Let me take you back to yesteryear: spring of 2002. I was 14 years old and had just received my first ever paycheck after starting my first real job. For $5.15 an hour I’d run supplies, organize four-square games, and play Mario Kart 64 with a bunch of second-graders in an after-school program. (And since you asked. No, I did not go easy on them. My brutal use of red shells should have been grounds for immediate termination.)
I remember the feeling of holding that pay stub for $92.70. I could do whatever I wanted with this! But after one trip to Funcoland and a moment of overindulgence in Blockbuster candy, it was practically all gone. And I felt a little sad that my new-found riches had disappeared as quickly as it came. I knew I was supposed to save some of my money so I asked my dad, “How much of my paycheck should I save?”
“You should always save 20 percent of your income,” he said. Then, he showed me how to make a transfer to my custodial savings account on the “internet,” and I was locked in. For the next ten years, I’d dutifully strive to save 20 percent every payday, ‘cause that’s just… what dad said to do.
But as I grew up, landing better jobs and racking up more expenses, I never achieved that goal. Sure, I’d send some money to my savings account every time I got paid. But it never stayed there. When my checking account ran low, I’d always reach into savings, even though I knew I wasn’t supposed to spend it.
And was that because I was an irresponsible kid? Well, yes, probably. But it was also because I was asking the wrong question. When I asked my dad how much I should save, I was really asking “How much should I avoid spending?”
Instead, I should have asked myself, “How do I want to spend my money?”
If you ask and answer that question every single time you get paid, the answer to “How much of my paycheck should I save?” will take care of itself. Let me show you what I mean.
The problem with the 50/30/20 budgeting rule
There is a popular rule of thumb known as the 50/30/20 rule—50% of your take-home pay should go toward needs, 30% to wants, and 20% should go toward savings and debt down payments. It’s considered a staple of personal finance advice, but quite frankly, I think it’s bunk. While it can be a helpful guideline to get you started, ultimately it won’t take you very far. And for some people, it can be actively unhelpful.
This old-school rule is arbitrary
The first problem with the 50/30/20 rule is that it’s arbitrary. It doesn’t take into account your values, your beliefs, or the life you yourself are trying to build.
Now, its arbitrariness is actually part of its appeal. When you don’t have a sense of your values or financial goals, you might be attracted to an external rule as something to grab onto. But as you get to know yourself and discover what you want out of life, this helpful guideline starts to feel more like a prison.
Weighing needs vs. wants is not helpful
The second problem is that the needs and wants are not well-defined. The needs vs. wants paradigm is too squishy to serve as a foundational principle. I can argue that any type of expense is both a need and a want.
I’ll give you a few examples. Let’s take groceries. Everyone agrees food is a need, right? But once you reach for the 22-dollar artisanal goat cheese, is that need suddenly a want? Most people would say yes.
What about clothing? Obvious need. But a $400 pair of shoes? Obvious want. I need shelter, but do I build a $3 million McMansion or rent a 800-square foot apartment?
I could give you 100 more examples, but the point is that needs and wants are not binary. In every case, they lie on a spectrum. That’s some shaky ground on which to build my financial life.
It leads to shame
The 50/30/20 budgeting rule inevitably leads to shame. It doesn’t work for everyone depending on the reality of their cost of living, it reduces the complexity of the needs vs. wants spectrum, and it sets up a random external rule against your extremely personal set of values and experiences.
Such systems will always lead to a war within yourself. I’ve heard too many stories of people caught in a constant cycle of rebelling against external spending rules, feeling ashamed, trying to “do better” only to restart the same cycle in an endless loop. That’s what I was doing every month when I’d reach into my high-yield savings account. I was rebelling against the external rule, feeling ashamed, and trying to do better next time only to repeat the cycle over and over for a decade.
I’m picking on the 50/30/20 budgeting rule right now because it’s such common advice. But I think the same problems apply toward any personal finance paradigm that tells you how you should spend your money. But we need some way to discover how much of our paychecks we should save, so what should we do instead?
Try this instead: give every dollar a job
Instead of a blanket rule, we need a framework for making decisions about specific expenses.
Here’s the deal. Money is meant to be spent. Why do you spend a third (or more!) of your day and a huge part of your focus and energy on your job? I hope it brings you some satisfaction and purpose, but the main reason you work is to get money. You work for that money so you can deploy it to build the life you want. So why should you refuse to use 20% of your hard-earned money?
The whole point of saving is to spend it later, so the right question to ask is not “How much of my paycheck should I save?” Instead, start asking “How do I want to spend my money?” Answer that, and the amount you want to save will become crystal clear.
How do I give every dollar a job?
Every time you get paid, give every new dollar a specific job. Set aside money for your basic needs first—any bills and expenses you need to fund before you get paid again or any larger expenses that you might want to partially fund before your next payday.
Then, move on to non-monthly expenses. Set money aside for car repairs, that once-a-year property tax bill, and your yearly Amazon Prime subscription. You’re not going to spend that money now, but you will later, so prepare! “Wait,” I hear you ask “Isn’t that saving money?” Why yes it is. I’m so glad you noticed!
If you still have money left over, start thinking about next month. What can you set aside for next month’s spending? Keep asking and answering that question every time you get paid. With some effort, you’ll find that all of next month’s expenses and savings goals are fully funded by the 1st of the month. Well, look at that! You just got a month ahead! More saving is happening. Imagine how much more peace and financial security you’d have if you got a month ahead of your expenses and consistently lived on last month’s income.
Next, consider any goals, large or small, that you want to prioritize. This is where the foundation you’ve built up will help you safely spend on the things that make you happy.
Do you want to buy a $100 new pair of running shoes? If your more-important priorities are funded, go for it! Or maybe you have some larger goals like a bougie European vacation? Start planning and saving for it now, little by little, until you have the money to take that trip. By asking, “How do I want to spend my money?” you ended up saving it again! Funny how that happens.
Along the way, always be open to making changes. Your spending plan should reflect your life, your dreams, and your circumstances. Those things are constantly changing. So don’t feel locked in to your previous choices. Change your spending plan any time, weighing the tradeoffs with your eyes wide open. The new allocation may suit you better.
Doesn’t this already feel… better? Less prison-like? Instead of picking a random amount to save, you’re considering all your expenses and saving for specific things. By asking yourself “How do I want to spend my money?” you ended up saving a lot of it—possibly more than you would under the reign of an arbitrary budgeting rule. The amount you save doesn’t matter so much as creating a framework that assures you deep down inside that you’re taking care of the things you need and want to take care of.
This is the savings philosophy that hundreds of thousands of YNABers use today. Don’t focus so much on the amount as the purpose of your saving. Now, let’s go over some common questions we get around the process of saving money.
You can start this journey of giving every dollar a job today by signing up for a free trial of YNAB.
Okay, what should I save for?
So now you might be asking, “What should I save for?” That’s awesome, because it shows you’ve made the shift away from saving an arbitrary amount of your paycheck toward setting money aside for specific priorities. The answer to this question is 100 percent up to you. But let me give you some common examples to get you started.
Emergency fund? No, an income-loss fund.
When I talk to people who dutifully save a certain percentage of their paycheck, I’ll often ask them “What are you saving for?” And because they’re not giving every dollar a job, I’m often met with blank stares. They don’t know what they’re saving for because they’ve never asked themselves that question before! But when pressed, they’ll usually say, “Well it’s a fund in case of emergencies.”
An emergency fund can be helpful. Like the 50/30/20 rule, it can help you get started. But if you’re giving every dollar a job, you’ll be setting money aside for all the things you previously thought of as emergencies. Things you previously didn’t plan for—like home repairs, vet bills, and a new car—will become routine, because you thought of it ahead of time.
The more you embrace giving every dollar a job, the less useful separate emergency savings become, because you’ll actually have fewer financial emergencies. Or at least it will feel that way.
But there is still a useful purpose for saving up 3-6 months’ worth of living expenses and that’s an income loss fund. If you or a partner experience a job loss or your income is interrupted for any reason, you’ll feel a lot more secure and stable if you have some cash to see you through the transition.
So if you’re saving for specific non-monthly expenses is a separate emergency fund still useful? Yes, but really only for the BIG “expense” of losing your income.
Retirement savings
Another reason people pick a specific amount of their paycheck to save is to get ready for retirement. I like to think of retirement as the ultimate non-monthly expense. You’re saving money to spend it later when you stop working.
What should your savings rate be? 15% is the common rule of thumb, but again, that’s an arbitrary amount that may not be helpful for every financial situation. If you want a lavish lifestyle in retirement or you’re closer to retirement age, you might need to save more. If you plan to continue working for several decades or you are fine with a more conservative retirement, you could send less to your individual retirement account and spend more on your individual priorities. A one-size-fits-all solution isn’t right here either. A financial adviser or other retirement service can help you figure out an amount that is right for you in the light of all your other expenses.
Short-term and long-term savings goals
Don’t forget to prioritize your financial goals as well. The whole point of planning spending is to build the life you want (that’s spendfulness in action!).
So as you give every dollar a job, consider the things that will enrich your life today, set up your family for future success, or just add a little fun to day-to-day spending.
Want a helpful framework for planning short, medium, and long-term financial goals? Learn how to start a Wish Farm!
Prioritizing debt vs. savings goals
One of the biggest questions we get at YNAB is whether you should prioritize savings or debt paydown goals. And we’ve got an answer for you. Always prioritize saving for non-monthly expenses as a higher priority than paying off past debt. Why? Because if you don’t, your debt will just come right back.
Focus on non-monthly expenses first
Many people throw every extra cent at their credit cards and student loans in an effort to become debt free as quickly as possible. And I love the enthusiasm. But what are you going to do when your car breaks down and you have no money left over to get it fixed? You’re going to reach for the credit card again. This is called the Debt Cycle, and it’s not a fun place to be. With this approach, you might make quick progress, but you’re going to lose motivation just as quickly when unexpected expenses arise.
Now, I’m not saying you need a fully-funded income-loss fund or a truckload of money in the car repairs and home maintenance categories before you can put a penny on debt. You should absolutely prioritize both saving for inevitable non-monthly expenses and debt pay down at the same time. But setting aside money every month for non-monthly expenses should be the higher priority. That will prevent future debt, break your reliance on credit, and make sure the debt that you do pay off will never come back.
If you’d like to learn more about our full debt paydown plan, check out our How to Get out of Debt Guide.
Which debt should I prioritize first?
For most people, we recommend the snowball method. Pay minimum debt payments on everything, and throw any extra at the debt with the smallest balance first. This will maximize your motivation by getting a win early and increase your cash-flow power quicker so you can pay off debt faster. The more of your monthly income that you have control over ,the more decisions you can make about your money.
But there are some instances where focusing on high-interest debt first makes sense. The avalanche method recommends starting with the debt with the higher interest rate first and work your way to the low-interest debts last. This will minimize the overall amount of interest you pay and for some people, that’s a major motivator.
Or, you might want to focus on the debt that bothers you emotionally. We call this the anger method. Debt you owe to a family member, the lingering credit card debt from that particularly difficult time in your life, the car loan on the vehicle your ex-boyfriend drives (yes, that’s a real story!)—these kinds of debts hold enormous emotional power and getting them out of your life sooner can be hugely motivating.
Whatever method you choose, I’m sure you can see the central point is to remain motivated. Debt paydown can sometimes be a long slog, so you want to choose a strategy that will help you stick with it for the long haul.
Where should I keep my savings?
If you use YNAB, you’re going to end up with a lot more cash than you ever have before. It’s just what YNABers do.
So where should you keep all this money you’re saving? Well, it doesn’t matter so much so long as your savings have a very clear purpose. You could store it in a wad of cash under your mattress for all I care (but a bank account is probably safer).
At YNAB, we like to keep your account structure as simple as possible. Keep all your savings in one high-interest savings account (HYSA) or money market account. Maximizing interest is the main reason for using a savings account, so researching interest rates is key. If you use YNAB, you only need one savings account, because your categories will keep track of the purpose of your money.
How to figure out how much to keep in savings vs. checking
In an ideal world, I’d keep all my liquid cash in one checking account. In fact, I did that for a long time and it felt great having immediate access to all my savings dollars. But as interest rates rose in the early 2020s, it made sense to put as much as I could into a savings account.
The YNAB software can help you calculate how much money to keep in checking vs savings. You can simply select all the categories that you don’t need to spend out of right away, get a selected total for all the money available in those categories, and chuck that amount into savings. Update that number once every month or two and you’re all set. No need to constantly transfer money back and forth. Keep enough in checking where you feel like you don’t have to worry about cash flow and send the rest to savings for that sweet interest money!
The right savings plan for you
You came to us asking “How much of my paycheck should I save?” and I hope you have your answer. There is no one-size-fits-all approach, but saving consistently is still important. Remember, the purpose of saving money is to spend it later. So picking an arbitrary amount is not really helpful.
Instead, ask yourself regularly, “How do I want to spend my money?” and then give every dollar a job accordingly. This mindset will motivate you to save more than any stuffy external rule… and pave the path for a spendful life.
Ready to take control of your spending and your savings with a proven method used by hundreds of thousands of YNABers all over the world? Try YNAB today. It’s free for 34 days!
