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50/15/5: a saving and spending rule of thumb

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity International

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: allocating 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. (Your situation may be different, but you can use our rule of thumb as a starting point.)

Consider the Fidelity 50/15/5 rule

None

50%

Allocating no more than 50% of take-home pay to essential expenses.

None

15%

Trying to save 15% of pretax income (including employer contributions) for retirement.

None

5%

Keeping 5% of take-home pay in short-term savings for unplanned expenses.

Why 50/15/5? We analysed hundreds of scenarios in order to create a saving and spending guideline that can help people save enough to retire. Our research found that by sticking to this guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement.

Step 1. Essential expenses: 50% 

Some expenses simply aren't optional—you need to eat, and you need a place to live. Consider allocating no more than 50% of take-home pay to "must-have" expenses, such as:

  • Housing: Mortgage or rent, council tax, utilities (like electricity and gas), and home insurance.
  • Food: Groceries only; do not include takeaways or restaurant meals, unless you really consider them essential, i.e. you never cook and always eat out
  • Transport: Loan/hire purchase agreement, fuel costs, car insurance, road tax, parking, tolls, servicing and MOT costs, and bus and rail fares
  • Child care: Day care, tuition and fees
  • Debt payments and other obligations: Credit card payments, student loan payments, child support, and life/critical illness insurance
Keeping it below 50%

Just because some expenses are essential doesn't mean they're not flexible. Small changes can add up. Try turning down the thermostat a few degrees in winter, buying groceries when they are on sale, and taking your lunch to work. If you need to significantly reduce your living expenses, consider a less expensive home. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Step 2. Retirement savings: 15%

It's important to save for your future—no matter how young or old you are. Why? The state pension isn’t going to provide all the money you need to live the life you want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings.

That's why we suggest people consider saving 15% of pre-tax household income for retirement. That includes your contributions and any matched contributions from your employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged pension schemes and savings accounts.

How to get to 15%

If contributing that amount right now is not possible, an employer may have a program that automatically increases contributions annually until a goal is met. Another strategy is to contribute at least enough to meet your employer’s pension contribution match, and then allocate all or part of a pay raise or bonus to savings.

Step 3. Short-term savings: 5%

Everyone needs a contingency fund. An unexpected event, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. 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 have built up enough.

Once you have your contingency savings in place, it’s a good idea to turn to saving for short-term expenses that pop up unexpectedly. Who hasn't been invited to a wedding—or several? Cracked the screen on a smartphone? Punctured a tyre? Setting aside 5% of monthly pay can also help with these "one-off" expenses.

How to get to 5%

Having this money automatically taken out of your current account on, or soon after, pay day and put into a separate account just for short-term savings can help you reach this goal.

Next steps

Explore our retirement savings guidelines and, in a few steps, check how much you should be saving for retirement.  

Important Information

The value of investments can go down as well as up, so you may not get back the amount you originally invest. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.