50/15/5: A simple saving and spending guideline for Canadians

When it comes to managing your money, it’s important to have a plan for saving and spending each month. One simple approach is to follow the 50/15/5 rule, which can help you manage your spending while working toward your long-term goals, such as retirement. Here’s what you need to know. 

What’s the 50/15/5 rule and why should you use it?

The 50/15/5 rule is a saving and spending guideline designed to help you maintain financial stability and save for the future. Here’s how it works:

• 50% of your take-home pay covers essential expenses.
• 15% of your pre-tax income goes toward retirement savings.
• 5% of take-home pay is for short-term savings for one-off expenses.

Rising costs can make it feel harder to save, and many Canadians feel stuck between covering expenses and saving for the future. This approach can help create structure when finances feel unpredictable and help you feel more in control of how you use your money.

How to apply the 50/15/5 rule to your paycheque

50% for essential expenses: What counts as essential?

Essential expenses are non-negotiable costs that you need to maintain a basic standard of living. This includes items like:

• Housing: This could include mortgage payments, rent, property taxes, utilities (like electricity and water), homeowner’s or renter’s insurance, and condo or home association fees.
• Food: Groceries are considered essential, while dining out is typically not.
• Transportation: This might include public-transit fares, car loan or lease payments, gas, car insurance, maintenance (like oil changes), tolls and parking.
• Health care: Any health expense you pay for out of pocket, such as prescriptions and medical devices, fit the bill.
• Child care: This includes everything from daycare and caregiver fees to any other costs related to ensuring your kids are cared for.
• Clothing: Some items for you or your kids are considered necessary. An example would be if you need to replace shoes or jackets that no longer fit or have worn out.
• Debt payments: Credit cards, car loans, student loans, lines of credit and other types of debt should be factored into the 50%.

Although these expenses are essential, there are ways you can cut costs in certain areas to make your money go further. For instance, you could strategically buy items on sale when grocery shopping and purchase new winter boots at the end of the season. To reduce your transportation costs, you could opt for public transit, drive a more affordable car or carpool when you’re headed to places with your peers.

If your essential expenses are well over 50%, you might consider larger changes, such as downsizing your home or looking for an apartment with lower rent.

15% for retirement: How much should you save in an RRSP?

How much money you’ll need for retirement depends on several factors, such as your income sources once you stop working, if you have access to a company pension and your desired lifestyle. According to the 2025 Fidelity Retirement Report, pre-retirees believe they’ll need an annual household income of $93,300 for a comfortable retirement, which means having between $1.14 and $1.42 million in savings (depending on withdrawal rates). 

Although retirement might be a ways off, it’s important to start saving well before you’ll need access to your nest egg. That’s because the sooner you start investing, the more time your money has to grow. Even contributing a small amount to your retirement savings each month gives your gains the opportunity to compound over time, which can help reduce the pressure to save more later in life.

A popular retirement savings vehicle in Canada is the Registered Retirement Savings Plan (RRSP). Contributions are tax-deductible and grow tax-deferred inside the account until withdrawn, helping you reduce your taxable income today while growing your savings for retirement. 

If contributing 15% isn’t possible right now, one way to help you get there is through employer-sponsored accounts. Some employers offer matching contributions to a group RRSP or pension plan, which can help you reach, or even surpass, the 15% allocation goal.

The matching formulas can vary by employer, but contributing enough to meet an employer’s match amount can be a good starting point. Then, if you get a raise or bonus, you can contribute all or part of these funds to your workplace savings plan or individual RRSP.

5% for short-term savings: Emergency funds vs. one-off costs

Setting aside 5% for short-term savings can help provide a financial cushion for unexpected expenses. A good starting point is to allocate this percentage of your take-home pay toward building an emergency fund. This fund would cover emergency situations, such as job loss or serious illness. A good rule of thumb is to set aside enough cash to cover six months of essential expenses.

You may also need to spend money on short-term expenses, such as attending a friend’s wedding or replacing a broken cell phone. There are also small expenses that are often overlooked, such as field trips, holiday gifts, minor car repairs and Halloween costumes, to name a few. While these expenses can be small, they can add up over time and potentially derail your long-term goals if you don’t plan for them. Once you’ve built your emergency fund, you can start putting 5% aside for these costs.

One strategy to help you get to 5% is having this money automatically taken out of your paycheque and deposited in a separate account, such as a Tax-Free Savings Account (TFSA), helping you make consistent progress toward your goals. This tax-advantaged account allows you to benefit from tax-free growth and withdrawals. Plus, you can make withdrawals at any time, giving you flexible access to your money. 

What if you can’t follow the 50/15/5 rule exactly?

If sticking to 50/15/5 feels out of reach, you may need to adjust your allocations based on your unique financial situation. Here are some adjustments you can make to help you stay on track:

• If your essential expenses are over 50%: Spending less than half of your take-home pay on essentials, especially in high-cost cities, can be difficult. Focus on controlling what you can and aim for 50% but adjust your allocation as necessary. The key is to focus on managing, not eliminating, essential costs.
• If saving 15% feels out of reach: This can feel like a big number, especially if the cost of essentials creeps up. You can start smaller by dedicating 5% to 10% of your pay to your retirement savings. As your income rises, or if you receive extra cash like a bonus, you can increase your contributions. Prioritizing employer matching can be a good place to start.
• If you don’t have short-term savings yet: Start with a small emergency fund target and work on creating consistency before increasing your contribution size.

It’s important to remember that the 50/15/5 rule is a guideline, not a fixed formula. You can adjust your allocations based on your income level, life stage and financial goals. For instance, if you’re early in your career, you may be more focused on paying off debt and having flexible access to your savings. Your focus may shift more toward retirement savings when you are further along in your career.

What should you do with the money left over after 50/15/5?

You may have some money left over once you apply the 50/15/5 rule, especially as you progress in your career and your income rises. Here are three ways you may want to use it:

1. Pay down high-interest debt: Focusing on higher-interest debt can help free up more money in the long term, helping you put more toward your goals.
2. Save for near-term goals: Outside of retirement, you may have other shorter-term goals you want to start saving for, such as a vacation, a new car or a first home.
3. Budget for wants: It’s important to set some money aside each month for activities you enjoy, like eating out, shopping, entertainment (movies, concerts, etc.) and other non-essentials.

The bottom line

The 50/15/5 rule is a valuable way to help you cover your essential expenses today while making progress toward your long-term goals, such as retirement. But these guidelines are just a starting point. You should review your plan regularly, with the help of a financial advisor, and adjust your saving and spending allocations as your financial situation evolves.

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