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How Does Your Spending Stack Up
If you’re looking for a simple way to measure your spending to help determine how healthy and sustainable your financial habits are, we’ve got a simple rule to share –the 50/15/5 rule. The 50/15/5 rule works by breaking down the percentage of your take-home pay that would be considered generally healthy ranges for essential expenses and savings.
- Essential expenses: 50% Ideally, you would aim to spend no more than 50% of your take-home pay on necessary expenses, which include housing costs, insurance, groceries, healthcare needs, transportation, childcare, and debt repayments.
- Retirement savings: 15% It may seem like a lot of money to allocate towards retirement, but it’s important to remember that what you save now will likely account for a large portion of your retirement income, and this income may need to last decades. Saving at the recommended levels and saving as early as possible will help increase the likelihood you’ll meet your retirement goals.
- Short term savings: 5% Making regular deposits into a savings account can help prepare you for unforeseen financial difficulties.
While the 50/15/5 rule is intended to help guide spending and saving, it might not be an exact formula for everyone. Where you live and what kind of debt you might carry can weigh heavily on your income and options.
The beauty of the 50/15/5 rule is that it doesn’t add up to 100% of your income; instead, you have 30% left over that can be flexible. Therefore, maybe you need to allocate a little extra to essential expenses until you pay off debt or any other expense you may have at that time. What’s important is that you find a way to distribute your income to meet your needs and allow for saving. The ratios may change depending on your situation from time to time.