Facebook Instant Articles - Fidelity https://www.fidelity.com This is feed for Facebook Instant Articles en-us 2017-12-21T21:45:26Z This is Title 2221489 04/01/2024 This is Author Text This is Description This is Title ]]> A look at the big picture 1332509 Invest 1 | Lesson 7 A look at the big picture

A look at the big picture

Invest 1 | Lesson 7

See how the market’s performed over the years, learn about volatility, and see why looking at the long-term is important.

Invest lessons until your next reward!

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50/15/5: An easy trick for saving and spending 1030360 03/03/2020 It isn't about managing every penny. Track your money using 3 categories. 50/15/5: An easy trick for saving and spending

50/15/5: An easy trick for saving and spending

It isn't about managing every penny. Track your money using 3 categories.

Key takeaways

  • Allocate no more than 50% of take-home pay to essential expenses.
  • Save 15% of pretax income (including employer contributions) for retirement.
  • Keep 5% of take-home pay in short-term savings for unplanned expenses.

Budget. Does anyone like that word? How about this instead—the 50/15/5 rule? It's our 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 unexpected expenses.

Why 50/15/5? We analyzed hundreds of scenarios to create a saving and spending guideline to help people save enough to retire. Our research found that sticking to this guideline offers a good chance of:

  • Maintaining financial stability.
  • Living the way you want in retirement.

Essential expenses: 50%

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

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees.
  • Food—groceries only; no takeout or restaurant meals, unless you 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.
  • Childcare—day care, tuition, and fees.
  • Debt payments and other obligations—credit cards, student loans, child support, alimony, and life insurance.

Keep it below 50%: Just because some expenses are essential doesn't mean they're not flexible. Identify the most important expenses, and those you can cut back. Small changes, such as these, can add up:

  • Turning the heat down a few degrees in the winter (and turning the AC up in the summer).
  • Buying—and stocking up on—groceries when they are on sale, and bringing lunch to work.
  • Driving a more affordable car, carpool, or taking public transportation.
  • Using a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break.
  • Considering a less expensive home or apartment.

Retirement savings: 15%

It's important to save for your future—no matter how young or old you are, because:

  • Pension plans are rare.
  • Social Security probably won't provide all the money a person needs to live the life they want in retirement.
  • About 45% of retirement income will need to come from savings.
  • 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.

Consider saving 15% of your pretax household income for retirement. That includes your contributions and any matching or profit-sharing contributions from an employer.

How to get to 15% (if contributing 15% is not possible currently):

  • See if your employer has a program that automatically increases contributions annually until a goal is met.
  • Contribute at least enough to meet an employer match.
  • Add all or part of a raise or annual bonus funds to your workplace savings plan or IRA until you reach the annual contribution limit.

Short-term savings: 5%

An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse, so:

  • Put aside enough savings to cover 3 to 6 months of essential expenses.
  • Think of emergency fund contributions as a regular monthly bill.

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. Setting aside 5% of monthly take-home pay can help with these "one-off" expenses, such as wedding gifts, car maintenance, field trips for kids, doctor copays, holiday gifts, and so on. If you have money set aside for random expenses, you won't be tempted to tap into your emergency fund or add to an existing credit card balance. 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 reach this goal.

What next?

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 staying:

  • Close to the 50/15/5 target spending and saving amounts, good job.
  • Within the guidelines, any remaining income is yours to save or spend, such as by:

    • Paying down high-interest debt.
    • Directing it toward other goals, like paying for a child's college or wedding, or adding to your retirement savings.

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. 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.

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