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How much of your paycheck should you save?

Kat Tretina

Updated Sat, Sep 14, 2024 6 min read

Whether it's a small emergency like a flat tire or a major one like traveling to care for an ill family member, life will inevitably throw some financial hurdles your way.

Building an emergency fund and setting aside money for the future is critical, but how much of your paycheck should you save? In general, experts recommend setting aside 20% of your income. If that percentage sounds impossible, there are some strategies you can use to find extra cash to build a sufficient safety net.

Breaking the paycheck-to-paycheck cycle

Living paycheck-to-paycheck is common. In a 2024 CivicScience survey, approximately 1 in 4 adults said they didn't have enough money after paying their bills to save.

If that fits your current situation, you know how stressful it can be. When you're barely getting by, small hassles like the cost of a prescription medication or routine car maintenance can become serious issues. Without a cushion in your budget or savings, you may need to use debt to cover the expense.

Saving for a rainy day and for your future is key to breaking that cycle. It also gives you tremendous peace of mind. Going to bed with the knowledge that you can pay for new tires or cover your pet's vet bill can be incredibly gratifying, and it's amazing how having a financial cushion can improve your sense of well-being.

How much of your paycheck should you save?

Recommendations vary, but generally, experts say a helpful goal is to set aside 20% of your income in savings. That guideline doesn't mean you have to put the entire amount in a savings account; you can split up that percentage according to your different savings goals. Below are three main areas to plan for when creating your budget for savings:

Emergency fund

An emergency fund is an essential part of financial security. It's what gives you protection if your washer machine breaks, your dog needs surgery, or your car needs extensive repairs.

Experts recommend setting aside enough money to cover three to six months’ of expenses in an emergency fund. For example, if you typically spend $4,000 per month on rent, food, insurance, and other essentials, you should aim to save between $12,000 and $24,000 in an emergency fund.

If that amount seems unrealistic, start smaller. Setting aside $1,000 or even $100 can be an important step toward improving your finances, and having that money can provide you with some relief when an emergency occurs.

Retirement fund

Most people aren't saving enough for retirement. Retirement experts say you need to save 10% to 15% of your income, but those recommendations are based on the assumption that you start saving in your 20s. If you start saving later, you may need to save even more.

But don't panic. That amount includes employer contributions. If your employer matches your retirement contributions, you can count those contributions toward the retirement guideline.

For example, let's say you make $50,000 per year. So to meet the 10% recommendation, you need to save $5,000 for retirement each year. Your employer matches 100% of your contributions (up to 5% of your salary), so you can qualify for up to $2,500 per year in matching contributions. With your employer's help, you only need to save $2,500 of your own money to meet the 10% goal.

Of course, any additional money you can save will help you over the long run. However, when money is tight, focus on qualifying for the full employer match and saving what you can.

The earlier you start, the better off you'll be. Let's say you start saving at the age of 25, and you plan on retiring at the age of 65. You contribute $50 per month and your employer contributes the same amount, allowing you to save $100 per month for retirement. Assuming an average annual return of 8%, you'd have nearly $350,000 in your retirement fund by the time you're 65.

Bump up your contributions to a combined $200 per month, and you'd have nearly $700,000. And saving $300 per month would make you a millionaire in retirement.

*Examples assume the individual begins saving at 25, and retires at 65, and that the stock market delivers an average annual return of 8%.

Other savings goals

Besides your emergency fund and retirement nest egg, you likely have other goals you want to accomplish, such as buying a new car, becoming a homeowner, or traveling.

Of course, with today's prices, those goals can feel out of reach. Today, for instance, the average home price is over $500,000, and the average price of a new car is over $48,000.

Setting aside a little money every month can add up over time, helping you build a down payment or cover the cost of your dream vacation.

What if you can’t save enough of your paycheck?

If you live in an area with a high cost of living or have other major expenses, setting aside 20% of your income may not be possible. However, it's important to start somewhere, no matter how small. Setting aside $5 or $10 per month can make a difference over time.

To find extra money to save on a tight budget, consider these tips:

1. Open a high-yield savings account (HYSA)

Putting your savings in an HYSA will help you maximize every dollar you save. You'll earn a much higher interest rate on your balance than you would with a traditional savings account, helping it grow faster. In fact, many high-yield savings accounts pay 5% APY or more.

See our picks for the best high-yield savings accounts available today>>

2. Earn extra income

There are only so many ways to cut your spending and trim your budget. When money is tight, look for ways to boost your income. For example:

Rent out unused space: You can rent out an extra room, a parking spot, or even an empty closet to neighbors and locals who need storage space. You can use platforms like Neighbor to list your space.
Sell unused gift cards: Nearly half of Americans have unused gift cards. If there's a gift card to a store or restaurant that's gathering dust, turn it into cash by selling it on resale platforms such as GiftCash or Raise.
Pick up gig work: If you have some free time, you can make money doing on-demand gig work on platforms such as TaskRabbit.

3. Use roundup savings tools

Some financial institutions have savings or investment accounts with roundup tools. When you make a purchase or pay a bill, the institution rounds up the purchase amount to the next full dollar, depositing the difference to your savings or investment account.

For instance, if you buy a coffee for $3.50, the platform would round the purchase amount to $4.00, depositing the extra 50 cents to your bank account. Over time, your spare change can add up.

You can take advantage of roundup features through Acorns, Bank of America, SoFi, and others.