Use the 50/15/5 savings and budgeting rule to avoid overspending

What is the 50/15/5 rule?

This budgeting rule is a ratio for putting your take-home wages into your savings. The ratio is simple:

• 50% of your take-home pay goes to essential expenses. This can include your rent or mortgage, utilities, and car payments. It also covers necessities such as food, childcare, healthcare, and debts related to credit cards or loans. If you find that your necessary budgeting is going past 50%, consider cutting back on other expenses so you can meet these target goals. A gas-friendlier car, more energy-efficient appliances, cooking at home, mortgage refinancing, and a health savings account with tax breaks all go towards saving you money on your needs. Read more about decoding your living expenses here.
• 15% of your pay goes to retirement. Whether it’s in an IRA, a 401k, or a savings fund, putting money towards retirement is vital. Since life expectancies are longer than ever, and pension plans and Social Security won’t cut it anymore, many financial experts estimate that 45% of retirement income will need to come from savings.
• 5% of your pay goes to short-term savings. Approximately 1/3 of Americans have no savings and are living paycheck to paycheck. If a medical emergency happens, over half of all Americans will be unable to cover a $1000 expense. That’s why it’s important to set aside money to build any form of savings, no matter how small—which is why this is part of the smallest ratio in the 50/15/5 rule. These savings can also go to urgent needs that aren’t as drastic as a medical emergency, like car troubles, holiday gifts, wedding trips, and sudden repairs.

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn more

What about the rest?

The 50/15/5 rule covers 70% of your pre-tax take-home pay. What you do with the other 30% is up to you. You can use it to fund your hobbies, dining out, new clothes, or whatever your heart desires.

The wisdom of this budgeting rule is that it sets aside room for meeting your financial goals. If you’re going beyond the ratio for any category, this extra money comes in as welcome extra padding. It also doesn’t preclude the need to have fun, or to occasionally splurge: if you go out for a night on the town, for example, you won’t need to feel guilty.

Of course, this is just one of the many tips and tricks to building a successful budget. For more tips on how to manage expenses, build net worth, and understand inflation, read about our budgeting advice here.