Try This Budgeting Approach With Your Next Paycheck: 50/15/5 Rule for Spending and Saving
Written by
John Csiszar
Edited by
Gary Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
For many Americans, the idea of budgeting is something equally hated and feared. It’s hated because it can seem time-consuming and onerous, and feared because it shows in black and white exactly how you’re spending your money.
The IRS Might Owe You $900: But Time Is Running Out To Claim Your MoneyFind Out: How To Save $200 on Your Grocery Bill Every Month
Yet, having this type of financial road map can protect you from making bad financial decisions and ensure that you are saving and investing for all of your financial needs. To help make the idea of budgeting more palatable, Fidelity Investments encourages individuals to use the “50/15/5” rule. While catchy and easy to remember, what exactly is the 50/15/5 rule and how does it vary from traditional budgeting methods? Most importantly, is it something that you can use to help manage your personal finances? Read on to learn more.
What Exactly Is the 50/15/5 Rule?
Understanding that many Americans are reluctant to budget, Fidelity suggests adopting the 50/15/5 rule. Under this budgeting strategy, 50% of your income goes towards necessities, such as rent and utilities. Fifteen percent should be allocated to your retirement savings, such as your 401(k) and/or IRA, while 5% should be reserved for emergency expenses.
This leaves 30% of your income “unaccounted for,” meaning it’s available to spend as you see fit. Since most individuals struggle with tracking every single dollar of their budget, having a relatively sizable pool of money unallocated can give a sense of financial freedom while still helping to keep spending under control.
How Does This Rule Conflict With Traditional Strategy?
Traditionally, financial advisors have suggested that a 50/30/20 budget is optimal, which may seem to conflict with Fidelity’s 50/15/5 rule. But in reality, they are just two different ways of accomplishing the same objectives.
Whereas the 50/15/5 rule is allocated among essential expenses, retirement savings and an emergency fund, the traditional 50/30/20 budget is divided among needs, wants and savings. When placed side by side, however, the two types of budgets are essentially identical:
| 50/15/5 Rule | 50/30/20 Strategy |
| 50%: essential expenses | 50%: needs |
| 15%: retirement savings | 20%: savings (inc. emergency fund) |
| 5%: emergency fund | |
| 30%: discretionary expenses | 30%: wants |
At the end of the day, both budgeting suggestions allocate 50% to needs/essential expenses, 30% to wants/discretionary expenses, and 20% to savings of some type.
Something important to note about both of these budgets, however, is that they conflict with the suggestions of some financial pundits to “give every dollar a job.” Those who espouse this philosophy believe that every single dollar you earn should be allocated to a specific budget category, rather than leaving 30% to the vague category of “wants.”
Pros and Cons of the 50/15/5 Rule
No budgeting rule can be 100% effective for everyone, as each person has their own specific financial situation. However, the foundation of the 50/15/5 rule is solid. Americans in general aren’t saving enough for their retirements, and recent studies have shown that 57% of Americans couldn’t cover a $1,000 emergency expense. By sticking to a 50/15/5 budget, both of those problems should be resolved, or at least minimized. Meanwhile, allocating 50% of your budget to necessities like rent helps protect you from living somewhere that you really can’t afford.
The main drawback of the 50/15/5 rule is that it’s general and not specific. If you live rent-free or have paid off your mortgage, for example, “forcing” yourself to allocate 50% of your budget to necessities may be too much. In this scenario, you might be much better off bumping up your savings and investments to 30%, 40% or even 50% of your budget, rather than simply adding additional “necessity” expenses to your budget.
Is This Rule Right for You?
The 50/15/5 budgeting rule offers individuals the flexibility to spend up to 30% of their income as they see fit. As it’s not as restrictive as the “give every dollar a job” budgeting method, it may be more palatable for you if you have trouble budgeting.
It also provides a basic framework as to how most people should be thinking about how they allocate their money. While it may not exactly work for your specific financial situation, at the end of the day, any budget that keeps you from going into debt and gets you to save for emergencies and longer-term goals is a successful one.
More From GOBankingRates
