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If the last couple years have taught us one thing about managing money, it's that having some savings set aside is crucial.
Despite the significance of having savings, however, research shows that 45% of Americans have less than $1,000 saved — and in an emergency situation, $1,000 may very well not be sufficient. To ensure you have an adequate amount to cover a worst-case scenario, stashing away a portion of every paycheck is key.
Financial security set aside, there are many other benefits that savings can provide. Interest rates are on the rise and having a more robust savings would allow you to pay down high-interest debt, such as credit cards. That's why, given today's volatile economic climate, financial experts recommend getting out of debt as soon as you can.
For starters, having some savings allows you to avoid going deeper into debt to cover purchases in the first place. It would also allow more room for you to try new things professionally and take more risks without worrying as much about how your finances might be impacted.
While we've established that it's important to save, the next question is just how much should we be putting away?
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The standard rule of thumb is to save 20% from every paycheck. This goes back to a popular budgeting rule that's referred to as the 50-30-20 strategy, which means you allocate 50% of your paycheck toward the things you need, 30% toward the things you want and 20% toward savings and investments.
Shon Anderson, a certified financial planner at Anderson Financial Strategies, says this "gold standard" will not apply to everyone or every situation. Another method, he suggests, involves an 80-20 divide, with 20% of your paycheck allocated to your savings and the remaining 80% allocated to spending related to your needs and wants. The idea is that the 20% allocation remains constant in either approach.
It's certainly realistic that, in this latest rule, the 80% takes up all your essential costs, leaving no room to spend on your wants. For example, latest data from Redfin reveals that the average monthly price of rent in the U.S. is $2,016 as of June 2022. With this high average, it makes sense that one's needs could easily reach 80% of one's paycheck.
No matter which rule you choose to follow, be sure to find a flexible balance between saving and spending. "The point with both these methods is that saving 20% is still a priority," Anderson says.
And if you're wondering how much of that 20% you should invest, it helps to first have a goal in mind to stash about three to six months worth of living expenses into your savings — it's also how much experts typically recommend saving for an emergency fund.
Determining how much to save is followed quickly by figuring out just where to put it. Your best bet is in an online high-yield savings account, which pays more interest than a traditional savings account at your local brick-and-mortar bank. Select ranked LendingClub High-Yield Savings as one of the best accounts because it offers some of the highest returns on your money, with a 2.07% annual percentage yield, or APY.
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There may very likely be times or circumstances that make it difficult to set aside a fifth of your paycheck — and that's certainly OK. "There's no one-size-fits-all answer here," says Delyanne Barros of Delyanne The Money Coach. Taking the example above, if your essential costs did equate to 80% of your paycheck, you may want to allocate some of that remaining 20% to discretionary spending and not all put into your savings.
At the end of the day, the goal really is to just make sure you're saving some portion of your paycheck — even just $20. By saving up a little each time you get paid, you'll make saving a habit and it'll soon become second nature to you.
It's important to get into the routine of saving no matter how much it is you are setting aside. That way, when the day comes that you can allocate more to your savings, it's already a muscle you've been exercising. "Starting small and as early as possible can make all the difference in your financial security," Anderson adds.
You can also try beefing up your savings by freeing up some of your spending money. Make it easy on yourself by signing up for an app such as Rocket Money (formerly Truebill), which can cancel unwanted subscriptions and negotiate bills on your behalf. Read Select's full review on Rocket Money (formerly Truebill) to learn more.
Beyond the 20% rule of thumb and making sure you are setting aside at least some portion of every paycheck, Barros says to acknowledge what exactly you're saving for, since what you plan to do with your savings is arguably more important than how much you save.
For example, if you're putting together an emergency fund to get you through a few months, you'll need to be saving at a higher rate since you're striving for a short-term, high-priority goal. On the other hand, Barros notes, if you're saving for retirement and you're in your 20s, you can get away with saving between 10% to 15% of every paycheck if you want to retire by age 60.
Barros offers one more guideline: How much you should save depends more on how much money you plan to spend, not how much you currently make. For example, someone who makes a $50,000 salary but lives rent-free will have fewer expenses than someone who makes a $100,000 salary but is paying rent and has a family, both of which will have different implications on their savings habits.
Building a solid cash cushion can afford you more flexibility in a pinch and help provide some peace of mind knowing you're financially prepared for whatever life throws your way.
While saving 20% of every paycheck is a pretty standard rule, use the guidelines we outlined above to help you determine what's best for your personal financial circumstances. 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.
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