The 50/15/5 rule is a simple guideline that aims to help people save and spend more efficiently. It involves setting aside at least 50% of their take-home pay for essential expenses and devoting 15% of their pretax income for retirement.
Our 50-15/5 rule aims to help people save enough to retire. We analyzed hundreds of scenarios to create a guideline to help people achieve this goal. According to our research, implementing this rule can help people maintain their financial stability and keep their current lifestyle in retirement.
50% for Essential Expenses
Some expenses are not optional, such as food and lodging. Setting aside at least 50% of your take-home pay for these necessities can help people maintain their financial stability.
Although some expenses are essential, setting aside at least 50% of your take-home pay for these necessities does not mean you can’t adjust your spending habits. For instance, you can still make small changes to your budget, such as bringing lunch to work and stocking up on groceries when they are on sale.
For instance, if you have a high-deductible health plan, consider using an HSA to reduce your health care expenses and get a tax break. Consider a more affordable apartment or home if you need to cut down on living expenses.
15% for Retirement Savings
Even if you’re not planning on retiring soon, you must save for your future. Since Social Security won’t provide enough money to cover your current lifestyle, you must have a savings account to allow you to live the life you want in retirement.
One of the essential factors that you should consider when it comes to saving for retirement is setting aside at least 15% of your pretax household income. This includes your contributions and any profit sharing or matching contributions from your company. It’s also important to start early and regularly invest to ensure you have a good chance of achieving your goals.
If you cannot set aside at least 15% of your income, you must check your company’s policy regarding automatic increases in contributions. Another strategy is contributing at least a certain amount to reach the company’s match. After getting the annual limit, you can add the rest of the funds to your workplace savings or individual retirement account.
5% for an Emergency Fund
An emergency fund can be significant, especially if you’re experiencing a financial crisis such as a job loss or illness. Having enough money in savings to cover three to six months of expenses is a good practice. You can start with a small amount, such as $1,000 and gradually build up to three to six months’ worth of expenses.
While emergency funds are usually for more immediate emergencies, like getting laid off, saving a portion of your pay is essential to cover more minor expenses. These include getting married, paying for a wedding, repairing a broken smartphone, and getting a flat tire. In addition to these, other costs are typically overlooked, such as car repairs and doctor visits.
Setting aside at least 5% of your pay can help you reach this goal. You can easily do this by having this money automatically deposited into a separate savings account.