The 50/15/5 Rule: A Guide to Spending and Saving
If you're looking for an easy-to-follow framework for managing your finances, the 50/15/5 rule offers a balanced approach. The goal is to spend no more than 50% of your take-home pay on essential living costs.
Save 15% of your gross income for retirement, including any employer contributions. Also, set aside 5% of your take-home pay for short-term savings. While every situation is unique, this guideline can be a practical starting point for potentially building financial stability now and in the future.
This method is based on a careful look at many financial situations. All of them lead to the same idea: using the 50/15/5 rule can help you stay on track for retirement. You can do this without giving up your current lifestyle.
50% for Essential Living Costs
Some expenses just can’t be avoided—housing, groceries, and transportation are needs, not wants. Aim to keep these “must-have” expenses below half of your take-home pay. This category generally includes:
Housing: Mortgage or rent, property taxes, insurance, utilities, and homeowners’ association dues
Groceries: Only necessary food purchases—not dining out
Health care: Out-of-pocket costs and insurance premiums if not deducted from your paycheck
Transportation: Car payments, gas, insurance, public transit, and routine maintenance
Childcare and tuition: For working parents, this is often essential
Debt and obligations: Student loans, minimum credit card payments, child support, alimony, and life insurance
Just because something is essential doesn’t mean it’s set in stone. Find ways to save money. Consider getting a cheaper car, cooking at home, bundling insurance, or shopping smart for groceries.
Health savings accounts (HSAs) work well with high-deductible health plans (HDHPs). They can help reduce health costs and provide tax benefits.
15% Toward Retirement
Saving for the future is important. Traditional pensions are becoming less common, and Social Security might not meet all your needs. Financial advisors suggest saving 15% of your gross income before taxes. This includes any employer contributions, like matches or profit-sharing, for retirement accounts.
Start with your workplace plan, like a 401(k) or 403(b), and contribute at least enough to get the full employer match. If you're not at 15% yet, consider increasing your contributions whenever you receive a raise or year-end bonus. Some employers offer automatic contribution escalators that bump up your savings rate each year until you hit your target.
Consistency is key. Saving early and often in tax-advantaged accounts like IRAs and employer-sponsored plans helps your money grow. This growth happens through compounding over time.
5% for Short-Term Savings
Life happens, and having cash set aside for unexpected expenses can keep you from derailing your financial progress. Start with a $1,000 emergency fund. Then, save enough to cover three to six months of essential expenses.
But not every surprise expense is a full-blown emergency. Car repairs, school field trips, and last-minute medical copays don’t necessarily justify dipping into your emergency fund. That’s why it’s wise to set aside an additional 5% of your take-home pay for smaller, irregular costs.
The best way to build this cushion? Automate it. Have the money directed into a separate savings account so you’re less tempted to spend it. This fund acts as a financial buffer, helping you avoid credit card debt when minor expenses pop up.
Bottom Line
By following the 50/15/5 guideline, you can strike a healthy balance between living for today and preparing for tomorrow. You may need to change the percentages based on your income or situation. However, using this rule as a guide can help you focus on what is most important in your finances.
Sources:
https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.