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If the last two years have taught us anything about money management, it’s that having a savings set aside is crucial.
Despite the importance of having savings, however, research shows that 45% of Americans have less than $1,000 saved — and in an emergency, $1,000 may very well not be enough. To make sure you have enough money to cover the worst case scenario, it’s essential to set aside a portion of each paycheck.
Financial security aside, saving can provide many other benefits. Interest rates are on the rise and having stronger savings would allow you to pay off high interest debt, such as credit cards. That’s why, given today’s unstable economic climate, financial experts recommend getting out of debt as soon as possible.
For starters, having savings helps you avoid going into more debt to cover your purchases. It would also leave you more room to try new things professionally and take more risks without worrying as much about the impact your finances might have.
Although we have established that it is important to save, the next question is how much should we set aside?
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How much you should save on each paycheck
The general rule is to save 20% on every paycheck. It goes back to a popular budgeting rule called the 50-30-20 strategy, which means you allocate 50% of your salary to things you need, 30% to things you want, and 20% to savings and investments.
Shon Anderson, Certified Financial Planner at Anderson Financial Strategies, says this “gold standard” won’t apply to everyone or every situation. Another method, he suggests, involves an 80-20 split, with 20% of your salary allocated to your savings and the remaining 80% allocated to expenses related to your needs and wants. The idea is that the 20% allocation remains constant in both approaches.
It is certainly realistic that in this last rule, the 80% takes care of all your essential costs, leaving no room to spend on your needs. For example, the latest data from Redfin reveals that the average monthly price of rent in the United States is $2,016 in June 2022. With this high average, it makes sense that his needs could easily reach 80% of his salary.
Whichever rule you choose to follow, be sure to strike a flexible balance between saving and spending. “The point with these two methods is that saving 20% is always a priority,” says Anderson.
And if you’re wondering how much of that 20% you should invest, it helps to first have a goal in mind to put away about three to six months of living expenses in your savings – that’s also how much the experts generally recommend saving for an emergency fund.
If you can’t afford to save 20% on every salary
There may very likely be times or circumstances that make it difficult to set aside a fifth of your salary – and that’s certainly not a big deal. “There’s no one answer here,” says Delyanne Barros of Delyanne The Money Coach. Using the example above, if your essential expenses were 80% of your salary, you might want to allocate some of the remaining 20% to discretionary expenses and not put it entirely into your savings.
Ultimately, the goal is really to make sure you save some of your paycheck, even just $20. By saving a little each time you get paid, you’ll make it a habit and it will soon become second nature to you.
It’s important to get into the savings routine, no matter how much you put aside. So, the day you can allocate more to your savings, you’ve already exercised a muscle. “Starting small and as early as possible can make all the difference to your financial security,” adds Anderson.
You can also try to boost your savings by freeing up some pocket money. Make it easy for yourself by signing up for an app like Truebill, which can cancel unwanted subscriptions and negotiate bills on your behalf. Read Select’s full Truebill review to learn more.
Tips for knowing how much to save
Going beyond the 20% rule of thumb and making sure you’re setting aside at least a portion of every paycheck, Barros says to recognize exactly what you’re saving for, because what you plan to do with your savings is arguably more important than how much you save.
For example, if you are building an emergency fund to get you through a few months, you will need to save at a higher rate since you are striving to achieve a priority short-term goal. On the other hand, Barros notes, if you’re saving for retirement and you’re in your 20s, you can get away with saving between 10% and 15% of each salary if you want to retire at 60.
Barros offers another guideline: How much you should save depends more on how much money you plan to spend, not how much you currently earn. For example, someone who earns a salary of $50,000 but lives without rent will have fewer expenses than someone who earns a salary of $100,000 but pays rent and has a family, which will have different implications on their savings habits.
Use a High Yield Savings Account for all your savings needs
Determining how much to save is tracked quickly by finding exactly where to put it. Your best bet is in a high-yield online savings account, which earns more interest than a traditional savings account at your local bank. Currently, LendingClub High-Yield Savings offers one of the highest returns on your money, with a 2.07% annual percentage return, or APY. Account holders don’t have to pay any monthly maintenance fees, nor do they have to meet a minimum balance requirement – they’ll only need an initial deposit of $100 to open their account.
At the end of the line
Building a strong cash cushion can give you more flexibility in a pinch and help give you peace of mind knowing you’re financially ready for whatever life throws at you.
While saving 20% of every paycheck is a pretty common rule, use the guidelines we’ve outlined above to help you figure out what’s best for your personal financial situation. Whether you’re able to save 20% or 5% of every paycheque, starting with any amount is better than nothing and will help you establish the habit of saving money, which is really the most important takeaway.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.