What percentage of your paycheck should go to savings? A practical guide

Introduction

Savings from each paycheck helps weather unexpected expenses, reach goals, and reduce financial stress. There isn’t a universal percentage that fits everyone. A practical starting point is to aim to save about 20% of your take-home pay, while also building an emergency fund and contributing to retirement.

Guidelines to set a savings target

Two common frameworks can help you set a target without overthinking:

The 20% rule

• Save about 20% of your take-home pay if you can. This can be split between an emergency fund, retirement, and other goals.

The 50/30/20 framework

• 50% needs, 30% wants, 20% savings. The savings portion is the key for building security over time.

Emergency fund and retirement aims:

• Build an emergency fund with 3–6 months of essential expenses.
• Retirement savings: many people aim to save 10–15% of gross income, more if you can, especially if your employer matches.

If you carry debt, you may need to balance debt repayment with savings, increasing your savings rate as debt falls.

How to figure out your personal target

Step 1: find your take-home pay

Calculate your monthly net income after taxes and deductions.

Step 2: list needs vs. wants

Identify essential expenses (rent, utilities, food) and nonessential spending you can cut.

Step 3: set a safety and retirement plan

Decide on an emergency fund target (3–6 months of essential expenses) and a retirement contribution goal, factoring any employer match.

Step 4: account for debt and big goals

If you have high-interest debt, plan to tackle it as part of your budget while you save gradually.

Step 5: pick a starting savings rate

Choose a realistic initial target (for many, 10–20%) and automate it.

Savings targets by situation

Early career or low income

Starting with 5–10% is common; 10–15% if possible. Prioritize building the emergency fund and retirement contributions as soon as you can.

Mid-career or with debt

Aim for 15–20% if debt is manageable. If debt is a priority, start lower and increase once debt shrinks.

High income, debt-free

20–30% is a reasonable target, with larger shares directed to retirement and goals.

Near retirement or aggressive saver

Aim to maximize retirement contributions and general savings to ensure a comfortable transition.

General note

If you’re aiming for FIRE or a fast timeline, higher targets (sometimes 40–50% or more) may be pursued, but only if your budget supports it.

Practical steps to reach your target

• Automate transfers to savings accounts so you save without thinking.
• Use multiple accounts: a separate emergency fund, sinking funds for irregular expenses, and retirement accounts.
• Increase savings with raises or windfalls; keep essential expenses in check.
• Review and adjust at least annually or when life changes (new job, inheritance, a move).

A quick example

If your take-home pay is $4,000 per month and you target 20% in savings, that’s $800 monthly. You could allocate $600 to building an emergency fund (toward 3–6 months of expenses) and $200 to retirement or other goals. Once your emergency fund is funded, you can shift more toward retirement or other goals.

Bottom line

Saving from every paycheck is a powerful habit. Start with a realistic target, automate, and adjust as life changes. Consistency over perfection compounds over time.