Is the 50/15/5 budget right for you? 3 key pros and cons

Finding a budgeting style that makes sense to you and doesn't eat up all your time planning and tracking can be a challenge. It's important to keep your individual situation in mind as you weigh different budgeting options.

One strategy, the 50/15/5 rule, may be a good fit for you if you're looking for a straightforward way to save and spend wisely. It encourages you to prioritize essential spending and savings but also gives room for flexibility on discretionary spending and additional savings.

The 50/15/5 budget allocates your after-tax income to essentials, retirement savings and short-term savings but leaves a significant portion of your income to use according to your current priorities.

• 50% for essentials. The bulk of the budget is set aside for spending on what you have to have, such as housing, utilities, groceries, loan repayments, health care and more.
• 15% for retirement savings. The 50/15/5 method is specific in helping you set aside a portion of your income for your long-term future, whether you choose to contribute to an employer plan, an IRA or another retirement account.
• 5% for short-term savings. The other key aspect of this budget type is to ensure you put money away for a specific financial goal that's in the relatively near future, such as building an emergency savings fund, saving up for a down payment on house, buying a car or going on a vacation.

It offers flexibility with the remaining 30%. You can allocate it how you need for the month. The idea is that you've diligently covered the essentials, contributed to an important long-term goal (retirement) and put something toward a specific short-term goal. You can use the last 30% for paying down debt, spending on wants, saving for other goals, or any combination you choose.

Let's say your household has $6,000 in after-tax income each month. With the 50/15/5 method, that would mean $3,000 is for essential expenses, $900 goes into a retirement account, and $300 goes to short-term savings. The remaining $1,800 might be split between paying extra to bring down a debt, going into a savings account toward a vacation, and dining out twice a week for the month.

50/15/5 budget

The overarching benefit of the 50/15/5 budget method—compared to most other methods that rely on spitting income into spending and saving portions—is having an element of choice. Here are other top advantages:

• Prioritizes essential spending. This budget gives you a moderately sized portion for your day-to-day must-haves, forcing you to weed out wants and wishes.
• Puts money toward two savings goals. Many times with budgets, "savings" is one generalized category. The 50/15/5 strategy separates retirement from your other savings. Every month, you're working toward multiple financial goals.
• Gives flexibility to your "leftover" income. The simplicity of this budget gets at the heart of the essentials—what you need now and what you will need in the future. What's left after you put money toward those things is up to you to save or spend.

The 50/15/5 rule isn't perfect for every financial situation. Here are a few downsides to consider:

• It's not ideal for variable-income households. If your paycheck changes a lot month to month, then the 50% to be used for your needs may be hard to predict. It can still be a good guide to use a percentage of your income for retirement and other savings, but to budget your needs vs. wants, you may do better with the envelope system or zero-based budget.
• It doesn't designate a category for paying down debt. With this system, you have to count paying extra on debt as an essential in the "needs" category or make it something you always take out of your leftover 30%.
• Saving only 5% may not help you reach certain goals quickly. This budget asks the savings category of 5% to do a lot of work. In the example mentioned previously, it captures just $300 if your take-home pay is $6,000 per month. That's going to take a while to save up for, say, a 10% down payment on a $350,000 home.

The top priorities of this budget are saving a substantial part of your income for retirement and keeping a tight cap on what you consider essential spending. That makes it a method worth trying if that and saving a little bit of money for other financial goals is all you need guidance with. The 50/15/5 budget may be easier to adopt if you've already optimized your housing payments, debt repayments, utility costs and food spending, because it can be challenging to cover all those necessities with just 50% of your income.

1. Categorize your spending. The first step to implementing this budget strategy is to look back at your last few months' expenses. Start flagging what you spent on essential costs, like paying for rent or a mortgage, insurance, food and utilities. Also note what you're spending on discretionary purchases. This will help you realize what will and won't fit in the 50% needs category.
2. Allocate your savings. The next time your paycheck hits, immediately allocate 15% to your 401(k), IRA or other retirement savings account and 5% to your emergency fund, a money market account or another short-term savings vehicle. You could also direct the 50% for your essentials into a checking account so you're prepared to spend it on what you need for the month. If you don't want to separate it into a different account, keep track of the amount and what it's spent on to ensure you're covering your needs first before spending it elsewhere.
3. Decide what to do with your flexible dollars. Finally, consider how you'll use the remaining 30% of your money. You may want it entirely for discretionary spending, but also consider the advantages of using it to pay down debt, putting some of it toward other savings goals or investing it.

It's a good idea to regularly revisit this budget to make sure you're in line with the 50/15/5 allocations. Also think about how it might shift if you were to have a sudden increase or decrease in income. Checking in and thinking ahead can help you develop a sustainable blueprint for managing your finances.

Whether the 50/15/5 rule works well for you or you need a different strategy, a budget helps you maintain financial awareness and transparency. A Thrivent financial advisor can help you analyze other budgeting approaches and financial strategies based on your individual situation, so you can be in a strong position to achieve your goals.