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Do you know how to divide your paycheck?

You know, like x% to cover housing, x% to savings, x% to food…

If you have no idea how to divide your paycheck, you’re not alone. This is (another!) one of those financial things most of us aren’t ever taught.

So today we’re covering how to divide your paycheck. But more than that, actually. We’re talking about how to divide your paycheck so you can afford anything.

Anything, Not Everything

No one can afford everything. Even friggin Bill Gates doesn’t have enough money to accomplish his dream of providing clean water to all of Africa.

When it comes to money, you have to decide what’s important to you. Once you know what matters and how much it costs, you’ll be able to factor that in when you divide your paycheck each month. And – genius money tip – you can automate the whole paycheck-dividing process to basically guarantee your financial success!

So with that anything-not-everything caveat, we’re ready to start talking about how to divide your paycheck.

Here are some tips on how to divide your paycheck so you can afford anything

How to Divide Your Paycheck So You Can Afford Anything

Here’s the big picture plan:

We’re going to figure out how much of your paycheck should go toward:

  • Savings
  • Your Needs
  • Charity
  • Your Wants

And we’re gonna cover each of those categories in that order.

Once we look at each category, well offer a suggestion for exactly how to divide your paycheck every month.

Btw, these are just suggestions based on my personal experience and the recommendations of respected financial advisors. Everyone has their own opinions about how exactly to divide your paycheck. Ultimately, you do what works for you. This post will just give you useful guidelines that you can use or ignore as you see fit.

Ok, let’s get to it!

Start With Savings

Most people start with expenses and plan to save whatever’s left after expenses. The problem with that plan is that there’s never anything left.

Let’s face it; there will always be something else to spend your money on. Always. Even if you make more money, you just find new ways to spend it. It’s human nature.

So instead of saving whatever’s left over, save first, then spend whatever’s left over. Financial guru, David Bach, author of my personal favorite financial book, calls this paying yourself first. Before you pay your landlord or your utility companies, pay yourself!

This is one of the single most impactful changes you can make on your journey to affording anything.

So How Much Should I Save?

To bullet-proof your finances, you need 3 separate saving/investment accounts:

  1. Emergency Fund
  2. Retirement Account
  3. Dream Fund

But the amount you need in each account depends on your unique circumstances.

Let’s take a look at each account:

Your Emergency Fund

Arguably the most important of your savings accounts, your emergency fund exists to save your tush when the unexpected happens. Without this account, you’d have to borrow money to cover unavoidable and unexpected expenses. And then you end up like Carl and Ellie, never able to go to Paradise Falls. Tragic.

Ideally, you want to have enough money in your emergency savings to cover 1-3 month’s worth of expenses (depending on your personal comfort level). You can build up to that number by saving just 5-10% of your paycheck each month.

The good news is: once you have that much money saved in your emergency fund, you can stop saving to that account and funnel that 5-10% into your retirement account or your Dream Fund.

To get all the details on your emergency fund, check out Your Quick-Start Guide to Emergency Savings.

Your Retirement Account

When it comes to retirement, it’s every woman for herself! Pensions and social security are far from guaranteed. So if you plan to do anything in your golden years, you better have a retirement plan!

Now, if you’ve never paid much attention to retirement accounts, you probably don’t know about the magic of compound interest. Compound interest is how you retire with $831,751 more than your peers. But because compound interest grows exponentially, it needs time to work. The more time you can give it, the better. So you have to start saving for retirement asap.

Even if you’re broke (which almost all of us are in our 20s!), find a way to make retirement savings happen. Even if you can only afford to save 3% of your income, do it! And sign up for automatic increases every 6 months. You’ll hardly notice a 1% increase, and before you know it, you’ll be saving 10-12% for retirement!

Your Dream Fund

This is where you get to afford anything.

My dream fund is how I:

Your dream list may look very different than mine. Maybe you want an epic wedding, or to pay for your kids’ college, or to start a non-profit. The fact is if you want to achieve your dreams, you’re going to need the money to fund them. 

In general, I save 5% of every paycheck in my Dream Fund, even if I don’t have a specific dream at that moment. Because I know a new dream will always come up, and I want to have the money ready and waiting!

But if you have your specific dream in mind, save as much as you need to make your dream come true.

How much do you think it will cost to realize your dream? If you saved 5% of your paycheck in your Dream Fund, how long would it take you to come up with the total cost of making your dream come true? For the math-impaired: take your monthly pay times .05 to see how much you’d be saving each month, then divide the cost of your dream by that monthly savings amount to see how many months it would take to save up for your dream.

You can play with the numbers til you find the solution you’re most comfortable with. What if you just saved 2%? What if you could save 7%? Find what works for you.

Your Needs

Once your savings are squared away, you need to account for your needs: food, housing, utilities, transportation.

As a general rule-of-thumb, here’s how much of your paycheck should go toward each category:

  • Food: 5-15%
  • Housing: 25-35%
  • Utilities: 5-10%
  • Transportation: 10-15%
  • Insurance: 5-15%
  • Clothing/toiletries (the stuff you legit need to look presentable): 5-10%

Do your current expenses fall within those guidelines?

To figure out how much you’re spending on each category, just divide your monthly expense by the amount of your paycheck.

Charitable Giving

We’re sliding charitable giving in here between your needs and your wants.

This is where it naturally fits for many people, but it might move up or down on your personal list of priorities. If you follow Biblical principles of tithing, for example, you might give 10% of your income to the church before you ever save or spend a dime.

If giving is less important to you, it may come after your wants.

The amount will also vary person-to-person. You might be comfortable giving 5%, 10%, or any other percentage. No judgment. This is your financial plan. Do what works for you.

Your Wants

You’re now free to spend the rest of your income on your wants!

This broad category covers entertainment, clothing (beyond the necessities), weekend trips, memberships, subscriptions, whatever else you care about.

Your Plan for Dividing Your Paycheck

It may be helpful to see a complete example of how to divide your paycheck.

Using the categories and percentages we just covered, here’s how an actual paycheck can be divided:

Wait…What About Debt Payments?

If you’re paying on student loans or credit card debt, you obviously need to factor that into your percentages.

In most cases, it makes sense to cut a percentage point or two out of each of the categories to find the money to cover your debt payments. Since housing is such a massive piece of the pie, you can quickly free up a good chunk of money by reducing your housing costs. Maybe consider moving to a small place or a less expensive neighborhood. Or even go the roommate route to save big on housing!

Whatever you do, don’t skip any of your savings accounts. If you have to save a smaller percentage, in each savings account, fine. But you’re building a good financial habit, knitting yourself a safety net, taking advantage of compound interest, and funding your dreams with these accounts. Don’t short-change yourself!

Dividing your paycheck to best meet your unique needs and wants is part science, part art. But it’s an important skill to practice. When you know how to properly divide your paycheck, you can afford anything!

Cheers! From Savings and Sangria

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