Tag Archives: Expenses

50/15/5 Budget for Saving and Spending

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Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including any employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.
  • Budget. The 50/15/5 rule is Fidelity’s simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.

50/15/5 Budget is an easy plan for managing your saving and spending

50/15/5 Rule Budget are simple guidelines for saving and spending and managing your money. Track your money using 3 categories:

  • Allocate no more than 50% of take-home pay to essential expenses,
  • Save 15% of pretax income for retirement savings, and
  • Keep 5% of take-home pay for short-term savings.

Fidelity Investment’s research found that by sticking to these guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement.

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, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance
    • Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation.
    • Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. 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.

Retirement savings: 15%

It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they 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 pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good practice is to have enough put aside in savings to cover 3 to 6 months of essential expenses. You can start with $1,000 or a month’s worth of expenses, and then gradually build up to 3 to 6 months’ worth. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those, there are certain categories of expenses which are often overlooked; for example, maintenance and repairs of cars, field trips for kids, copays for doctor’s visits, Christmas gifts, and Halloween costumes, to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses.

It’s good practice to have some money set aside for random expenses so you won’t be tempted to tap into your emergency fund or pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

50/15/5 Budgeting guidelines serve as a starting point

Our guidelines are intended to serve as a starting point. It is important to evaluate your situation and adjust these guidelines as necessary. If you’re close to the 50/15/5 target spending and saving amounts, good job. And for those staying within the guidelines, any remaining income is theirs to save or spend as they would like.

Some ideas: First, pay down high-interest debt. For other goals, like paying for a child’s college or wedding, you could use the remaining income to save for them. And finally, for those who want to retire early or haven’t been saving diligently, putting it toward retirement savings may make sense.

The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on our 3 categories can give you control—and confidence. Most everyone’s financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.

References:

  1. https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving

Emergency Funds: How to Build and Use Them

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An emergency fund can help you manage unexpected expenses without using a credit card or incurring personal debt.

“None of us, no matter our job, is immune to financial impacts,” Mikel Van Cleve, USAA advice director and CFP professional said. “Under the pandemic, we’ve seen major corporations close their doors, and small businesses that once were thriving fail.” Millions of Americans, who believed they were in secure recession proof positions, found themselves with jobs and regular paychecks.

Thus, Americans from every realm have witnessed firsthand the impact of unexpected black swan events can have on their livelihoods, hopes and dreams for the future.

“Emergencies—from a broken bone to a layoff—are a fact of life. When you’re faced with life’s unexpected events, you can be ready.”  Vanguard Investments

Even in the best of times, it might make sense to have a little extra money put aside for emergencies. A financial buffer can help if your car breaks down, you experience a loss of income, or you’re hit with a big medical bill. And having an emergency fund might also help you avoid tapping into savings and investments when an unexpected cost pops up.

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

Saving money isn’t always easy, but it’s likely to be less painful than the alternatives. A 2012 FINRA Investor Education Foundation National Financial Capability Study found that many of the people surveyed currently or recently:

  • Had unpaid medical bills: 26%.
  • Overdrew their checking account: 22%.
  • Took a loan from their retirement account: 14%.
  • Took a hardship withdrawal from their retirement account: 10%.
  • Had more than one late mortgage payment: 13%.
  • Filed for bankruptcy: 3.5%.

Furthermore, if you don’t have an emergency fund, you’re not alone. A 2019 Federal Reserve report found that 27% of Americans in 2018 would have a hard time covering an unexpected $400 expense. And 12% wouldn’t be able to pay for it at all.

How to Build an Emergency Fund

You might think that emergency funds are only for people who can set aside lots of extra cash each month. But even if money is tight, an emergency fund could help you feel more secure. Here are a few suggestions for building yours.

  • Keep it separate. The Consumer Financial Protection Bureau (CFPB) recommends setting up a separate savings account for your emergency fund. This makes it accessible, but not so accessible that you’ll be tempted to dip into it.
  • Start small if you need to. The Federal Trade Commission recommends saving even if you can only manage $10 each week or month. You might find it useful to set a regular schedule for your contributions and stick to it. It can be motivating and satisfying to watch the deposits add up, however small they start off.
  • Pay yourself first. If you can, you might want to consider setting aside some of your income for savings before you spend it on anything else. You could even automatically transfer your chosen amount into a savings account each payday.
  • Bank any extras. A tax refund, cash gift or raise at work could provide a good opportunity to kick-start an emergency fund or give it a big boost. Immediately setting that money aside can be a great way to grow your savings without dipping into your wallet.
  • Say “yes” to the 52-Week Savings Step-Up Challenge. The premise is simple: This week, save $1; next week, save $2; in week 3, save $3. Continue adding a dollar a week for 52 weeks. A year from now, you’ll have saved $1,378 — and surpassed your first goal of $1,000.
  • Schedule a monthly automatic draft that transfers money from your checking account to your savings account. This is the perfect solution if you look at your budget and know how much you can save. Just set it and forget it.

When to Use an Emergency Fund

After building an emergency fund, here are a few common situations when you might need to tap into your emergency savings.

  • To protect your income. A financial buffer could help if anything threatens your ability to do your job—for example, if your car breaks down and you can’t get to work any other way, or you need a new piece of equipment.
  • To replace your income. If your job is downsized or cut, your emergency fund could help you pay rent, buy food and cover other necessary expenses until you can find another source of income.
  • To cover medical expenses. Using your emergency fund is a no-brainer if your doctor recommends treatment or medication for a health issue.
  • To maintain a habitable living environment. Damage to your home, like a leaky roof, could cause more costly issues down the line if it’s not taken care of as soon as possible.

Remember, everyone’s situation is different, and you might have multiple ways to respond to a financial emergency. If you’ve been laid off and you’re struggling to pay bills, the CFPB recommends reaching out to your lenders directly. And it might be a good idea to seek the advice of a qualified financial adviser.

Bottomline

Whether you’re considering putting your money in a savings account, checking account, certificate of deposit, money market deposit account, money market mutual fund, bond or equity investment, real estate, or some other form of investment, weigh the following pros and cons:

  • How liquid are the funds? In other words, can you immediately withdraw your money if you need it?
  • Are there any fees or limitations to accessing the funds?
  • If you access your funds, is there a risk of loss of principal?

In many cases, FDIC-insured savings accounts or money market deposit accounts are preferable options because your money is more easily accessible. Plus, it’s not subject to market fluctuations.

References:

  1. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
  2. https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/
  3. https://www.consumer.ftc.gov/articles/0498-its-never-too-early-or-too-late-save
  4. https://www.usaa.com/inet/wc/advice-finances-emergencyfund

Personal Emergency Fund

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Emergencies—from a vehicle breakdown to a layoff—are a fact of life. When you’re faced with life’s unexpected events, you can be ready.

When things are going well financially and monthly expenses are being paid, emergency savings can seem unimportant. Yet, emergencies are unpredictable and can quickly derail your financial stability. And, a recent FINRA Study finds that 56% of people in the United States don’t have a rainy day fund that would cover 3 months of expenses.(1)

A sudden illness or accident, unexpected job loss, or even a surprise home or car repair can devastate your family’s day-to-day cash flow if you aren’t prepared. While emergencies can’t always be avoided, having an emergency fund can take some of the financial sting out of dealing with these unexpected events.

Being prepared for the unexpected – ensuring you’ve done what you can to protect yourself and the ones you love – can reduce stress and provide a good feeling. Many people at some time in life find they need to dip into savings during a rough patch, so make an effort to open an emergency savings account and try to make deposits on a regular basis.

An emergency fund are savings used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when financial crises occur.

It is a good idea to work toward an emergency fund equal to 3 to 6 months of living expenses. But anything you can put away is better than being unprepared. Saving up emergency cash can be easier if your financial institution has an automatic payroll savings plan. These plans automatically transfer a designated amount of your salary each pay period – before you see your paycheck – directly into your account.

An emergency fund is useful for unexpected expenses, and to maintain personal financial liquidity and cash flow.

Reasons why emergency savings are important:

  • Being prepared – Issues like car or home appliance repair are common occurrences. However, since they do not happen regularly, people often overlook these costs as they create a budget. By anticipating these costs, you can be prepared for these potentially expensive items.
  • Avoiding debt – Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.
  • Having peace of mind – Having emergency savings will give you peace of mind. Even if you can’t save much, a little money set aside may make a big difference when you need it and reduce stress.
  • Emergency savings give you the option of dealing with the unexpected without having to take on debt. Without the cushion of emergency savings, you may be unable to pay regular bills if you face an emergency, and are more likely to take on debt.

Thus, an emergency savings is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. Some of the top emergencies people face are:

  • Job loss.
  • Medical or dental emergency.
  • Unexpected home repairs.
  • Car troubles.
  • Unplanned travel expenses.

Emergency funds create a financial buffer that can keep you afloat in a time of financial need without having to rely on credit cards or take out high-interest personal loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.

The right amount for you depends on your unique financial circumstances. Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses in case of an unexpected financial emergency. This account should be relatively liquid.

For your emergency or rainy day fund, you’ll want to choose savings or investments accounts that are:

  • Safe from market risk. You want to know that your money will be there when you need it—especially in times of market or economic turbulence.
  • Easy to access. This will ensure you’ll be able to take care of your emergency quickly
  • Interest-bearing. The point of an emergency fund isn’t to make money, but don’t turn down the opportunity to earn interest on your savings.

If you lose your job, for instance, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits.

Start small, but start.

Saving even small amounts such as $500 can get you out of many financial scrapes. Put something away now, and build your fund over time.

An emergency can strike at any time, having quick access is crucial. But the account should be separate from a bank account you use daily, so you’re not tempted to dip into your reserves.
Building an emergency fundCalculate the total that you want to save. To figure out how to add up your expenses for six months.

  1. Set a monthly savings goal. Get into the habit of saving regularly. One way to do this is by automatically transferring funds to your savings account each time you get paid.
  2. Keep the change. When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account.
  3. Move money into your savings account automatically. If your employer offers direct deposit, there’s a good chance they can help you break up your paycheck into multiple checking and savings accounts.
  4. If there’s no money left, cut expenses. See which parts of your monthly spending you can trim, so you’ll have cash left over to build your fund.
  5. Get supplemental income. If you have the time and willpower, get a side hustle or sell unused items from home to accumulate more money for your fund.
  6. Save your tax refund. Saving tax refund can be an easy way to boost your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account.
  7. Assess and adjust contributions. Check in after a few months to see how much you’re saving, and adjust if you need to add more.

An emergency fund is for emergencies only. Usually it’s something that affects your health, your home or your ability to earn money.

What’s not an emergency?

  • Holidays, birthdays and mental pick-me-ups for yourself or significant others.
  • Vacations.
  • The chance to get a great deal on something you don’t need.
  • Expenses that aren’t surprises, such as car insurance.

When saving, draw a line between emergencies expenses and everything else. In fact, once you’ve hit a reasonable threshold of emergency savings, it’s a good idea to open multiple savings account for irregular but inevitable items such as car maintenance, vacations and clothing.

Everyone needs to save for the unexpected. Having something in reserve can mean the difference between weathering a short-term financial storm or going deep into debt. Emergency savings can help you handle unexpected events. With money set aside for emergencies like unexpected car repairs or sudden job loss, you can better take care of yourself and your family financially.

Building an emergency fund

Calculate the total that you want to save. To figure out how to add up your expenses for six months.

  1. Set a monthly savings goal. Get into the habit of saving regularly. One way to do this is by automatically transferring funds to your savings account each time you get paid.
  2. Keep the change. When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account.
  3. Move money into your savings account automatically. If your employer offers direct deposit, there’s a good chance they can help you break up your paycheck into multiple checking and savings accounts.
  4. If there’s no money left, cut expenses. See which parts of your monthly spending you can trim, so you’ll have cash left over to build your fund.
  5. Get supplemental income. If you have the time and willpower, get a side hustle or sell unused items from home to accumulate more money for your fund.
  6. Save your tax refund. Saving tax refund can be an easy way to boost your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account.
  7. Assess and adjust contributions. Check in after a few months to see how much you’re saving, and adjust if you need to add more.

An emergency fund is for emergencies only. Usually it’s something that affects your health, your home or your ability to earn money.

What’s not an emergency?

  • Holidays, birthdays and mental pick-me-ups for yourself or significant others.
  • Vacations.
  • The chance to get a great deal on something you don’t need.
  • Expenses that aren’t surprises, such as car insurance.

When saving, draw a line between emergencies expenses and everything else. In fact, once you’ve hit a reasonable threshold of emergency savings, it’s a good idea to open multiple savings account for irregular but inevitable items such as car maintenance, vacations and clothing.

Sources:

  1. FINRA Investor Education Foundation National Financial Capability Study, 2012, pg. 13
  2. https://www.nerdwallet.com/blog/banking/savings/life-build-emergency-fund/
  3. https://www.thebalance.com/do-you-need-a-rainy-day-fund-and-an-emergency-fund-4178821
  4. Building Emergency Savings, UMBC