Photo: fizkes (Shutterstock)
Sometimes the best way to stay on a budget is to follow a simple rule that doesn’t dictate how every last dollar should be spent. That’s the idea behind the 50/15/5 rule, which provides guidelines for managing your monthly budget while keeping an eye on your savings goals. This rule is most relevant for people who are already making enough to cover their expenses and put money aside for retirement – here’s how it works.
How to use the 50/15/5 rule
Popularized by loyalty, The 50/15/5 Monthly Budget Rule will help you maintain financial stability in the short term while ensuring that you are on track to maintain your current retirement lifestyle. The rule is structured as follows:
- 50 percent or less Your takeaway salary should be spent on essential expenses such as accommodation, transportation, and food.
- 15 percent Your pre-tax income should be stored in a retirement account such as an IRA or 401 (k) account (including appropriate employer contributions, if offered).
- 5 percent used for unexpected monthly expenses or building an emergency fund.
Of course, that’s only 70% of your income. The remaining 30% is usually spent on discretionary purchases such as restaurant meals, entertainment, clothing, or travel. The benefit of this approach is that you don’t have to micro-manage every random penny you spend – a hassle that makes it more likely that you will give up budgeting entirely (a current survey suggests that 20% of people don’t budget at all).
G / O Media can receive a commission
Of course, this rule works best if you are already living reasonably comfortably, as you will need to increase your retirement savings if you want to improve your retirement lifestyle (and if you are burdened with a lot of debt, a 50/20/30 budget or 80/20 budget may suit you better).
To see if a 50/15/5 budget is right for you, Take a look at this calculator. And remember, this rule is also customizable – aside from the 15% allocated to retirement savings, the rest of this budget rule is more of a guideline than a hard and fast rule that needs to be followed. Lots of people struggle to keep spending at only 50%, so you may want to do something closer to 65/15/5 – whatever works best for you.
And if you’re struggling to pay off your debts, check out this Lifehacker post that covers your options.