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How Should Young Adults Divide Their Paychecks? 

Don't Spend Money You Don't Have

 I got the inspiration for this article after speaking with a 23-year-old unsure of how to divide his paycheck every two weeks. How much did he need to put in savings? How much of it should he invest? Where should he invest? These are all great questions, and the answers are unique depending on your lifestyle and age. 

This article is for young adults still learning the ropes of financial independence. We hope readers will be inspired to take greater control of their spending habits and get started on making a savings plan if they haven’t done so already. 

Key Takeaways  

  • The 50/30/20 rule argues you should spend 50% of your paycheck on basic needs, 30% on wants, and 20% on debt repayment and savings. 
  • It’s often a smart idea for young adults to invest in the stock market, as the market has always historically increased over a long enough period of time. 
  • Young adults should start their retirement savings as soon as possible, and depending on when they want to retire, may want to save more of their paycheck than 20%. 

Before Your Paycheck Arrives

If you’re a young adult and – like the guy I spoke to who inspired this article – feel a bit out-of-touch with your finances, your first step should simply be considering your situation. How much money do you make every month? How much do you spend on different things? 

Download or print out a transaction history for your checking account. Go through the transactions and pick out the ones that are “needs.” 

Some transactions may be a bit ambiguous. Eating out at a restaurant, for example, could arguably be a “need” since you need to feed yourself. But you could also reasonably say it’s a “want” since it’s often an activity done for pleasure. Use your own discretion to decide whether a purchase was done out of necessity or not. 

Once you’ve determined how much (roughly) you need to spend per month, determine how much of your paycheck you currently dedicate to “needs.” 

You may have heard of the 50/30/20 rule. The rule argues you should spend 50% of your income on needs, 30% of your income on wants, and 20% of your income on savings. This rule should be treated more as a guide than a law, and won’t be helpful to everyone. However, in an effort to be useful to as many people as possible, we’ll refer to it for this article. 

We’ll discuss each of these categories in greater detail soon, but before getting your paycheck, simply find two numbers for yourself: how much you make per month, and how much you spend on recurring, necessary purchases. 

Breaking Down Purchases 

Let’s go into greater detail on the three spending categories covered above. 


Purchases that can be considered “needs” might include groceries, utilities, rent, insurance payments, car payments, and minimum debt payments. I say “might” because part of dividing your paycheck involves deciding how strict you want to be with yourself

A Netflix subscription, for example, may feel like a “need” for you. In that case, you should list it as such when breaking down your monthly transactions. For most young adults, just rent and utilities put them over the 50% mark. In that case, try a more strict thought exercise with yourself. What are things you could reasonably give up? 


The “wants” category should be relatively self-explanatory. These are purchases that are not essential, but which you make for pleasure or enjoyment. We won’t tell you to give up things like alcohol, going out for dinner with your friends, or streaming services, just to direct more money into savings. These are the things that make life more pleasurable and exciting! 

However, it’s sometimes important to take stock of how much money you direct toward fun. If you’re spending almost half your paycheck on basketball tickets, movies, and cigarettes, you’re sacrificing certain future comforts. Namely, greater financial security after retirement. 


The savings section of spending includes more than just money in a savings account. You should build at least three months’ worth of emergency funds in case you lose your job. You may have to direct a minimum amount of money to debt repayment each month. Rather than put money in a savings account, maybe you already invest money into things like an IRA or the stock market. 

All of these can reasonably qualify as money spent on savings.  

The 80/20 Rule 

If you find splitting your purchases into three different categories a bit too involved and unhelpful, you can think of the same principle with just two spending categories: savings, and everything else. 

The 80/20 rule is another guide some people find helpful, which argues you should dedicate 20% of your paycheck to savings each month. 

You’ll notice that both the 50/30/20 rule and 80/20 rule argue you should direct a fifth of your paycheck to savings. If you’re young and planning to retire at a typical age (60s), this amount of savings should be enough to help you pay off debt, build an emergency fund, and invest enough to adequately grow your wealth by the time you stop working. 

Investing for Young Adults 

Being a young investor is a tremendous opportunity because you have more time than your older counterparts before reaching retirement age. Time is a great asset to an investor because both real estate and stocks historically grow in value faster than the rate of inflation. 

Investing in a mutual fund or exchange-traded fund is one option for young investors looking to take advantage of stock market growth without picking stocks to invest in themselves. If you choose to invest in stocks that pay dividends, reinvesting those dividends is a proven method of expanding long-term wealth. 

Investing in a 401(k) or IRA is another savings option for growing wealth pre-retirement. If you have an employer-sponsored retirement plan, see if your employer provides contribution matching, which can boost your savings considerably. 

A traditional IRA gives you pre-tax advantages by letting you deduct contributions to your account from your taxable income during tax season. You’ll instead pay taxes at the personal income tax rate when you withdraw money during retirement. A Roth IRA doesn’t give you immediate tax benefits but allows you to withdraw money in retirement tax-free. 

Because a Roth IRA allows your money to grow tax-free until retirement, it’s often the preferred IRA option for young adults. 

Investing in real estate is another option for growing considerable equity at a young age, though it also requires a slightly longer time commitment and is a more involved investment than an ETF or mutual fund. The process of investing in real estate is very complex and deserves an entire article dedicated to it. 


An interesting development in recent years is that an increasing number of young investors are turning to cryptocurrency instead of stocks. Gen Z seems particularly drawn to crypto investments. There are several reasons crypto is so alluring to so many. It represents an alternative to centralized finance, promises huge returns on investment, and has a certain level of playfulness (see Dogecoin) traditional investing lacks. 

There’s an undeniable appeal to being part of the “counter-group,” on the cutting edge. We’ve all heard stories of investors making millions off of crypto and retiring young. We won’t tell you not to invest in crypto, but simply caution you that many crypto investors lose more money than they make. 

We saw a crypto winter in 2022, largely triggered by US inflation and the Fed’s monetary policy which raised interest rates. Crypto exchanges collapsed, investors lost billions, and the US government showed increased urgency in starting to regulate the crypto market. 

Because cryptocurrency is such a speculative asset, we can’t recommend it as a reliable way to expand your wealth. It’s a very risky option you should only try out if you’re prepared to lose everything you invest. 

Automate Your Savings 

As you prepare to take greater control over your finances, one of the biggest recommendations we can make is automating investments into a savings account. Automating your checking account to move a certain amount into savings every month will take the effort out of saving, and ensure you’re consistently putting money toward your future. 

Most bank accounts allow you to set up this kind of automation, and taking advantage of it is an incredibly easy and useful tool for improving your savings habits. 

Again, the amount you choose to put into savings will depend on your goals and needs. If you’re a young person looking to retire in your 30s or 40s, you’ll probably need to save much more than 20% of your income every month. 

Some young people involved in the FIRE (financial independence, retire early) movement try to save upwards of 50% of their monthly income. If you’re aiming for a typical retirement age, though, you don’t need to be so strict with your spending habits. 

The Bottom Line

Getting back to the question that started this article: how should I divide my paycheck as a young person? While this rule won’t apply to everyone, we think many young adults will benefit from aiming to save about 20% of their income every month. 

Savings options like ETFs and mutual funds allow young people to take advantage of stock market growth without requiring the effort of picking individual stocks. Remember that the stock market offers an average 10% annual return on investments, so putting money in early and letting it grow up until you retire is a great way to grow wealth. Investing in a retirement savings plan is another great option, especially if your employer offers contribution matching. 

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Personal Finance Expert
Eric Rosenberg is a personal finance expert. He received an MBA in Finance from the University of Denver in 2010. Since graduating he has been blogging about financial tips and tricks to help people understand money better. He is a debt master, insurance expert and currently writes for most of the top financial publications on the planet.

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