Everything you need to know about the 50/15/5 budgeting strategy-| North Loop Official Blog
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30 Nov 2020

Everything you need to know about the 50/15/5 budgeting strategy-

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One of the hardest things about budgeting is allocating a fixed amount of money for essentials, luxuries, and savings. Some budget plans can either allocate too much money for essential and other desirable purchases, which may leave no room for savings and others may allocate too much for savings, which may be not feasible.

The 50/15/5 is more of a practical budgeting strategy incorporated after a great deal of research, which can help individuals strike a perfect balance between savings and expenditure.

What percentage of paycheck should go to savings?

The 50/15/5 savings rule allocates 50% of your income towards essential expenses, 15% of your pretax income for savings, and the remaining 5% for any short term goals or emergencies.
The 50/15/5 savings rule can help you maintain your current lifestyle even after retirement by just following the strategy.

1. Essential Expenses (50%)-

This budgeting strategy would require you to allocate 50% of your income towards essential expenses. These expenses may vary from person to person but can include expenses such as-

  • Rent and Utilities such as water, electricity, internet, maintenance, etc.

  • Food and groceries.

  • Credit card bills, EMIs, Insurance Premiums, and all other miscellaneous expenses such as fuel, gas, transport, etc.


Although the rule allocates 50% of your income toward essential expenses, you must minimize these expenses as much as possible to maximize your savings. Purchasing essentials during a sale, using electricity responsibly, etc. can go a long way in reducing your expenses.
At the same time, you must also make sure that you lead an affordable lifestyle, live in an affordable home, and drive a modest vehicle which can help you cut back on your expenses.

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2. Savings for retirement (15%)-

In order to retire young and rich, it is key to start saving from very early on in your career and at the same time, how much you save is also very important. Ideally, one needs to save 15% of their pre-tax income for retirement (starting from their early 20s) to lead a comfortable post-retirement life.

This 15% can be achieved with the help of an employer match or employer’s retirement contribution. It is advisable to contribute as much as your employer does to help achieve your 15% retirement savings. In addition to this, any bonuses, hikes, and profit-sharing contributions from an employer needs to be added to the retirement fund.

As and when your income increases, your contribution to the retirement fund needs to increase proportionately.

3. Short-term savings or Emergency Fund (5%)-

The remaining 5% of your income needs to be allocated towards short term savings or an emergency fund. Financial predicaments are always unpredictable and a small lump sum amount of money can help tread over difficulties.

It is advisable to save up to three to six months worth of coverage for essential expenses in the case of unforeseen circumstances such as illness or job loss.

This 5% can also come in clutch during other situations such as car breakdowns, electronics repairs, or even to fund a birthday party.

Bottomline-

The 50-15-5 serves as an important stepping stone in the process of budgeting. As long as 50% of the income is spent on essentials, 15% is saved on retirement, and 5% on short term savings/emergencies, the remainder of the income can be spent/ saved as per the discretion of the individual. We advise our readers to spend the remainder of their income on high-interest debt repayments, followed by other financial goals. Once these are set, you’re all good to go!

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.