One of the biggest mistakes you can make with your paycheck is not saving enough, after all, if you’re spending every dollar that comes in, how will you ever save up to buy that house or car? Figuring out How Much Should You Save From Your Paycheck?
This requires some planning and self-analysis but can be done if you break the problem down into manageable chunks, as this guide will help you do. Just follow these steps, and you’ll have an answer!
What is net income?
Before you can determine how much of your paycheck to save, you’ll need to understand what net income means. Net income is your gross pay—your total compensation before taxes and other withholdings—minus any pre-tax deductions for health insurance premiums, 401(k) contributions, etc.
By comparing your net income to an amount you’ve budgeted for discretionary spending each month, you’ll have a rough idea of how much money will be left over once all bills are paid. If that amount seems intimidatingly small, then it’s time to look at where your money is going each month and look for places to cut back on expenses.
But don’t worry if that number seems more positive than negative; if so, congratulations! That means you’re doing well financially and might even be able to start saving or investing some of your money. When planning out your savings goals, always make sure they’re realistic. It’s better to overestimate than underestimate when it comes to saving money.
The ideal savings rate
Answering such a question is a personal matter, as it depends on your overall financial goals and situation. It’s helpful to determine how much of your paycheck you want to save and create an appropriate budget to account for what’s left over.
Another important point to keep in mind is that saving doesn’t have to mean giving up everything else in life; plenty of people still go out with friends or travel while also saving money.
Once you have an idea of how much you want (or need) to save, try setting up automatic transfers into your savings account each month so that putting away a portion of your paycheck becomes second nature. As time goes on, you can adjust your monthly contributions based on your needs and wants.
How much do I need to live on?
Before you can determine how much you need to save, you need to figure out your living expenses. This includes housing costs, food, and transportation (including gas, car maintenance, and insurance).
There are many free tools available online that can help you get an idea of how much you spend on these items each month. The beauty of figuring out your monthly cost is that it will give you a baseline number to work from.
When it comes time to fill in those dreaded give-up categories—things like clothes and entertainment—you’ll have a good idea of what spending less actually means for your budget.
Saving for retirement
If you want to enjoy retirement, your money needs to be working for you. If you’re not saving enough money right now, start with a plan. Try adding up how much income your future self will need in retirement, then estimate how much it will cost to live that lifestyle.
Then estimate how much money you can set aside each month. It may seem like a lot, but increasing your savings rate by just 1 percent each year can add up over time and set you on track to retire in comfort.
How much should you save each month for retirement? Start by thinking about how much income your future self will need.
Then estimate how much it will cost to live that lifestyle in retirement. In other words, if you can afford $100,000 in annual expenses now, how much do you think it will cost when you stop working and have to pay for everything out of your pocket? Use an online calculator to project your expected living costs in retirement based on where you live and current spending habits.
Saving for an emergency fund
To have a good emergency fund, you should save enough for at least three to six months’ living expenses. Some financial experts recommend even more than that—they say you should be able to save up at least 12 months’ worth of living expenses in an emergency fund.
If you want to do that, though, make sure it’s not taking money away from other important things like retirement savings or college funds! To figure out how much you need to save for an emergency fund, take a look at your budget and determine your monthly living expenses. This will give you a ballpark number on how much you need to be saving each month.
Saving for other goals
It’s easy to think that saving for retirement should be your only goal, but when it comes time to pay your bills, there are plenty of things to consider. Depending on how much you make and how much debt you have (plus all those other life goals). You might want to work toward paying off student loans or setting aside money for an emergency fund.
Allocate a percentage of your salary every month that matches your goals. For example, if you’re saving for retirement and plan on maxing out a 401(k) or IRA, then put 10 percent in each paycheck into a separate account earmarked specifically for retirement savings.
It’s always a good idea to have an emergency fund. That account should have money set aside to cover six months of living expenses and should be kept separate from your other savings goals.
Questions to ask before starting a savings plan
First things first, do you have a savings plan in place? If not, don’t worry—you’re not alone. A recent survey found that 49% of workers have nothing set aside for emergencies or unexpected expenses. If you find yourself in that camp, here are some questions to ask yourself before you start saving. Answers will help you identify how much you should be saving from your paycheck and other sources.
The first question to ask yourself is: What are your goals for saving? Are you trying to build an emergency fund or save up for a big expense like a car, home, or wedding? How much do you have in mind, and how quickly do you want to achieve it? Next, take a look at your budget.
Is there an area where you can trim your spending so more money is available for savings each month? Also, consider whether there are many ways to increase your income that might make a difference.
Remember that sometimes doing nothing is OK, too. You’re not being irresponsible if you can’t save from your paycheck as much as you would like right now.