Exactly How You Can Save $10K This Year On A $40K Salary

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Last week, while flying back to LA from the east coast, I made a spreadsheet-on-steroids for my 2016 budget. Because I do a lot of freelance work, my budget sheet is significantly more complicated than when I had a salary, benefits, and a parent company. I have a line for each client, and how much I bring in from them each month, and those numbers fluctuate. When I set a savings goal for the year, it’s hard to know what would be a 100% realistic goal because, honestly, I’m not entirely sure how much money I’ll earn in 2016. As a result, I’m well-practiced in the art of developing savings strategies based off projected earnings. In fact, last year, I quit my entry-level job and went freelance, but was still able to save very well. Here’s a breakdown of how I would personally recommend saving about $10K if you make a salary that is around $40K/year.

First, you need to calculate what your annual salary comes out to in a month: $3,333

After taxes, that is (approximately): $2,222

Of course, everyone’s expenses are going to be different. If you live in New York City, you’re paying a lot more in rent than if you’re living in upstate New York. For argument’s sake, I used my own expenses as a litmus test. My monthly expenses come out to about $1,450. Within this budget, I’ve covered all my living expenses (including health insurance and car insurance), and built in $240/month for groceries and $150 of allotted “fun” money.

Looking at my expenses versus the example income of $3,333, I can see — now more clearly than ever — how millennials in their first few post-grad years can end up in debt. When you’re making roughly $2,200 after taxes, and your living costs come out to $1,500+, saving on top of that is extremely difficult. Even if you don’t spend at all on socializing for a month, you would end up putting $700 away every month, which comes out to saving $8,400 for the year. And if we’re being completely honest, I could easily spend that entire $700/month on social engagements. I never would, of course, but most of my friends who live in New York City pay more in rent than I do (I pay $750) and therefore only have about $500 left over after paying their living expenses. And it’s not hard to spend $500 in a month going out in New York City.

I wanted to do this breakdown based on $40K/year because I would say it is the mean income of those I graduated with (who are less than three years out of school and work predominantly in communications). In order to save $10K in a year, you have to save $833/month. If your expenses are anywhere close to mine, I would say the most you could save from that is $700. However, you aren’t going to want to deprive yourself of occasionally going out and having fun. Realistically, saving $600 of your current income is (in my opinion) an attainable goal.

That leaves $230 to come up with every month.

First, see if you can cut your monthly expenses by about $70/month.

It honestly depends on whether or not you want to make savings a priority. If you are currently paying about $300 in loan payments but want to make income-based payments, thus reducing your payments, you could end up paying under $100/month at the income bracket of $40K/year. This would give you $200 extra dollars per month, but it would also mean not getting ahead on loans with accruing interest. For me, I don’t have loans and I cannot cut my health insurance (which is about $250). However, I called my car insurance company, and I can cut some of my bill with them. I can also be more thrifty when it comes to grocery shopping, and could likely get that number down to $200/month.

Then, aim to earn an additional $200/month in #sidehustle money that you can deposit directly into savings.

If you can successfully cut your expenses by $70 and earn an additional $200, then you’re actually bringing in more than your savings goal. Personally, I think that is best because then you aren’t having periodic anxiety attacks about pinching pennies. Last year, I brought in about $60/week babysitting on top of my freelance income, which meant I was getting $240 in cash every month. I deposited it directly into my savings account without a second thought, and then I was already ahead of my savings goal. If your work offers overtime, that is another way to bring in the extra $200/month. All you need to do is promise yourself that $200 of your overtime money will go directly into savings.

The last way you can meet a $10K savings goal is to save closer to $700/month, and then do a month of aggressive savings to bring you from $8,400 saved to $10K saved. Essentially, if you want to participate in a #nobuy challenge or not eat out for 30 days straight and drastically cut your expenses for a month, then you have the potential to throw a lot of extra savings into your account at once. If you come from a family who does birthday and holiday presents, you can also consider banking your gift money, which is what I did last year.

In the last three years, I’ve learned that saving $10K on an entry-level paycheck is incredibly hard. I have honestly never done it successfully. When I got my first post-grad full-time job (which paid less than $40K), my goal was to save $2K. While I stepped it up the next year, my point is that finding spare money in your budget is a daunting task. Whatever your savings goal for 2016 might be, hopefully this got you thinking about how you can achieve that goal.

Are there other methods you’ve used to meet a savings goal on an entry-level paycheck? Let us know in the comments.

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  • Shu

    I would recommend using a 401K or a IRA to save money before taxes. That would “reduce” the amount you have to save in post tax dollars.

    Also, an assumption of a 33% tax rate is pretty high for 40K. Your federal tax bracket would be at 15% (assuming you took the standard deduction) and your social security/ medicare tax will be around 8%. I think most states would not have a 10% tax rate on top of that.

    • meep

      I live in NYC and make around 45k, and I definitely do pay 33% of my income in taxes, with both city and state taxes to pay for on top of fed/SS. I realize NYC is unreasonably expensive in a lot of ways (and disproportionately high taxes is one of them)– would be interesting to know if living in an expensive metro (SF, DC, LA, etc.) also means an effective tax rate that high.

      • Shu

        Meep, totally fair. NYC does have one of the highest tax rates due to the city + state taxes. I know SF also has a city tax, but other places like DC or Chicago have much more affordable income taxes.

        • sara

          But the property taxes in Chicago/Cook county are insane. I paid $3200/year for my 2 bedroom condo (after applying for every discount possible). That’s almost 10% of my paycheck!

      • Angie

        I make 72K in LA and also pay around 33%

      • chelster759

        I also live in NYC and make 45k, but between pre-tax retirement contributions and the max student loan interest deduction, I only ended up paying an effective tax rate this year of about 14% (federal + state), for comparison’s sake.

    • Sindhoo

      Really, really second this. I think it should be a top priority for people to max out their 401Ks or IRAs every year.

    • I like using my 401k because there isn’t any temptation, the money gets locked up right out of my paycheck! Plus, it’s so much more beneficial in the long run for your retirement.

  • Mrs. Lewis

    It can be done! I am int his process right now. I have taken my annual salary subtracted my monthly expenses x12 and calculated how much should be left over each month. Then I multiplied that number to find out how much I could save in one year. Once I saw that number I knew paying off my debts would be possible before the end of the year. By the end of this year I’ll have one student loan, and two car loans paid off. Going into 2017 with only student loans and one smaller car payment. My stretch goals is pay off that second car as well, but it’s going to take some major hustling.

  • Sindhoo

    Whoa…am I the only one who balked at $240 per month in groceries? How do you manage spending that little? Assuming you eat out even once a day, that comes out to only $3.50 per meal! Is this normal? Is this how little savvy people spend on groceries?

    I know you do your $3 treasure hunts, which somewhat explains it, but if you could follow up with a post on grocery shopping that would be much appreciated!

    • Angie

      Why do you need to eat out once a day, I eat out once a week!

      • Sindhoo

        You don’t – I was being generous to account for how little she spends on groceries.

    • I spend around $200/month on groceries. I swear it all comes down to buying the right quantity of what you need, sticking to a list, and checking out your groceries stores ads for what’s on sale that week. And I never eat out 🙂

      • Sindhoo

        You never eat out and spend only $200?! That’s amazing. This is definitely a wake up call for me!

        • TBH I eat a lot of oatmeal. You should check out budgetbytes.com if you need any affordable recipes 🙂

          • Sindhoo

            Ahh yeah, I do love browsing through that website, but I’ve never actually made anything because she tends to go heavy on the carbs….which is my ideal honesty but my fiancé insists that we eat ~healthy~ at home. Fruits and veggies can be super cheap depending on what kind, but the “trendy” ones tend to be pretty pricey. I also don’t buy meat, which you would think would make my grocery bills cheaper, but I tend to make it all up with snacks…my downfall.

          • Snacks are my downfall too. in the spirit of full disclosure, my office does usually have some free snacks in the kitchen, so maybe I’m cheating a little bit, though the snacks are usually unhealthy and to be avoided. It would be cool if TFD did a breakdown of say, a full month of groceries without eating out

          • One thing that’s helped me eat healthier, but still keep my grocery bills lower was buying a spiralizer. Because it can make so much out of one vegetable, I’ve been able to get two to three meals out of one zucchini or sweet potato. Also, for snacks, I started changing what I snacked on to keep my prices lower. I’ll just buy big bags of almonds now and carry around a small baggie of them. If i want a slightly more expensive snack, I’ll only let myself get it if it’s on sale.

            Don’t be too hard on yourself though! It’s possible to get a lower grocery bill, it just takes some work and some getting use to. I had to do some shifts in my buying, but I’m eating healthier and generally spend around/less than $200/month on groceries.

    • meep

      i shop almost exclusively at trader joe’s and usually spend about $50 a week on groceries. i let myself do one work lunch out each week for the sake of socializing and will usually eat one-two meals out on weekends, but that $50 worth of groceries lasts for all other meals. cheap lentils, potatoes, beans, that sort of stuff can way bulk out your meals.

      • Sindhoo

        Wow, that’s fantastic. I mostly shop at TJs too but I go elsewhere for certain fresh veggies, and I know I definitely tend to buy more than I intend to at those other stores.

        • Maya Kachroo-Levine

          Hey all! Such great comments here, I can’t believe I am tuning in late. Re: the comments that suggest I might be eating out more to offset my low grocery total, I actually don’t. I would say I eat out about once a week, if that, but my grocery total, like Summer’s and Meep’s comes to about $50/week, or about $200/month (I put $240 because I wanted this to be able to fit more people’s lifestyle than just my own).

          I also do most all of my shopping at Trader Joe’s! For me, one of the main ways I keep my grocery costs down is not buying very much meat. Also, and this is totally just a personal thing, but I’m one of those people who has a very low caffeine tolerance, so I don’t have to stock up on coffee on a weekly basis. My weakness in life is cheese though, and you can find amaaaaazing cheeses at TJ’s for a great price!

          • Sindhoo

            Hey, thanks for responding! In terms of the eating out thing…I know most TFD readers don’t eat out so much–I was just trying to be generous with my calculations to point out that even if you were eating out once a day, that’s still a fantastic per-meal cost.

            Honestly after reading another article on here, I realized that my grocery bill is so much higher because I live with my fiancé. At first I was thinking “well, even half of that is still way more than these girls are spending” but the other article pointed out that costs go up by more than 100% since men just eat more.

            I never buy meat to eat at home, and I am probably 50% TJs and 50% other stores. We also tend to eat pricier veggies like avocados and kale because, well, eating healthy is miserable enough and we figure it’s okay to indulge in these ~trendy~ veggies if we can make them taste delicious.

      • NL

        A little late to the party, but I feed my 30 y.o. boyfriend and myself for $250 a month. We shop almost exclusively at Aldi, an option that I know isn’t available to most, however, if it is…use it first! We are disgusting carnivores and eat meat with almost every dinner and shop sales at chain grocery stores for that. All other fresh/frozen veg, canned goods, grains, etc. are purchased at Aldi. I know this may not apply to most because some of you will never live in a location where you will know the joys of Aldi (looking at you, NYC), but it’s pretty much just TJ’s less attractive, German cousin. We also live in Philadelphia, where you can do things like drive your car to get groceries and then put them in your chest freezer in your basement, but I digress…

    • taylor.je

      While I realize this isn’t attainable for most people depending on living expenses in your area, in my rural town of less than 10,000, prices are low. I spend between $100-150 monthly on groceries, which includes eating out once every 2-3 weeks (cheap restaurants in my area, rare to spend more than $12 for a full dinner) and fast food or pizza maybe once a month (it’s easier to not be tempted when both my home and employer are on back country roads and there are literally zero stores of any kind along my daily commute). I live alone and buy food on sale, in bulk when possible, and eat primarily crockpot meals, stir fry (made with whatever is on hand), pasta, or Mexican food for dinners, and sandwiches or wraps with trail mix and fruit for lunch.

      These totals don’t include alcohol. I live in a dry county so I might pick up a bottle of wine every couple months when I’m in a neighboring county and it’s convenient. Another reason my food expenses are so low is because I work 1-3 nights a week at a Subway sandwich shop, and get one full free meal for each shift and the occasional bags of ‘expired’ chips. So, picking up a little “side hustle” at a restaurant is a plus for me!

  • Angie

    Shop the ads. I get ads every week on whats on sale. Know what a good price for something is and ONLY buy when its around that price. I currently have 2 whole chickens and a tri-tip in my freezer from when it was on sale.

    Also learn to cook..

  • George Town
  • Michael Sillince

    I want to know where you pay $750 for rent and manage to also add in health insurance along with all these expenses and still only get to $1450??? the math does not add up here at all. you also forgot Cell $100 , Cable $100 car payment ( variable), gas , electric, water etc..