When you save your paycheck, there is a classic rule in personal finances that states 20% of your paycheck should be set aside for savings. This is referred to as the 80/20 rule or alternatively the 50-30-20 rule. This rule guides you to spend 80% of your income on needs and wants and 20% directly to paying off debt, savings or investments.
Since inflation is hitting Americans hardest in the cost of basic goods, setting aside savings is becoming increasingly difficult. Research shows that 45% of Americans have less than $1,000 saved. In an emergency situation, such as a job lay off or even a car repair $1,000 will not be sufficient. In times of economic downturn having funds in savings is more important than ever.
No question, saving money from your monthly paychecks can be challenging. This is especially true if you are struggling to pay off debt and bills. However, if you can learn to set aside even a portion of regular funds from each paycheck you will improve your financial well-being and alleviate the associated stress.
Whether you’re able to save 20% or 5% of every paycheck, starting with any amount is better than nothing and will help establish the habit of putting money away, which is really the most important takeaway.
Determining how much to save every month
There is no one-size-fits-all way to save money. However the following strategies can help you save money from your paycheck every month:
- Take a hard look at your paycheck
The first step is to determine your actual take-home pay. How much money do you have to spend from each paycheck after taxes, insurance, and other deductions are taken from your salary?
Once you determine what you have to work with, you can start to divide your paycheck more accurately to cover your financial wants and needs.
- Analysis your budget and expenses
Study your bank statements, so you can identify spending patterns. Understanding how you spend money can give you key insights when you’re looking to save your paycheck.
Consider creating a budget to track your regular and unexpected expenses. In doing so, you may be able to spot areas to cut back on spending.
For example, you may find that you are spending too much at restaurants. To reduce spending on meals out, you might want to consider some ways to alter your lifestyle and save on weekly meals.
Try planning your meals for the week based on sales and shop with a list you’ll stick to. Also use coupons and cashback apps. Try creating a menu plan for the week and work to eliminate food waste. Cut out processed and snack foods. Stick to vegetables and whole grains. You may end up eating better!
Another area to cut back on is entertainment and subscription services. Cancel all services that are not essential and cap all online expenditures.
- Tackle your debt
Take a hard look at your debt obligations and see if you can reduce your monthly payments in any way. Options include debt consolidation or adjusting your regular debt payments. Refinancing student loans, for example, can help you get a lower interest rate. This can also lower your monthly payment and save you money in the long run, The same is true for transferring high-interest credit card debt to a balance transfer card with a 0% introductory promotional rate.
- Get creative and make extra cash
Get creative and find ways to make extra cash. Offer to sell a relative’s old clothes or belongings. Also think of ways to turn one of your passions into a side job that can bring in additional income.
It might be time to face reality. If you just don’t make enough money to meet your basic needs it might be time to make some major life changes. This could include looking for a better paying job, taking on a second job or moving your household to a more affordable location. When your income can’t cover basic needs it’s time to look for another source of income.
- Set Up Automatic Transfers to Your Savings Account
After you establish your budget, expenses, and financial goals, determine the amount you’ll need to set aside each month to pay your bills and make headway on your savings goals. Once you determine how much to save each month, set up automatic transfers to simplify the savings process.
There are two main methods of automating your savings. You can use direct deposit to separate your paycheck into multiple bank accounts. This way you can automatically send money to your savings account or emergency fund. Once in a separate account, it will be harder for you to draw from it.
If direct deposit is not an option through your employer, consider an automatic savings transfer. You can set up this type of transfer to move money from your checking account to your savings account each payday.
The Bottom Line
Developing the right mind set towards saving is the first step towards achieving financial freedom. By establishing an automatic deposit from your pay check into your savings account each pay period will help build financial discipline. This one act can get you into the saving habit. It’s a risk-free method, because you can always access the funds if you need them.
Make your journey to financial freedom a success.
