How to Use the 50/15/5 Rule for Spending and Saving
Sometimes the best way to stick to a budget is to follow a simple rule that doesn’t dictate how every last dollar should be spent. This is the idea behind the 50/15/5 rule, which offers guidelines for managing your monthly budget while still maintaining your savings goals. This rule is most relevant for people who are already earning enough money, covering their expenses and saving money for retirement – this is how it works.
How to use the 50/15/5 rule
Popularized by Fidelity, the 50/15/5 monthly budget rule helps you maintain financial stability in the short term by ensuring that you are on track to maintain your current retirement lifestyle. The rule breaks down as follows:
- 50 percent or less of your home wages should be spent on basic expenses such as housing, transportation, and food.
- 15 percent of your pre-tax income should be kept in a retirement account such as an IRA or 401 (k) account (including applicable employer contributions, if offered).
- 5 percent goes towards incidental monthly expenses or creating a contingency fund.
Of course, this is only 70% of your income. The remaining 30% is usually spent on random purchases such as food at a restaurant, entertainment, clothing, or travel. The benefit of this approach is that you don’t have to carefully monitor every discretionary penny spent – a hassle that increases the likelihood that you will not budget altogether (a recent survey shows that 20% of people do not plan a budget at all). ).
Of course, this rule works best if you are already living comfortably enough, as you will have to increase your retirement savings if you want to improve your post-retirement lifestyle (and if you are heavily indebted, the 50 / 20/30 or 80/20 budget ).
To see how the 50/15/5 budget works, use this calculator . And remember, this rule is also regulated – with the exception of the 15% earmarked for retirement savings, the rest of this fiscal rule is more of a guideline than a hard rule to follow. Many people find it difficult to keep spending at 50%, so a more realistic option may be close to 65/15/5.
And if you’re struggling to pay off your debts, check out this Lifehacker post that outlines your options.