50 15 5 Rule: How to Save More and Spend Less

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Last Updated on December 30, 2022 by Rebecca Lake

How much money should you save?

The right answer can depend on your financial goals. But it’s important to know how much money to allocate to short-term and long-term savings so that nothing falls through the cracks.

The 50 15 5 rule is a financial rule of thumb you may have heard about. This saving rule, popularized by Fidelity, says you should dedicate 50% of your income to essential expenses while putting 15% in retirement savings and allocating 5% of your cash to short-term savings goals.

Is the 50 15 5 rule the best way to save money from monthly income? Understanding how this personal finance rule works can help you decide if it’s worth following every month.

What Is the 50 15 5 Rule of Thumb?

The 50/15/5 rule is a simple spending and saving rule developed by Fidelity. If you’re not familiar with Fidelity, it’s an established financial institution based in the United States that offers a variety of financial products, including investment and retirement accounts, as well as financial planning and investment advice.

The 50-15-5 rule is designed to ensure that you’re able to save enough money to enjoy a comfortable retirement.

Here’s how this simple rule breaks down:

  • 50% of take-home pay goes to essential expenses

  • 15% of pretax income is added to an investment or retirement account

  • 5% of post-tax income is dedicated to short-term savings accounts

Fidelity’s financial experts developed the 50 15 5 rule for saving after analyzing different scenarios for retirement. They determined that saving 15% of pretax income in a retirement account and 5% for short-term savings goals was an ideal formula for achieving financial stability.

In general, making retirement contributions that are equal to 15% of your pretax income is a good rule of thumb to follow. 

Fewer employers offer pension plans these days and Social Security isn’t always enough to cover basic needs. Saving in a retirement plan at work or an Individual Retirement Account (IRA) can be a great way to achieve financial independence on your own terms.

Related post: How to Get Rich From Nothing (10 Proven Secrets to Become a Millionaire)

How the 50 15 5 Rule Works

woman using the 50 15 5 rule to budget
50 15 5 Rule to Manage Money

The 50/15/5 rule is pretty straightforward. Again, you’re simply dividing up your household income each month into three separate categories.

So you’d calculate 50% of your take-home pay, 15% of pretax income and another 5% of after-tax income. For example, if you make $5,000 a month in take-home you’d allocate $2,500 of that to paying bills and the rest would go to saving and spending.

This savings rule is meant to be a starting point for developing your financial plan. You may find that your personal savings rate needs to be more (or less) of your total income, based on your financial situation.

Essential expenses: 50% of take-home pay

If you’re following the 50 15 5 rule, covering your essential expenses is the first step. Again, you’re using take-home pay to cover your expenses, which means after-tax income.

In simple terms, essential expenses are ones that you need to cover in your budget in order to maintain a basic standard of living. The following categories are examples of essential expenses to include in a monthly budget:

  • Housing costs: Rent and renter’s insurance, mortgage payments and homeowners insurance, property tax if you own, condo or HOA fees

  • Utilities: Electric, water, sewer, trash collection, recycling pickup (you could also add cell phone service and internet service into this household budgeting category)

  • Transportation costs: Car payments or lease payments, gas, auto insurance, parking fees, public transportation fares, vehicle maintenance

  • Health care costs: Health insurance, copays, coinsurance

  • Childcare expenses: Daycare, in-home care if you pay a sitter or nanny, school fees and tuition

  • Food: Groceries at home, meals out, snacks

Those are the spending categories that most people have, regardless of what method of budgeting they use. These expenses may be fixed or variable. Fixed expenses don’t change from month to month but variable expenses may be higher or lower over time.

Related post: 100+ Budget Categories to Help You Build a Smarter Budget

woman saving money in a piggy bank
What Is the 50-15-5 Saving Rule?

Retirement savings: 15% of pretax income

Once you’ve covered your essential expenses, the next step is earmarking some of your pretax income for retirement savings.

There are different ways to save for retirement. Your options might include:

  • 401(k) offered through your employer

  • Pension plan

  • Traditional IRA

  • Roth IRA

A lot of people have access to retirement accounts, though they don’t always use them to their full potential. At a minimum, it’s important to contribute enough to your plan to get the full employer match contribution if one is offered.

What if you don’t have a retirement plan at work? Or what if you’re self-employed?

The good news is that you can still manage to set aside cash for retirement in an IRA.

With a traditional IRA, you can get the benefit of tax-deductible contributions. When you retire, your withdrawals are taxed at your ordinary income tax rate.

A Roth IRA offers no deduction for contributions but you can get tax-free withdrawals in retirement. That could be a good place to save for retirement if you expect to be in a higher tax bracket when you retire.

Regardless of where you decide to invest for retirement, here are a few rules to keep in mind:

  • Investment strategies aren’t all alike and it’s important to choose one that fits your goals and risk tolerance.

  • Past performance isn’t an indicator of how well the stock market will perform in the future.

  • Investment returns are not guaranteed and you are taking a risk with your money when you put it in the market.

  • Asset allocation and asset location are two different things but both are important to consider when making financial decisions.

  • Getting professional tax advice can be a good way to manage tax liability on your investments so you’re not paying the IRS more than you need to.

If you’re looking for a simple way to start investing some of your money for retirement, you have a few options.

First, you could try a micro-investing app. Acorns, for example, links to your checking account and invests your spare change in a portfolio of low-cost exchange-traded funds (ETFs).

That’s a simple introduction to investing. But if you’d like to go a step further and trade stocks or other securities, you might open a brokerage account instead.

With M1 Finance, for example, you can start investing with as little as $100. You can trade stocks and other investments on your terms, according to your goals and risk tolerance, with zero commission fees.

Pro tip: If you’re not able to invest 15% of your pretax income yet, consider bumping up your annual contributions by 1% to 2% each year until you hit your target.

Looking for a simple money management tool? Empower makes it easy to track spending, saving, investing, and budgeting in one place so you can tackle your financial goals!

Short-term savings: 5% of take-home pay

Short-term savings means money that you plan to spend some time in the near future. You generally want to keep these savings accessible in a bank account where you can keep track of it easily.

Here are some of the things that you might save money for in the short term:

It’s also important to save for emergencies.

An emergency fund isn’t necessarily a short-term savings goal, since you don’t know exactly when you’ll spend the money given how unpredictable life can sometimes be. And if you spend down part of your emergency fund, you may need to top it again so it’s more of an ongoing or long-term goal.

So how much should you save for emergencies?

A good saving rule of thumb for emergencies is to keep three to six months’ worth of expenses on standby in case you need it. When unexpected expenses come up, you can dip into your savings to pay for them.

The actual dollar amount you’re able to save for emergencies each month depends on how much wiggle room you have in your budget after living expenses are paid.

Pro tip: Keeping your emergency fund in a high-yield deposit account is a great way to earn the most interest on your money.

Looking for the best high yield savings option? Compare savings account rates online at top banks and credit unions now!

What Happens to the Other 30% of Income?

The 50 15 5 rule accounts for 70% of your income and ensures that your essential expenses are paid and you’re saving consistently.

It’s up to you to decide what to do with the other 30% of the money you have to budget.

Depending on where you are financially speaking, some of that might go to discretionary spending. 

Discretionary spending means the “wants” in your budget, like dinners out, new clothes, hobbies and entertainment.

You could also include credit card bills, student loans, car loan payments and other debts in the 30% category as well.

Keeping up with payments to high-interest debt is important because of how it can impact your credit. Defaulting on credit card debt, car loans or student loans is an easy way to damage your credit score.

A lower score could make it more difficult to borrow money in the future. And you might pay higher interest rates for any loans you’re able to get.

For that reason, it’s a good idea to pay at least the minimums on your debts each month. Making minimum debt payments may not help you make a dent in what you owe but it can keep your credit score in good standing.

And if you have a lot of debt, you might consider refinancing it, consolidating it, or talking to a nonprofit credit counselor who can help you come up with a debt repayment plan.

Pro tip: Consider using a service like Credit Karma to monitor your credit scores for free each month.

50 15 5 Saving Rule vs. 50 30 20 Rule for Budgeting

woman making a budget

The 50 15 5 saving rule looks a lot like the 50 30 20 budget rule popularized in the book, “All Your Worth: The Ultimate Lifetime Money Plan”, co-authored by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi.

The 50 30 20 rule budget dictates dividing up your monthly income like this:

  • 50% for needs

  • 30% for wants

  • 20% for savings and/or debt repayment

A lot of people use the 50/30/20 rule budgeting method because of its simplicity.

You’d simply look at your take-home pay and allocate 50% of your cash to needs like housing and groceries, use 20% to save or pay down debt and spend the rest on whatever you want.

The 50 30 20 rule of budgeting is similar to the 50 15 5 rule but there’s one key difference.

With the 50 15 5 method, 20% of what you make gets saved each month.

Under the 50 30 20 rule budget, you’re allocating 20% of your household income to saving and debt repayment. So it’s possible that you might save less money for retirement income or short-term goals with this budgeting method than you would with the 50 15 5 rule.

Related post: Budget Percentages Explained: 3 Easy Ways to Create Your Ideal Budget

50 15 5 Rule FAQs

Which number of the 50 15 5 is pre tax income?

If you’re following the 50 15 5 saving rule, you should be saving 15% of your pretax income for retirement. You may deposit that money into a 401(k) at work or a traditional IRA, depending on your individual situation. Keep in mind that if you’re putting money in a Roth 401(k) or Roth IRA, those accounts are funded with after-tax dollars.

How much should I put in my savings every paycheck?

It’s a good goal to set aside 15% of your pre tax pay each paycheck for retirement if you’re able to. At the very least, it’s smart to save enough in your workplace retirement plan to get the full employer match. You may also want to budget 5% to 10% of your take-home pay to deposit into a bank account each payday for near term financial goals.

How much money should you have left after bills?

Whether you use the 50 15 5 rule or the 50/30/20 budget method, you should have 50% of your income left after covering essential expenses or needs. The remaining 50% is split between savings, debt repayment and discretionary spending. If you’re spending more than 50% of your income on bills you may want to revisit your expenses to see what you might be able to cut back in order to create more wiggle room. Using a budget app or budget binder to track spending make it easier to calculate where your money is going.

How much do you need for emergencies?

A good rule of thumb for emergency savings is to have three to six months’ worth of expenses in a savings account at your local bank or an online bank. You may want to increase that to nine to 12 months’ worth of expenses if you’re worried about an extended illness or job layoff wiping out your savings.

Final thoughts on the 50 15 5 rule

The most important thing to keep in mind when choosing a budgeting method is to pick a system that works for you and fits your life. It’s easier to achieve good financial health when you’re following a budget that’s realistic for your situation and allows you to meet your essential expenses while still having enough money left over to save or spend on fun monthly. The 50 15 5 rule could help you to do that if you’re committed to sticking with your budgeting plan.

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50 15 5 Rule Explained

About Rebecca Lake

Rebecca Lake is a Certified Educator in Personal Finance, freelance writer and homeschooling single mom of two. Since 2014, she's paid off nearly $100,000 in debt and grown her net worth to seven figures. Her work has appeared online at top personal finance websites, including Forbes Advisor, Bankrate, Investopedia, The Balance, CreditCards.com and U.S. News & World Report. Find out more.

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