Whether it's a small emergency like a flat tire or a big emergency like a business trip to care for a sick family member, it's inevitable that life will present some financial obstacles.
Building an emergency fund and setting aside money for the future is crucial, but how much should you save from your paycheck? Generally speaking, experts recommend setting aside 20% of your income. If that percentage sounds impossible, there are a few strategies you can use to find extra cash to build an adequate safety net.
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Living paycheck to paycheck is common. In a 2024 CivicScience survey, about a quarter of adults said they didn't have enough money to save after paying their bills.
If this applies to your current situation, you know how stressful it can be. When you're struggling to make ends meet, small annoyances like prescription drug bills or routine car maintenance can become serious problems. If you don't have a cushion in your budget or savings, you may need to use debt to pay for expenses.
Saving for a rainy day and the future is key to breaking this cycle. It also gives you peace of mind. It's incredibly satisfying to go to bed knowing you can pay for a new tire or pay your pet's vet bills, and it's amazing how having a financial cushion can improve your happiness.
Read more: How to make the most of three months' salary
Advice varies, but experts say generally putting 20% of your income into savings is a useful goal. This guideline doesn't mean you have to put the entire amount into a savings account; you can allocate the percentage based on different savings goals. Here are three main areas to plan for when creating a savings budget:
An emergency fund is an important part of financial security. It can protect you if your washing machine breaks, your dog needs surgery, or your car needs extensive repairs.
Experts recommend setting aside enough money to cover an emergency fund for three to six months. For example, if you typically spend $4,000 a month on rent, food, insurance, and other necessities, your goal should be to save $12,000 to $24,000 in an emergency fund.
If that amount seems unrealistic, start small. Setting aside $1,000 or even $100 can be an important step toward improving your financial situation, and having this money can provide you with some relief when an emergency strikes.
Read more: How to save money in 2024: 44 tips to grow your wealth
Most people don't save enough for retirement. Retirement experts say you need to save 10 to 15 percent of your income, but those recommendations are based on the assumption that you start saving in your 20s. If you start saving later, you may need to save more.
But don't panic. This amount includes employer contributions. If your employer matches your retirement contributions, you can count those contributions toward your retirement guidelines.
For example, let's say you earn $50,000 per year. Therefore, to meet the 10% recommendation, you would need to save $5,000 per year for retirement. Your employer provides you with a 100% matching contribution (up to 5% of your salary), so you are eligible for up to $2,500 in matching contributions per year. With help from your employer, you can achieve your 10% goal by saving just $2,500 out of pocket.
Of course, any extra money you can save will help you in the long run. However, when money is tight, focus on qualifying for the full employer match and saving as much as you can.
The sooner you start, the better off you will be. Let's say you start saving at age 25 and plan to retire at age 65. You contribute $50 per month and your employer contributes the same amount, leaving you with $100 per month saved for retirement. Assuming an average annual return of 8%, you'll have nearly $350,000 in your retirement fund by age 65.
Increase your total monthly payment to $200, and you'll have nearly $700,000. Saving $300 a month will make you a millionaire in retirement.
*Example assumes an individual starts saving at age 25, retires at age 65, and the average annual return on the stock market is 8%.
In addition to your emergency fund and retirement savings, you may have other goals you want to achieve, such as buying a new car, becoming a homeowner, or traveling.
Of course, at today's prices, those goals may feel out of reach. For example, today the average home price is over $500,000 and the average price of a new car is over $48,000.
Saving a little money each month can add up over time and help you make a down payment or pay for your dream vacation.
If you live in an area with a higher cost of living or have other major expenses, saving 20% of your income may not be possible. However, it’s important to start somewhere, no matter how small. Set aside $5 or $10 a month and it will make a difference over time.
To find extra money to save on a tight budget, consider these tips:
Putting your savings into HYSA will help you maximize every dollar you save. Your balance will earn a higher interest rate than a traditional savings account, helping it grow faster. In fact, many high-yield savings accounts offer annual interest rates of 5% or more.
Check out our picks for today’s best high-yield savings accounts >>
There are only so many ways to cut spending and budget. When money is tight, look for ways to increase your income. For example:
Rent unused space: You can rent an extra room, a parking space, or even an empty closet to neighbors and locals who need storage space. You can use a platform like Neighbor to list your space.
Sell unused gift cards: Nearly half of Americans have unused gift cards. If you have gift cards from a store or restaurant gathering dust, you can turn them into cash by selling them on a resale platform like GiftCash or Raise.
Taking odd jobs: If you have some free time, you can make money doing on-demand gig jobs on platforms like TaskRabbit.
Some financial institutions have savings or investment accounts with aggregation facilities. When you make a purchase or pay a bill, the institution rounds the purchase amount to the next whole dollar and deposits the difference into your savings or investment account.
For example, if you purchase a cup of coffee for $3.50, the platform will round the purchase amount to $4.00 and deposit an additional 50 cents into your bank account. Over time, your change will keep adding up.
You can take advantage of comprehensive features through Acorns, Bank of America, SoFi, and more.
Read more: 5 money-saving apps to help you grow your wealth
A general rule of thumb is that you should save 20% of each paycheck. So, if your salary is $1,000, you should set aside $200 in savings. However, if you don't have the ability to save that much money right now, that's okay - some money is better than nothing. Start with a smaller amount - even just 5% or 10% - and gradually save more over time.
For most people, saving 20% of their net income is considered "enough." However, the 20% rule is just a guideline; for some, 20% may be too much, and for others, it may not be enough. If you're not sure how much saving makes sense for you, sit down and create a detailed budget that outlines your income, financial obligations, and savings goals. From there, you can determine the amount of savings that's right for you.
No matter how often you get paid, you should save 20% of each paycheck.