How much of your income should you save?
A common guide is to save 20% of your take-home pay, but the right number depends on your debts and whether you have an emergency fund yet. Here is how to work out your savings rate and where to start.
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The rule of thumb: 20%
The 50/30/20 guide splits take-home pay into 50% for needs, 30% for wants and 20% for savings and extra debt payments. On $4,000 a month, that is $800 a month saved. Try your own income in the 50/30/20 calculator.
20% is a target, not an entry fee. If rent alone takes half your pay, starting at 5% or 10% and raising it is better than not starting.
Work out your own savings rate
Your savings rate is what you save in a month divided by your take-home pay. Save $600 of $4,000 and your rate is 15%. Count money put toward savings goals, retirement and extra debt payments, not money that merely sat in your account.
What to save for first
- 1
A small starter cushion, enough for a surprise bill such as a car repair, so it doesn’t go on a credit card.
- 2
High-interest debt. Credit card interest is often around 20% a year, more than savings will earn, so paying it off is the better return.
- 3
A full emergency fund: 3 to 6 months of essential costs. The emergency fund calculator works out your number.
- 4
Retirement and bigger goals. Many planners suggest 10–15% of pre-tax income for retirement, counting any employer match.
Raise it a little at a time
Each time your pay goes up, send part of the raise to savings before you get used to spending it. Going from 5% to 20% one step at a time is easier than cutting 15% from your spending at once.
Questions
Is saving 20% of my income enough?
20% of take-home pay is a sound general target that covers an emergency fund and steady retirement saving for most people. If you started saving late or want to retire early, you may need more; if you are paying off high-interest debt, part of that 20% can go to the debt first.
Should I calculate it on gross or take-home pay?
For a monthly budget, use take-home pay: it is the money you actually have to split. Retirement guidelines such as 10–15% are usually stated on pre-tax (gross) income, so check which one a figure means before comparing.
What if I can’t save anything right now?
Start with a small fixed amount, even $25 a payday, moved automatically. It builds the habit, and you can raise it when a bill ends or your income goes up.