Saving

How much money you need to save per paycheck to max out your IRA in 2021 and reach three other big New Year's resolutions

“Don’t shortchange” your savings.

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Over the last nine months, the coronavirus pandemic has taken a toll on people's finances, from job losses to slashed wages. And many Americans are understandably ready to close the book on 2020.

It might seem daunting to think about your money goals for 2021, particularly in terms of saving, after a year like this one. But now is actually a great time to start making some plans, just by breaking things down one paycheck at a time.

And keep in mind that it always makes sense to run your own figures based on your specific goals.

Here's how much you'd need to save from each check to max out your IRA, build an emergency fund, afford a home down payment, or buy a new car in 2021.

To max out your IRA

Maxing out an Individual Retirement Account is actually quite common. According to the Investment Company Institute, about 36% of U.S. households use an IRA to save for retirement. And of those individuals who made a contribution in tax year 2017, almost half, 47%, maxed out their account, the latest data from the Employee Benefit Research Institute shows.

Americans will be able to contribute a maximum $6,000 to an IRA in 2021 if you're under age 50, or $7,000 if you're older than 50. Those figures are the same as in 2020 and the year prior. 

Here's how much you would need to save per paycheck to reach the $6,000 limit, or come close to it, assuming you are paid biweekly and bring in 26 paychecks in a calendar year.

  • For a $6,000 IRA contribution in 1 year: $231 per paycheck
  • For a $4,000 IRA contribution in 1 year: $154 per paycheck
  • For a $2,000 IRA contribution in 1 year: $78 per paycheck

Maxing out an IRA or another retirement account is a good idea, and the earlier you start, the better. Many retirement vehicles offer compound interest to help your money grow, meaning you earn a return on your money and on the interest it has already accrued.

"Automating your contributions, such as a 401(k) through payroll deduction and an IRA through automatic transfers from your bank account, are seamless ways to build the nest egg for your golden years," says Greg McBride, chief financial analyst at Bankrate. "Don't shortchange retirement savings as it means your future self pays a bill your current self could not."

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To build a $1,000 to $3,500 emergency savings fund

Emergencies happen, but relatively few Americans are financially prepared to handle one. Just 41% of U.S. adults have enough money put away to cover an unexpected $1,000 expense, according to data from Bankrate, while another 28% have no emergency savings at all.

The pandemic hasn't helped: Since March, 14%, up to 46 million people said they've wiped out their emergency savings, according to a CNBC + Acorns Invest In You Savings Survey.

Experts generally recommended putting at least 3 to 6 months' worth of living expenses toward an emergency account, although financial expert Suze Orman recently told Grow the pandemic has shown aiming to save a year's worth can be a smart move.

The average household's annual expenditures total about $63,000, according to the Bureau of Labor Statistics. Using that 3-to-6-month guideline as a benchmark, a typical household's emergency fund goal might be between $15,500 and $31,000.

Since saving that much could currently seem unreasonable, it helps to aim for smaller goals along the way. Having even $1,000 is a start, and stashing away $3,500 could be even better, considering that's about the typical cost of an emergency, according to the Bankrate data.

Assuming you are paid biweekly and earn 26 paychecks in a calendar year, here's how much you would need to save per paycheck to build a $1,000, $2,250, or $3,000 emergency account.

  • For a $1,000 emergency fund in 1 year: $38 per paycheck
  • For a $2,250 emergency fund in 1 year: $87 per paycheck
  • For a $3,500 emergency fund in 1 year: $135 per paycheck

Consider setting up automatic transfers to ensure you're regularly contributing to your goal, and think about dedicating a portion of the funds you get from your $600 stimulus check as well.

"Nothing helps you sleep better at night than knowing you have some money tucked away just in case," says McBride. "Your emergency fund acts as a buffer between you and high interest rate debt when unplanned expenses arise."

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To afford the typical home down payment

It's not uncommon for consumers to go with a traditional 20% down payment when buying a new home. But if you're willing to make a few compromises, like paying for private mortgage insurance, you could land in a new place for much less than that. The median down payment is 7.6%, and certain types of federally backed mortgages require as little as 3.5%.

Assume you're buying a home for the national median price of $263,351, according to Zillow. If you are paid biweekly, you can likely expect 26 paychecks in a calendar year.

  • For a 3.5% down payment ($9,217) in 1 year: $355 per paycheck
  • For a 7.6% down payment ($20,015) in 1 year: $770 per paycheck
  • For a 20% down payment ($52,670) in 1 year: $2,026 per paycheck

The state you live in could offer financial assistance if you need it. First-time buyers in New Jersey for example, might qualify for a loan of up to $10,000 to cover the down payment and other closing costs and Colorado residents may be eligible for grants worth up to 3% of the mortgage.

"Whatever you think you can afford on a new home purchase, give it a test drive," Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors, told Grow in October. "Start saving the extra amount that is the difference between what you are spending now versus what you will spend after the new home purchase. Put this difference from projected expenses toward saving and trying out the new expense spending plan."

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To buy a new car

The average transaction price for new cars has crept up in 2020, despite the economic issues brought on by the coronavirus pandemic. The typical cost for a new vehicle in the United States reached $39,259 in November, according to data from Kelley Blue Book.

Drivers usually pay a standard 20% down payment for a car purchase, but the average down payment for both new and used vehicles was 11.7% in 2019, according to Edmunds

Assume you are paid biweekly earning 26 paychecks in a calendar year, and looking to buy a car for the industry average of $39,259.

  • For a 11.7% down payment ($4,593) in 1 year: $177 per paycheck
  • For a 20% down payment ($7,852) in 1 year: $302 per paycheck
  • For the full price of the vehicle ($39,259) in 1 year: $1,510 per paycheck

Finding the money for a new car that cost nearly $40,000 can seem out of reach, especially as prices are rising. Treat it as you would any other financial goal, Jedidiah Collins, a certified financial planner and author of "Your Money Vehicle," told Grow in June. Budget, plan ahead, and save regularly, he says. Figure out what you need and "tackle it in bite-sized chunks."

Whatever your goal, set up a direct deposit from your paycheck into a dedicated savings account, McBride recommends. "If your employer doesn't offer direct deposit, arrange for automatic transfers from your checking into your savings on a regular schedule," he says.

"Successful saving is all about the habit," he says, "and the best way to establish that habit is to pay yourself first and do it automatically."

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