How Much Of Your Paycheck Should You Save? (Hint: It’s Not 20%)

How much of your paycheck should you save? Common knowledge says 10-15%, and other popular strategies like the 50/30/20 rule say 20%. 

But will that really help you achieve your financial goals?

If you’re happy working 35-50 years, sure. 

But if you want more freedom, and more time, there is a better way.

We’ll take an honest look at how much to save per month and how it will affect your ability to retire early… and uncover the truth about how long it will really take.

If you follow this guide, you will see how it can be faster than you ever thought possible. 

(without any get-rich-quick hype)

Why Do You Want To Save Money Each Month?

If you want to know how much of your paycheck should you save—start with why.

What are you saving for? Why do you want to save?

Initially, you may be saving for peace of mind. Having an emergency fund can help you sleep better at night. instead of being afraid to open the mailbox to find a bill you can’t afford, you’ve got a cushion to cover you.

Once you’ve met that need, you may be saving because you want to get out of a high-paying but stressful job in 15 years, instead of 40. Or you love your job but would also love to retire early and travel the world even more (and you don’t want to wait until you’re 70 to do that).

Take some time, and think about your future hopes, dreams, and even some of your fears. What would it feel like to wake up one day and have enough money and investments that you no longer had to work? 

Write those things down. They’ll be important motivators through your journey to financial freedom.

Now that you know what you’re saving for, let’s look at how much you should save each month.

How Much of Your Paycheck Should You Save?

I could tell you that 20%, or 57%, or 10% is how much to save per month, but if you don’t know if that will get you where you want, then it’s a useless, arbitrary number. Unfortunately, that’s what most financial experts give you. But you’re smarter than that. You’re ready to take control of your money and become your own financial expert (it’s easier than you think).

We’ll figure out how much you need to retire early, and a very simple formula for how long it will take you to get there.

Where do you start?

The average savings rate in America in 2019 was 7.6% ¹. Yikes! We won’t be average.

If you aren’t there yet, that’s ok! This post is going to help you set a goal, make a plan, and even show you tips on getting far beyond an average savings rate. Let’s do this!

So then how much of your paycheck should you save?

One savings rule of thumb called the 50/30/20 rule (popularized by Elizabeth Warren) says we should break our monthly income down like this:

50% should go towards essentials.

Things like your rent or mortgage, food, minimum debt payments, health insurance and the like.

30% To discretionary spending.

Here you would put Netflix, your gym membership, going out to eat and your other wants (not needs).

20% to savings.

This would include saving up for your emergency fund, retirement accounts or even saving for a downpayment for a house.

This is a great place to start answering what percentage of your income you should save, but not the whole picture and not where you may want to end!

If you’re comfortable with a 30-year working timeline until retirement and financial freedom, then you can stop here. But if you want more, and you want to dramatically reduce your time to freedom, then you’ll want to see your other options.

Let me show you how you can make your money go further and faster.

Once you see the full picture, you’ll gain more control of your money and your financial future.

Let’s begin with a goal. We want to know where we’re going, so we can make a plan on how to get there.

The 4% rule states that you can safely withdraw 4% of your investments every year for 30 years without going broke. In fact, in the vast majority of cases, you would end up with several times more money than you started with. (Thank you compound interest)

How that works out for you is fairly simple: take your annual spending and multiply it by 25. That’s your target investment savings goal to retire forever.

Here’s a simple chart breaking down how much you need to have saved up based on how much you plan to spend in early retirement each year.

Ok, that’s great, we have a goal in mind.💪

So how long will it take to get there?

That depends on a few factors. 

1. How much you earn every year?
2. What percentage of that do you save vs spend?

For our purposes, we’ll assume a 7% annual interest rate from your investments (think index funds— more on this in the next section)

Here’s how long it would take you to retire based off of your savings rate if you started at zero dollars in savings:

As you can see, the higher percentage of your income you save, the faster you’ll reach retirement. That’s because if you can live off of $40,000 on a $100,000 a year take-home you’re saving $60,000. That would put you at the 60% savings rate and would only take 11.5 years until you could retire for life.

If you can save 90% of your income you’re ready to retire in under 3 years!

The reverse is also true. If you spend 90% of your income and only save 10% and never get raises or increase your savings, it will take you 41.7 years to retire 😳. Unless you’re comfortable working for the rest of your life, you’ll want to make some changes.

I’ll show you how below.

But for now, look at this chart, and see where you’re at on it, and where you’d ultimately like to be. You may be saving nothing right now, but it doesn’t have to stay that way. Just a few years ago i went through a fairly long slump of 0% savings too.

Now that you can answer “how much of my paycheck should I save?” It’s time to see where you should put your money to achieve your goals as quickly as possible.

Where Should You Put Your Monthly Savings?

You’ve figured out why you want to save money and what you’re saving for.

And based on how fast you want to reach early retirement you’ve learned and decided how much of your paycheck you should save.

Now we need to know where to put that money every month.

There are a few different places, each with its own purpose.

Here’s the hierarchy of savings and why each matter.

1. 401k Company Match

If your company has a 401k plan and offers a match, it’s FREE money. There’s almost no greater return than this. So if your company offers a 6% match when you put in 6% of your earnings, you’re now at a 12% total savings rate! This is too good to miss out on and can make a big difference in getting to early retirement faster. Always check with your human resources department to see what options they have. If there’s no match at all, you may want to jump to the next steps below first.

2. Eliminate Debt if you have it.

This does not include your standard mortgage. Typically mortgage rates are low enough that we don’t want to lose greater wealth-building gains we can make via investments. This does include credit card debt, car loans or whatever other consumer debts you may have. If you don’t have any— awesome! Move on to the next step. If you’re still at this step, keep reading because the next section will address tips to speed up savings and earning which can be applied to destroy your debt quickly.

3. 3-6 month emergency fund

Where: Save this in a high-interest money market savings account like Capital One 360 or Betterment’s savings account. They offer a 6-20x higher savings rate than standard bank savings accounts.

Why: This money is like a personal money insurance policy or safety-net. This is not investing money to try and make great gains off of.

It’s to give you peace and security so that in difficult times you while everyone else is freaking out, you’re confident and in control- knowing you can handle financial ups and downs.

Alternator decides to die and go to car-parts-heaven? If you didn’t have an emergency fund, you might FREAK OUT. But because you do, and you planned for it… no worries, you can pay cash to have it fixed, and even rent a car for a few days so you can make it to work. The “big” problems in life start to feel smaller because you planned for them.

4. Traditional IRA or Roth IRA

Where: You can go to M1 Finance, Betterment, or even Vanguard and open a tax-advantaged IRA investment account.

If you plan on retiring early, you may want to favor putting money into a Traditional IRA over a Roth IRA. Due to the ability to save money on your taxes each year, you’re working and because you can convert your Traditional IRA to a Roth IRA during early retirement when you’re likely to be at a lower tax rate. See MadFientist’s explanation on converting your IRA for further info. Your goal here is to max out what you’re allowed to contribute each year. For 2020 the annual contribution limit is $6,000 or $500 per month ($7,000 if you’re over 50 years old)

5. Max Out Your 401k

If you still haven’t hit your desired savings rate goal, then you’ll put any extra money you have into your 401k until you hit the max. For 2020 the 401k contribution limit is $19,500 (or $26,000 if you’re over the age of 50).

6. Regular Brokerage Account

If you’ve maxed out all of the above accounts and you still haven’t reached your savings goals here’s where you’ll go next.

Where: You can go to the same place you opened your IRA account: M1 Finance, Betterment, or even Vanguard and open a regular investment account. By regular, it means a non-retirement account that doesn’t offer retirement account tax advantages. Sure, you won’t get a tax break, but these accounts do allow you to invest and put your money to work. They also allow easy access to funds if you ever truly need to sell investments without paying early withdrawal penalties of most retirement accounts.

Special Note: if you have an HSA (Health Savings Account) you want to max that out around step 3. There are great tax benefits and excellent flexibility in withdrawal options now and later in life.

If that feels like a lot, just work one step at a time. After you complete each step, it will get easier and easier. You’ll feel more familiar with handling your savings, investments, and the accounts they go into.

Plus it becomes extremely motivating as you watch your savings grow from tiny numbers into a substantial cash cushion. And to watch your investments compound into huge amounts you never thought were possible at the start of your journey.

Now that you know where to put the money you save from each paycheck, we want to address how you can actually do this if you’re feeling like these numbers are out of reach right now.

What If I Can’t Save Any of My Income?

If you follow all of the steps above consistently over time, you’re going to better off than 95% of others in just a few years.

But right now, you may be struggling and don’t feel like you can even start. My wife and I have been in massive debt (over $135,000 not including a mortgage), and we’ve been at the point of savings exactly $0 dollars per month. It can suck, I get it.

But it doesn’t have to be that way, and it doesn’t have to stay that way.

Here are some ways to start making a difference in your finances today so that you can have a better future.

Cut expenses

The first place to start is by looking at your current income and expenses. There is always room to trim unwanted expenses, and that’s an added opportunity to save or pay off debt.

I like to use YNAB to both budget and track our expenses every month. Before YNAB we tried doing it on paper, spreadsheets, envelopes, and nothing really worked well for us for more than a few weeks or months. This tool made a huge difference and paid for itself in the first month during the free trial.

Whatever you use, just start budgeting so you can get a clear picture of your money and purchases.

Now you’re going to look for opportunities to trim the fat.

1. Go through your monthly charges and look for recurring expenses like Cable, your Cell phone, Landline (some people still have these!), gym memberships, subscription services.

Anything you don’t use, make money from, or get serious value from gets canceled immediately.

Next: Is there a cheaper alternative that’s just as good or 80% as good? I just switched to Mint Mobile and saved over $1,100 on my family’s annual cell phone plan vs. Verizon. It took me 20 minutes to sign up and was super easy. I can’t believe how long I overpaid. (See this post on making and saving money for details)

2. Call and negotiate your bills, credit card interest, and car insurance.

In the same post above you’ll see ideas, tips, scripts and services to help you negotiate all of these. Another personal example: I switched car insurance companies and saved over $900 for a couple of hours of research and calls on the weekend. There are so many missed opportunities in this area and that equals MONEY. Money you can use to pay down debt, or save and invest for your future. 

Get Serious About Paying Off Debt

Debt outside of your mortgage is an emergency! It feels terrible and dramatically slows down your path to early retirement. It’s like dragging an anchor behind you while running a race. 

Once you have hit your company’s 401k match, all of your financial efforts should go towards getting rid of consumer debt. See the section titled “Get Out of Debt” for a basic primer on how to pay off your debts fast.

Once your debt is gone, simply take whatever you were paying towards your debt and now move that freed-up money straight into your savings plan! You’ll start at Step #2 on building your emergency fund, and then keep moving down the list.

Make more: 

After you’ve cut expenses, the next place to look is increasing how much you make every month.

If you’ve figured out how much of your paycheck you should save each month, and you’re not hitting that number, or you simply want to accelerator your time to retirement, it’s time to make more money! And there are plenty of ways to do just that.

Negotiate a Raise

If you enjoy what you do, a surprisingly quick way to increase your salary is to negotiate a raise or promotion. Most people either don’t think this is possible or simply accept the annual 3% inflation raise or whatever their boss hands them. But top performers know that they can make massive gains now while setting up their future for even more growth.

Take a more in-depth look at how to get a raise or promotion including scripts and tips. Under the section “Negotiate a Raise” you’ll see how I helped a friend get a 40% raise he never thought was possible.

Start a Side Hustles or Side Businesses

Side Hustles and the gig economy are both excellent ways to start making more money this week. I love that you can scale them up or down depending on how much time you want to invest and how much extra money you need to earn. We have a big section on side hustles you can start today as well as 50+ other strategies for making and saving more money now.

This is a quick way to push harder and crush your debt or boost your savings rate this month.

Switch Companies

Just like the section on negotiating a raise, sometimes you can make large jumps in income doing the same job, but for another company. See our post on how to get a raise or promotion for more context (in the section “Negotiate a Raise”). It’s best to always network with other similar companies and to set up multiple interviews to not only keep your options open but to get competing offers. Having multiple companies (including your current one) in a bidding frenzy over you can do wonders for your income and how much of your income you save each month.

Find a new job or career path

Sometimes you just don’t love what you do or you’ve legitimately tried to get promotions and raises and it’s just not going to happen. You can always switch careers. I did this 18 months ago and it made a substantial difference in our family income and financial future. (And now I’m getting paid to learn all of the hands-on skills I’ve always wanted to know so I can fix-up my own properties in the future. Double win.)

We have 2 massive posts showing you different career paths to boost your income (and therefore, savings!).

Jobs that pay $100 an hour 27 Jobs that you can earn $200,000 a year in.

Jobs that pay $30 an hour without a degree there are over 120 jobs here! (You’ll notice quite a few of these ones earn even more than $30 an hour)

Start Your Savings Plan Today

The best time to plant a tree was 20 years ago. The second best time is now.

— Chinese Proverb

The same thing goes with saving and investing. Today is your day. 

Find out where you’re starting, where you want to go, and follow this guide. In 5 to 10 years, not only will you be ecstatic you did, you’ll wonder why you didn’t start sooner.

It starts with simply answering how much of your paycheck should you save… but it often ends with financial freedom from investments that grew to high 6 or even 7-figures. You can do it.

If you need any help, put your questions in the comments below. I read every one of them.