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One of the easiest ways to maintain a budget is by following a simple rule that doesn’t control every single expenditure. The 50/15/5 rule offers guidelines for managing your monthly finances, keeping you aligned with your savings goals. This strategy is especially useful for those who already earn enough to cover their living expenses and contribute towards their retirement savings. Let’s explore how it works.
How to Implement the 50/15/5 Rule
Made popular by Fidelity, the 50/15/5 rule helps you stay financially stable in the short term, while ensuring you remain on track to sustain your lifestyle in retirement. Here’s how it works:
- 50% or less of your net income should go toward essential expenses like housing, transportation, and groceries.
15% of your pre-tax earnings should be allocated to retirement savings, such as an IRA or 401(k), including any matching contributions from your employer, if available.
5% should be set aside for unforeseen expenses or to build up an emergency fund.
This covers only 70% of your income. The remaining 30% is typically spent on discretionary expenses like dining out, entertainment, clothing, or travel. The benefit of this strategy is that you don’t need to micromanage every non-essential expenditure—a burden that could make you abandon budgeting altogether (a recent survey found that 20% of people don’t budget at all).
This method is most effective if you’re already in a comfortable financial position, as you would need to increase your retirement savings to enhance your lifestyle in retirement. If you're dealing with significant debt, a 50/20/30 budget or 80/20 budget may be more appropriate for your situation.
To see how the 50/15/5 budget works in practice, check out this calculator. Remember, this rule is flexible—aside from the 15% allocated for retirement, the rest of the budget is more of a guideline than a strict rule. Many people find it hard to keep expenses at 50%, so a more realistic approach might be closer to 65/15/5.
If you’re finding it difficult to manage your debts, check out this Mytour post for some helpful options available to you.
