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

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

Do impulsive spending 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.

“In my experience, 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, CFP®, a financial professional with Principal®.

When you’re young and social, you may be allocating big portions of your monthly paycheck to dining out and entertainment. Or maybe travel is your budget buster, where you’ll spend nearly double for a night out on the road. Three-day weekends to Chicago. Gaga in Las Vegas. A wedding in San Diego.

That’s not to mention the debt load: 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.

So, what can you do?

Breaking down a paycheck

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

Things like bills, rent, debt payments should make up about 50% of a gross (before taxes) paycheck. Poorman is on board with the popular 50-30-20 rule of thumb: 1

  • 50% percent of gross pay for essentials like bills and regular expenses (groceries, rent or mortgage)
  • 30% for spending on dining out and entertainment
  • 20% for personal saving and investment goals

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.

Graph showing that the suggested paycheck allocation is 50% to essentials, 30% to entertainment, and 20% to savings and investments.

2. Put retirement savings on the radar.

Aim to contribute enough to your retirement plan to maximize your employer’s match (if they offer one). Poorman suggests a 10% contribution—then build from there.*

3. Ask for advice.

“That’s huge,” Poorman says.

4. Don’t track expenses.

Surprised? Well, it’s tedious. “Financial planning is really more about behavior than numbers,” Poorman says. Adjust your priorities so that saving comes first and spending second. Remove the money from your paycheck 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.

5. Establish “goal” money.

This is part of a paycheck set aside to meet future financial objectives. Poorman suggests 10% of your gross pay. This piggybacks on the habit of moving your “bill money” to a savings account on payday. Retirement, expense, and goal money set aside, you can spend the rest however you want.

6. Set initial priorities.

Now, what to do with that goal money? Poorman suggests 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 1 month of expenses (with the goal of having 3–6 set aside, which may take a few years). When you’ve hit your goal, decide what constitutes an emergency—worth tapping into that fund.

What does “emergency” mean to you? Ask yourself: Is it unexpected, unavoidable, or urgent?

  • Unexpected: You’ve lost your job but must pay the bills.
  • Unavoidable: It will cost more to fix your broken refrigerator than buy new.
  • Urgent: Your fur baby needs surgery.

To help avoid temptation, Poorman suggests keeping the emergency fund in a different place than your checking account. Maybe it’s at an online bank or a different financial institution (try 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.

7. Pay down debt.

With that $1,000 emergency goal hit, you can split 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 1-month cushion is set, you can start tackling the credit card balance.”

8. Put the cards on ice.

Poorman says going to a cash-only system may help tame impulse spending. “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 to 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.

Bonus step: Protect your paycheck

Depending on your age, life situation, and current retirement savings strategy, after you’ve established savings and paid down debt, consider a few bonus steps.

Disability income insurance could help protect your paycheck if you get sick or hurt and are unable to work. This will happen to about 1 in 4 people in their 20s.2 You can find out how much insurance you might need using the income protection calculator.

One thing to consider: Many employers offer short- and long-term disability to employees. But after tax, the amount you receive could be only 40–50% of your income. If that seems difficult, an individual disability income insurance policy can help cover expenses.

What to do next?

  • A strong financial future starts with a solid financial plan. Check out our simple guide to making yours.
  • Have a retirement account from your employer with services by Principal®? Log in to to make sure you’re maximizing your employer contribution. First time logging in? Get started.
  • Got a financial professional? They can help you figure out your financial picture. If you’d like to meet with one face to face, we’ll help you find one.

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

2 Social Security Administration Fact Sheet, January 2019.

* Based on analysis conducted by the Principal Financial Group®, October 2015. 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; 7% annual market returns; 2.5% annual inflation; and 3.5% annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85% 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.

Disability insurance has limitations and exclusions. For costs and coverage details, contact your local Principal representative. Disability insurance is issued by Principal Life Insurance Company, Des Moines, IA 50392. 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.