How Much of Your Income Should You Save?

FT Contributor  | 

Most people say to save 20% of each paycheck. This, however, isn’t an ideal situation for everyone, nor is it custom. In reality, the amount of income you should save out of each paycheck varies depending on multiple factors. The most important factors are how much you bring in on a monthly basis, and what your savings goals are. Have you asked others how much of your salary you should save without receiving a satisfactory answer? Here, we’ll discuss the different approaches you can take to saving money and how to settle on the savings plan that’s right for you.

Net vs Gross Income

Before you ask how much income you should save, first assess your income. It’s important to understand the differences between net and gross income, as this will affect how much you save out of each paycheck. As an employee, your W2 contains information on your gross and net incomes. Your gross income is the amount of your salary or wages that you’re paid prior to any deductions. Net income is the residual amount of your earnings after all of the necessary deductions are taken out. This includes things like taxes and retirement plan contributions.

Savings Goals

To answer the question about how much of your monthly income you should save, you first have to decide on a goal. Your savings goal can be quite specific, but it will typically fall into one of two categories: long-term or short-term. Similarly, the methods for achieving your savings goals correlate with the savings goal you set. For example, a yard sale can be held to achieve a short- term savings goal, and a second job may be recommended to help achieve a long-term savings goal.

Long Term

Long-term goals usually take five years or more to reach. One of the most important long-term goals that people save for is retirement. Regardless of what your long term goal is, it’s important to be disciplined with your spending and saving habits. Make it easy to contribute to your long term savings goal by automatically allocating funds to the accounts in which you’re storing your long-term savings. Another long-term savings option is investments. Funds can accrue interest over time, so you’re essentially putting your money to work.

Short Term

Short-term goals are reserved for things like vacations, auto insurance payments, and gifts. These funds can also be used for infrequent, big-ticket items like a down payment on a house or funds for a new laptop. The money set aside for your short term goals should be kept in an easily accessible account that you can take money out of at your leisure.

50/30/20 Rule

One of the most popular methods for saving money is the 50/30/20 budgeting rule. Essentially, the rule states that 50% of your estimated income should go towards needs, 30% towards wants, and 20% towards savings.

The 50% of your income designated for needs is for things like your mortgage, grocery bills, utilities, health insurance, and essentially anything else that you need to survive. The 30% you spend on wants is meant for things like shopping, eating out, and any hobbies you might have. The final 20% is what should be allocated towards your savings.

To succeed with the 50/30/20 rule, it’s imperative that you know the difference between your net and gross income. The dollar value you calculate for each category should be determined by your net income, as this is the money you physically have access to when you get paid. You can choose to base these numbers off of your gross income. It’s really about the amount of cash you need to have on hand when you get paid.  

Savings by Age

As you get older, you will probably start to adjust the way you think about your savings. In reality, the amount of income you put away into savings will vary greatly depending on your age. Age can be a good determinate of how to calculate the amount you put into savings. Below are some of the most common savings benchmarks based on age range.

Age Amount To Save
30 $13,000 – $27,000
40 $16,000 – $34,000
50 $17,000 – $36,000
60 $12,000 – $26,000
70 $9,000 – $20,000

Of course, the amount of income you set aside fluctuates throughout your life depending on emergency expenses. What you save is also heavily dependent on your personal income as well as your monthly expenses, but as you age, those expenses start to dwindle. For example, later in life, you may not have a mortgage payment and therefore won’t have to put as much money into savings every month to cover that expense in case of an emergency. The real answer to how much you should be saving every month varies on a case-by-case basis.


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This post was updated October 31, 2019. It was originally published October 31, 2019.