When you're trying to get your finances together, there's usually a question of trade-off. Do I pay off debt or save for an emergency? Do I save for retirement or a home down payment? Fidelity's 50/15/5 rule addresses the most important financial goals by allocating your pay accordingly.
You've probably heard of the 50/20/30 rule and the 80/20 rule. Both are general budgeting rules of thumb that help you decide how to divide up your income. The 80/20 rule is focused on your financial goal, whereas the 50/30/20 rule is focused on balancing your spending.
Fidelity tosses another rule of thumb into the ring. Its 50/15/5 rule focuses on balancing multiple financial goals. Here's how it works:
- 50% of your income goes toward essential expenses: rent, bills, minimum debt payments.
- 15% per cent goes to retirement savings. They also suggest you increase this by 1% each year. (You'd need to take your compulsory superannuation into account when considering this element.)
- 5% goes toward unexpected monthly expenses or building an emergency fund.
Of course, this doesn't add up to 100. So what do you do with the rest of the money? That's up to you. You can increase your retirement savings, save for another goal, or throw more at your debt. It depends on your financial situation. The main goal of this rule seems to be making sure you're saving for retirement and building an emergency fund. Like any budget rule, you can also adjust the numbers in each category as you see fit.
It's not a guideline for everyone. If you're living hand to mouth, your pay may barely cover your living expenses. But if you're trying to balance multiple financial goals, this is a solid rule to consider.