Photo of a person enjoying drinks with the money left over after allocating their paycheck o retirement, expenses, and financial goals.

3 steps to allocate a paycheck when you want to get ahead with your money

Do impulsive online shopping and a lack of an emergency fund push your paycheck to the brink? Do you make a decent income but find your finances are running on empty just as payday is around the corner? Maybe you’re not falling behind financially, but you’re not getting ahead either?

You’re not alone.

“I’d estimate that more than half of people in their 20s deal with some mix of impulsive spending and a lack of savings,” says Stanley Poorman, a financial professional with Principal®.

Graphic showing that 4 in 10 consumers follow a budget.

4 in 10 consumers follow a budget.1

Graphic showing that 3 in 10 workers admit to saving less than they need to for retirement.

3 in 10 workers admit to saving less than they need to for retirement.1

When you’re young and social, you may spend big portions of your monthly paycheck on dining and entertainment, at least in normal times. Or maybe travel is your budget buster—going all out on weekend getaways or a highly anticipated trip abroad.

That’s all on top of the typical debt load for young earners: student loans, car payment, credit cards.

Lifestyle spending can keep the credit card in a “one-step-forward, one-step-back” cycle, with a significant balance. If you’re stuck in a pattern like this, it can feel impossible to get ahead financially without making sacrifices.

But trust us: There are ways to find a sustainable balance of living in the now—and planning for the future. Giving up the pleasures you work hard to earn may not be required.

Breaking down a paycheck 50/30/20

So, what does that strong yet sustainable balance look like? And how do you implement it? Poorman suggests the popular 50/30/20 rule of thumb for paycheck allocation:2

  • 50% of gross pay for essentials like bills and regular expenses (groceries, rent, or mortgage)
  • 30% for spending on dining/ordering out and entertainment
  • 20% for personal saving and investment goals
Graph showing that the suggested paycheck allocation is 50% to essentials, 30% to entertainment, and 20% to savings and investments.

Let’s break it down: essentials first, savings and investments second, and entertainment third.

1. Keep essentials at about 50% of your pay.

Things like bills, rent, groceries, and debt payments should make up about 50% of a gross (before taxes) paycheck. Remove this money from your primary account right away, so you know your needs will be covered.

This generally works, but Poorman says if you’re living in a high-cost area like Chicago or New York City, you’ll likely be shelling out a higher percentage for essentials. Adjust accordingly.

2. Dedicate 20% to savings and paying down debt.

This is the part of your paycheck set aside to meet future financial objectives—whether they’re long-term or relatively short-term.

Put half of this toward retirement (about 10% of your pay).

The priority here is to contribute enough to your retirement plan to maximize your employer’s match (if they offer one) and set yourself up to help meet your long-term goals. Poorman suggests a 10% contribution—then build from there.*

The other half is your goal/debt money (about 10% of your pay).

Depending on your circumstances, how you use this money may change over time.

Initially, Poorman suggests using it to build an emergency fund, so you can be prepared financially if life throws a curveball—and not rely on a credit card to cover unexpected expenses. Set an achievable goal—say $1,000—and when you hit it, move on to saving one month of expenses (with the goal of having three to six set aside, which may take a few years).

With that $1,000 emergency goal hit, consider splitting your allocation to 8% for credit cards and 2% for the emergency fund. “Keep allocating to the emergency fund,” Poorman says, “but now that the one-month cushion is set, you can start tackling the credit card balance.”

To help avoid temptation, keep the emergency fund in a different place than your checking account. Maybe it’s at an online bank or a different financial institution (try bankrate.com to compare high-yield saving accounts). The idea is to modify your behavior by making transfers take longer, so you’re less tempted to use it on a spending splurge.

3. Use the remaining 30% as you please—but don’t track expenses.

Surprised? Well, it’s tedious. And people don’t tend to stick with tasks they dread.

“Financial planning is really more about behavior than numbers,” Poorman says. Adjust your priorities so that saving comes first and spending second.

Remove from your paycheck the money you need for living expenses and future savings with automated apps or bank accounts. It can be a mental shift, but when you know your financial goals are met, you can spend the remainder of your paycheck guilt free.

If you’re worried you’ll go overboard when you can finally shop and dine in person again, try putting the cards on ice and easing back in with a cash-only approach. “Credit and debit cards make money abstract,” Poorman says. “It’s hard to get a mental grasp on cashflow when you never actually see the cash.”

For example, try allocating cash for your nights out. Since there’s economically no difference between spending cash and paying by card, this is exclusively a behavioral change. “The end of the cash is a hard-stop,” Poorman says. “And it helps prioritize an evening’s activities.”

The same idea transfers to a travel budget, using a per-day or a per-trip budget, keeping that amount in cash.

What to do next?

  • A strong financial future starts with a solid financial plan. Check out our simple guide to making yours.
  • A financial professional may talk you through how changes to your financial goals can shift your saving, especially for retirement. Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.

Retirement Security Survey by Principal® Retirement Income Solutions, Q1 2021

2All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi

* Based on analysis conducted by the Principal Financial Group®, November 2019. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12%; Social Security providing 40% replacement of income: 4.5% withdrawal of retirement savings; 6% annual market returns; 2% annual inflation; and 3% annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 80% of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs. 80%, Based on our industry experience and GAO Retirement Security Report to Congressional requestors.  The estimated average total spending for post-retirement households was about 77% of the spending levels for pre-retirement households. GAO, 2013 CE Data; 16-242, Retirement Replacement Rates.

The subject matter in this communication is educational only and provided with the understanding that Principal® and its employees are not rendering legal, accounting, investment, or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.​

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.