What Is the 50/15/5 Rule for Saving?

Quick Answer

The 50/15/5 rule is a plan for managing your spending and saving. Here’s how it allocates your income:

  • 50% for essential expenses
  • 15% for retirement
  • 5% for short-term savings

The remaining 30% can be used for discretionary spending or to bump up your retirement or short-term savings goals.

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The 50/15/5 rule for spending and saving provides guidelines that could make budgeting a little easier. It allocates 50% of your income to essential expenses, 15% to retirement and 5% to short-term savings.

The 50/15/5 rule could be a good approach for folks who want to prioritize saving. Like any budgeting style, however, it has its pros and cons. Whether it's right for you will depend on your personality and financial goals. Let's take a closer look at what this rule looks like in practice.

What Is the 50/15/5 Rule?

The 50/15/5 rule provides a set of guardrails to follow when budgeting for your expenses. Using it could rein in overspending and help you live within your means. At the same time, it carves out space for your savings and retirement goals.

Here's a breakdown of how the 50/15/5 rule works:

50% of Your Income Goes Toward Essential Spending

These are unavoidable expenses you have to pay every month. Add them all up, then see how the total relates to your monthly take-home pay. Essential spending includes your:

  • Housing payment
  • Utilities
  • Phone bill
  • Minimum debt payments
  • Groceries and food expenses
  • Transportation and gas
  • Health and auto insurance
  • Child care expenses

How to Reach Your Spending Goal

Look for ways to reduce your essential expenses. That might mean shopping around for better insurance rates, adjusting your cellphone plan, consolidating debt, meal planning or taking other steps to bring down your monthly spending.

15% of Your Income Goes Toward Retirement Savings

If you feel behind on your retirement savings, it's never too late to start building your nest egg. One rule of thumb is to set aside 15% of your income during your 20s and 30s, then increase it to 20% in your 40s and beyond. If that feels like a big jump from where you are now, you can gradually increase it every few months.

How to Reach Your Spending Goal

If you have a 401(k), you can make contributions through automatic payroll deductions. An added benefit is that the money you put in is tax-deductible. Try to contribute at least enough to secure an employer match. If you have an individual retirement account (IRA), you can set up automatic monthly transfers from your checking account.

5% of Your Income Goes Toward Short-Term Savings

A healthy emergency fund is an important part of financial wellness. Surprise expenses pop up all the time—and they can throw a wrench into your budget. That can include car trouble, unexpected home repairs, unplanned medical bills or periods of unemployment. Most experts recommend saving three to six months' worth of expenses in your emergency fund. Having that money on hand can help you manage financial surprises without accumulating debt.

How to Reach Your Spending Goal

The 50/15/5 rule has you set aside 5% of your take-home pay for this goal. If that feels like a stretch, start small and work your way up. Cutting back on discretionary spending can also free up money to put toward saving.

What Happens to the Remaining 30%?

With the 50/15/5 rule, you'll have 30% of your take-home pay left over for discretionary spending. That might include:

  • Shopping
  • Dining out
  • Entertainment
  • Subscription services
  • Reasonable splurges

Keep in mind that you don't always have to spend 30% on discretionary expenses. You could use some of this money to bump up your retirement savings, invest, pay down debt, pad your emergency fund or save for a specific financial goal.

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How Is It Different From Other Spending and Saving Recommendations?

Here's a look at how the 50/15/5 rule compares to other popular budgeting guidelines:

  • 50/30/20 rule: Spend 50% on essential spending, 30% on discretionary spending and 20% on financial goals.
  • 40/30/20/10 rule: Spend less than 40% on loans, less than 30% on expenses, at least 20% on financial goals and at least 10% on insurance.
  • 70/20/10 rule: Spend 70% on monthly bills and regular spending, 20% on saving and investing, and 10% on extra debt payments.

Is the 50/15/5 Rule a Good Idea?

The 50/15/5 rule might make sense if you want to prioritize saving. That includes saving for retirement and building your emergency fund. One potential downside of the 50/15/5 rule is that it doesn't build long-term, non-retirement savings into your budget. That includes investing. You'll have to be intentional about working that into your plan—otherwise you could be leaving a lot of money on the table. You'll also want to plan ahead for non-monthly expenses.

If you're paying off debt, you might like the 70/20/10 rule better because it allocates 10% of your income to extra debt payments. Meanwhile, those with irregular income may prefer zero-based budgeting. This method accounts for every dollar of your take-home pay and can be helpful if your income fluctuates from one month to the next.

The Bottom Line

The 50/15/5 rule is a budgeting technique that's meant to optimize your income. When done right, it can curb overspending and help you reach your savings goals faster. One of those goals might be to improve your credit. Experian can help here, allowing you to check your credit score and credit report for free at any time.