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Explaining the 50/15/5 Savings and Budgeting Rule

There are at least eight million different rules floating around out there about how to manage money. Well, maybe not quite that many, but there are hundreds of blogs around the internet offering financial advice. They each have their own brand of a guaranteed method for saving money and budgeting.

One of the more common rules is the 50/15/5 saving and investing rule. This rule lays out guidelines based on your income that can help you better financially prepare for your future. The numbers refer to the percentage of your take-home pay each month that should be allocated to three spending categories: essential expenses, retirement savings, and short-term savings. Let’s dig deeper into those numbers.

50%: Necessary expenses and bills

Funds for essential human needs should be allocated before anything else. We’re talking about the things you need to live. First and foremost, shelter. You have to have somewhere to live. Not just the cost of rent or a mortgage, this also includes:

  • Food – You have to eat. You do not have to eat out at restaurants. Keep this focused on the groceries.
  • Transportation – This category includes gas, auto loan payments, car insurance, maintenance and any other costs associated with getting from one place to another.
  • Health insurance – Don’t forget to include your deductibles, prescriptions and copayments.
  • Debt – We’ve been over this multiple times in previous blogs. Making consistent payments is the biggest factor in your credit score. We’re talking about 35% of your score.
  • Child care – This doesn’t apply to everyone but those of us with children understand that day care and tuition can cost as much or more than a car payment.

These things are needs but they aren’t necessarily fixed costs. Being conscious of your energy bill and taking steps to lower that can allow you to spend more on transportation. Vehicles with high gas mileage can lower your transportation costs and allow you to allocate more of this 50% toward debt payments. You can’t take action to save on rent once you’ve signed a lease, but you can choose a home with the 50% guidelines in mind. If the monthly payment on a mortgage or rent on an apartment will put you over that threshold, you might want to find another option.

15%: Saving for Retirement

Saving for retirement should begin as soon as you start bringing home a paycheck. In the past, pension plans and Social Security provided living income for those ready to retire. Today, pensions are rare. Social Security is still around but it won’t likely provide all the money you need to live your life comfortably in retirement. The financial burden of retirement is going to be your responsibility. If 15% isn’t possible right now, at the very least contribute enough money to take advantage of your employer’s 401(k) match program.

5%: Emergency Savings

Unexpected expenses happen. They’re impossible to predict, but you can be prepared. The consensus among financial planners is to have three to six month’s of essential expenses tucked away. When you look at that lump sum, it can be daunting. Putting away 5% chunks monthly will build up quickly. Once you have a comfortable cushion, don’t stop. Roll that 5% into your retirement savings to help you reach that 15% goal. You can also allocate that 5% to help pay down some outstanding debts.

Pro tip: Have these expenses taken out of your paycheck automatically. If the money never enters your checking account, you are less likely to spend it.

But what about the other 30%? That’s your flexible spending. That includes going out to eat, seeing a movie, buying clothes, and anything else you might want to purchase.

Talking about saving and budgeting is one thing. Putting those rules to action is completely different. Take a look at one example below:


James is a 30-year-old with five years' professional experience in Birmingham. He has student loans, but he is still able to meet his student loan payment every month and pay a little extra. He lives with a roommate to mitigate some of his living expenses. He also contributes to a Roth IRA, and pays all his bills.

Income: $48,750 a year

Take-home pay after taxes: $2,509 a month after taxes. (Gross pay per month: $3,746)

Fixed Costs:
Rent: $395
Transportation (Includes insurance, payment, and gas): $400
Utilities (including phone, water, power, gas, and internet): $200

Health Insurance: $75

Student Loan Payment: $180

Fixed Costs Total: $1,250, roughly 50% of his take-home pay.

Retirement Contributions: $600, roughly 16% of his gross pay.

Emergency Savings: $200, roughly 8% of his take-home pay.

Flexible Spending: $674, roughly 27% of his take-home pay

Of course, this is just one suggestion for budgeting and saving. Every financial situation is different. Before you sit down and begin budgeting, always assess your finances and understand your expenses. 

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