Everybody’s paycheck differs based on the job they do. So of course, no fixed amount can be allocated to your savings. However, any working individual should set a percentage of their paycheck to savings so that they can utilize it during emergencies. With that being said, there is a tried and tested framework that works great for a lot of people; the 50/30/20 rule. We will guide on what the rule means and how it is an effective way of managing your paycheck.
The 50/30/20 Rule
According to this rule, 50 percent of your paycheck should be allotted to necessities that include rent, groceries, transportation, insurance, and limited debt payments. Out of the rest of the paycheck, 30 percent should be allotted to clothing/accessories, hobbies, memberships, travel, and extra debt payments. The remaining balance should be put into your savings account to add to your fund for emergencies, investments, and retirement.
This rule works great for anyone with minimum wages to highly-paid salaries. Changes can be made to the rule if it is a two-income household. For example, if each person in a two-income household has similar salaries, one can cover 50 percent of the necessities, while the other should focus on extra expenses and savings.
How Much To Set Aside For Different Kinds of Savings?
Saving 20 percent of your paycheck should be the bare minimum. But if you want to reach bigger financial goals you’ll have to allocate more to savings while cutting on things that you want currently. Savings shouldn’t be done just so you can make impulse purchases down the line.
However, it doesn’t mean you can’t live a little. While you’re working towards saving for the important goals in your life, you should try and set aside a little as “fun money”. Although it might also fall under the 30 percent from the 50/30/20 rule that we discussed earlier. At the end of the day, it’s up to you to decide on how much you’d like to spend on things that you “want” on the spot. With that being said, here’s how much you should save for the major financial goals.
Even if you do not touch on the other financial goals mentioned here, make sure you save for emergencies. Unfortunately, everybody faces an emergency at some point in their life. Ideally, at least 3 to 6 months of your total income should be set aside for an emergency fund. Now, that’s not possible if you’ve just started your career. But that’s the thing about savings; you should build up your savings right from the beginning so that if you were to face an emergency such as a car accident or illness, you’ll have saved money solely to be used for that purpose.
To continue the same lifestyle, it is suggested to save at least 15 percent of your gross income for retirement. So if you get a monthly paycheck of $3000, you should set aside at least $450 for a retirement fund. The easiest way to do so is to set up automatic payments so you don’t have to worry about it every month. Although a lot of people depend on Social Security, it isn’t the most viable option for a smooth retirement. This is why is necessary to take matters into your own hands.
Depending on how much you earn, you can set aside a percentage of money from your paycheck for investments such as bonds and index funds. Of course, you should consider risk tolerance before making any investment and the best option would be to evaluate how the investment can benefit you in the long run.
A big purchase could be a house or a car that you’ve been meaning to buy for a long time. As it requires a good chunk of money, it’s better to allocate a percentage of your paycheck specifically towards the big purchase.
Where To Put Your Savings?
General Savings Account
Normally, short-term savings and emergency funds are put in a general savings account. These types of accounts have a growth APY of about 0.01 to 0.08 percent. Since they are easily accessible, you should put your savings for emergencies in a general savings account.
High-yield Savings Account
Since high-yield savings account ensures 1 percent APY, they are ideal for short-term savings. While the account can be easily accessed, it also helps to increase your contributions over time.
401K or Investments
Solely made to set you up for retirement, you should contribute to 401K as it allows the growth of your investments up to 14.2 percent. Plus, 401K contributions allow the possibility of reducing the monthly taxable income.
Invest in Stock Market
One of the best ways to grow your money is by investing it. Stock market is probably the most lucrative option with the greatest earning potential.
However, as a beginner, you might find it difficult to understand a few things and read charts. Here’s a guide to help you understand candlestick charts and make the most of them.
How Can You Grow Your Savings?
Set Your Savings Goal as a Percentage
Setting an amount for savings will not allow it to grow over time. Therefore, it’s important to set a percentage for each savings goal so that as your income increases so does your savings.
Make Your Savings Hard to Access
If your savings are readily available you’ll be prone to draw money from it, go on an impulse trip or purchase an expensive product that you do not really need. Now, it doesn’t mean you should do those things but it’s important to make your savings are difficult to access so that it prevents you from spending from it regularly. “Out of sight, out of mind” really works well in this aspect.
Putting 20 percent of your paycheck in your savings account is a great way to keep aside a sum of money that would be a life savior during emergencies, retirement, and potential investments. Therefore, no matter at what point in your career you are at the moment, you should set aside at least 20 percent of your paycheck.