How Much of Your Paycheck Should You Save?

How much of your paycheck should you save?

It’s a question at the forefront of many people’s minds — especially those who are working hard to build a solid financial foundation. While many experts suggest specific amounts for savings goals, such as 20% of your income, the reality is that there’s no one-size-fits-all answer.

The appropriate amount to put away each pay period depends on several factors, including your financial goals and current situation.  Here are a few important points to consider.

How To Determine Your Ideal Savings Percentage

The 20% savings “rule” stems from the well-known 50/30/20 budgeting strategy. It suggests allocating 50% of income to things you need, 30% to wants, and 20% to savings and repaying debt. While this is a good starting point, it may need to be tweaked to fit your personal situation. Begin by following these four steps.

1. Start With Your Savings Goals

Determining your ideal savings percentage starts with setting clear financial goals. Understanding what you’re saving for and why it matters can help you create a personalized savings strategy. Whether you’re building an emergency fund, planning for retirement, or saving for a major purchase, visualizing the results can help you stick to a savings plan. 

2. Consider Your Personal Situation

With your goals in mind, consider how the following factors may influence your ideal savings rate:

• Income level and stability: Higher and more consistent income typically allows for greater savings potential. Fluctuating income may require you to adjust the savings rate accordingly.
• Living expenses: The cost of living in your area and lifestyle choices can significantly affect your ability to save.
• Debt obligations: Existing debts, such as student loans, mortgages, or credit card balances, may affect the ability to meet savings goals. 
• Age and time horizon: The amount of time you have to reach your financial goals impacts how aggressively you need to save. Younger individuals can take advantage of compounding interest, while those closer to their goals may need to put away more each month. 
• Economic conditions: Inflation, interest rates, and economic stability can influence savings goals. During times of economic uncertainty, it may be wise to increase your savings rate.

3. Calculate Your Paycheck Savings Percentage

To calculate the dollar amount you need to put away each pay period, multiply your net income by the savings goal. 

For example, if your net paycheck is $2,000 and you want to save 15%, put away $300 per pay period.
$2,000 x 0.15 = $300

Alternatively, you may prefer to start by deciding on a set dollar amount to save each pay period. In this case, understanding the percentage of income it equals can help you understand if you’re meeting the 20% rule.

To calculate the savings percentage, start with the amount you want to save and divide it by net income. Then multiply the result by 100 to convert it to a percentage. 

For example, saving $400 from a $2,000 paycheck means you’re setting aside 20% of net income.
$400 / $2,000 = 0.20
0.20 x 100 = 20%

4. Customize Your Savings Strategy

It's difficult to follow a savings strategy that's not customized to your needs. Beware of setting goals that stretch your budget too far. Instead, focus on making smaller, more sustainable contributions. Prioritize savings goals based on their urgency and importance, then adjust the strategy as your needs evolve. Don’t forget to regularly review the savings plan to ensure it’s still effective and aligns with your current financial goals.

Practical Ways To Save

Setting a savings goal is an important step toward financial security. However, turning that goal into a reality may prove challenging. The following practical tips will help you consistently build savings and stay on track toward meeting financial objectives.

Budgeting and Expense Tracking

To effectively save, it's critical to understand where your money goes each month. Begin by listing all sources of income and monthly expenses. Categorize your expenses into needs, such as rent, utilities, and groceries, and wants, such as dining out and entertainment. You can do this using a simple budget spreadsheet or try an app or tool designed to monitor spending in real-time, like the PNC Mobile app. This may help you identify spending patterns and find opportunities to increase savings.

Once you understand current spending patterns, decide what percentage of income to allocate to each spending category and the savings plan. With a budget in place, regularly review expenses to ensure your spending stays within the planned ranges.

Cutting Unnecessary Costs

To save even more, closely review expenses categorized as wants or fun money. Often, it’s possible to reduce or eliminate some of these discretionary costs, freeing up extra funds for savings. Consider these tips:

• Review subscriptions: Cancel subscriptions or memberships you don't use regularly.
• Cook at home: Reduce the frequency of dining out by planning meals and cooking at home.
• Shop smart: Look for discounts, use coupons, and compare prices before making purchases.
• Limit impulse purchases: Avoid spontaneous buying by making shopping lists and sticking to them. 

Automating Your Savings

An automatic savings plan is a powerful way to consistently and effortlessly set aside money. Many banks and financial institutions, including PNC Bank, allow automatic transfers from checking accounts to savings or money market accounts. Some waive the monthly fee for accounts with auto savings plans, freeing up even more money to allocate toward savings.

Put Your Savings Plan Into Action

When determining how much of your paycheck to save, keep in mind that everyone’s situation is different. While the 20% rule is a helpful guideline, it’s important to customize your strategy based on personal needs.

Start by setting clear goals and considering factors like income stability, living expenses, and debt obligations. Then, calculate your ideal savings percentage. Finally, remember to review and adjust your plan regularly.

To make saving easier, implement practical strategies such as budgeting, cutting unnecessary costs, and automating your savings. These steps can help you stay on track and steadily build your savings.

When you’re ready to implement a savings strategy, PNC Bank offers a range of savings tools to support your journey. Explore your options now, or contact our team for personalized advice.