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Spending or saving - how to find the right balance?
Budget. Does anyone like that word? How about this instead - the 50/15/5 rule?
It's our simple rule of thumb for saving and spending: aiming to allocate no more than 50% of take-home pay to essential expenses, 15% of pre-tax income to retirement savings, and 5% of take-home pay to short term savings.
Whatever's left over can then be spent as you choose - on leisure, restaurants, holidays, etc.
Consider the Fidelity 50/15/5 rule
50%
Essential expenses
15%
(including employer contributions) towards retirement
5%
Short term savings for unplanned expenses
Why 50/15/5? We looked at hundreds of different scenarios to come up with a spending and saving guideline that would help people save enough to retire. Our research suggests that by sticking to this rule, you'll have a good chance of staying on top of things financially now - and maintaining your current lifestyle in retirement.
Some expenses simply aren’t optional - you need to eat, and you need a place to live. Other examples are electricity, gas, home insurance, childcare, life insurance, etc.
If your essential expenses represent more than 50% of your income, no worries. In fact, that’s the case for most of us. But just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up. Check out our tips to cut costs by clicking here.
If you still can’t make it below 50%, well, you just can’t. So don’t feel bad about it. And it doesn’t necessarily mean that you can’t save up to 15% for your retirement, which is the second most important goal.
It’s important to save for your future, no matter how young or old you are. Once you stop working, you’ll be relying on your retirement income to live the life you want - potentially for several decades. Remember, too, that your future self will live in a world where everything is likely to be even more expensive than it is now. Of course, investments can go down as well as up, but the money you put aside today is aimed at allowing you to live comfortably tomorrow.
That’s why we suggest you consider saving 15% of pre-tax household income for retirement. That includes your contributions and any matched contributions from your employer. Starting early, saving constantly, and investing wisely is important.
Everyone needs a contingency fund. It can be comforting to know you’re financially prepared for unexpected events like illness, job loss, or even home or car repairs. A good rule of thumb is to have three months of income readily available. Think of your contingency fund contributions as a regular bill every month, until you’ve built up enough.
Having this money automatically taken out of your account on (or soon after) pay day and put into a separate account just for short-term savings can help you reach this goal.
Now, let's be completely honest. With housing, food and energy costs as high as they are right now, it could well be that the
50/15/56 split isn't realistic for you. Instead, use it as a starting point, adjusting the proportions to suit your own wallet. Or
simply keep it at the back of your mind as a goal to reach in the future.
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