Have you ever wondered how my paycheck breaks down every other week, allowing me to save a majority of my take home pay? If so, this post is for you.
I won’t argue that how much you’re paid is a big factor in determining how much you can save. But expenses are a crucial component as well. Since my mortgage is paid off and I don’t have any loans or credit card debt, I need very little of my paycheck to cover my expenses each month.
Here’s a breakdown, in gross percentages:
- Taxes (23.6%) Not much I can do about this one. Federal tax, state tax, Social Security, and Medicare all need to be paid.
- Deductions (5.3%) This would be my medical and dental premiums, as well as my HSA contribution, since my employer provides coverage. Pretty small since I have a high deductible health plan and pay for any care (outside of preventative) out of pocket. Thankfully, I’m relatively healthy.
- 401k (10%) I have to contribute 6% of my pay throughout the year to earn the 4% company match each payday. I currently contribute 10%. Why don’t I max it out? Read my reason why here.
39% of my paycheck is gone before it ever reaches my bank account. Here’s how I distribute the rest:
- Retirement Savings (35.4%) This includes my Roth IRA, taxable brokerage account, and a savings account I set up so I can accumulate a couple years worth of expenses in cash prior to retirement.
- Other Savings (7.1%) These accounts contain money that I plan to spend in the near future, such as Fun Money, Car Fund, and House Fund accounts. These aren’t meant to be long term savings, but instead a way to sort my cash for various goals/expenses. Fun Money is for travel or unnecessary purchases. Car Fund is to help me save up enough to pay cash for my next vehicle. And my House Fund contains enough to cover the deductible as well as any surprise repairs that might need to be done (e.g. water heater, appliances, etc.).
- Living Expenses (18.6%) This is how much I need to pay my bills, buy groceries, etc. If I have money left over, I’ll transfer it to one of my short term savings accounts.
In total, I save 52.5% of my gross pay. If we’re looking at take-home pay (gross pay less taxes), I save 74.1% (which includes my HSA). Only 64.9% are towards my long term goals, though. If I can keep up this kind of savings rate, I should be able to meet my goal of early retirement in just over 10 years, as this doesn’t include any savings I’ve already accumulated. At the end of February, I was 37% of the way towards my early retirement financial goal.
How does your paycheck compare? Does the distribution align with your priorities?