Budgeting for Multiple Financial Purposes Using the 50/15/5 Rule
When you are trying to clean up your finances, there is usually a question of compromise. Pay off debts or save for an emergency ? Can I save money for a retirement or home down payment ? The Fidelity 50/15/5 Rule aims to achieve your most important financial goals by allocating your salary appropriately.
You’ve probably heard about the 50/20/30 rule and the 80/20 rule (if not, we wrote about them here ). Both are general rules of thumb for budgeting that will help you decide how to split your income. The 80/20 rule is geared towards your financial goal, while the 50/30/20 rule is geared towards balancing your spending.
Fidelity offers another rule of thumb. Their 50/15/5 rule aims to balance multiple financial goals. This is how it works:
- 50% of your income goes to basic expenses: rent, bills, minimum debt payments.
- 15% of interest goes to pension savings. They also suggest that you increase this by 1% every year.
- 5% goes towards incidental monthly expenses or creating a reserve fund.
Of course it doesn’t add up to 100. So what do you do with the rest of the money? You decide. You can increase your retirement savings, save for another purpose, or pay off debt. It depends on your financial situation. The main purpose of this rule is to make sure you save for retirement and create an emergency fund. As with any budget rule, you can also customize the numbers in each category as you like.
This is not a recommendation for everyone. If you live from hand to mouth, your salary can barely cover your living expenses. But if you’re trying to balance multiple financial goals, this is a solid rule to keep in mind.
Fidelity also has a budget checker tool to see how your actual savings and spending compares to their recommendations. You can try it here . To learn more about their 50/15/5 rule, check out the full article at the link below.