

Brokerage account

The remainder of your money earmarked for savings can go into the stock market, mutual funds, or other stock-based investments via a brokerage account. 

While the stock market averages great returns — roughly a 10% annual return on investment — the volatility of stocks makes investing in them risky.

To determine the best investment routes for you, get the financial advice of an investment professional or a financial planner. They'll evaluate your financial situation and goals, then recommend financial services and paths best suited for you. 

Savings rates are relative

Mom and child putting money in their piggy bank

While there are rules of thumb to consider and various savings tips, like when to skip saving and pay debt or the right time to save toward retirement, savings as a whole is relative. Your savings rate depends on your income, your monthly expenses, your high-interest debts and more. 

While you can follow some of these personal finance rules to a point, the ultimate goal in savings is to save as much as you're comfortable doing. 

If credit card debt is delaying your savings plan, Tally† can help. Tally is a credit card debt repayment app. It rolls all your credit card payments into one monthly payment and offers a lower-interest line of credit to help you pay off your credit card debts.

​​To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.