Getting a handle on your finances should never feel like a mystery. When you have a concrete plan in place, you will have a better idea of where your money is, where it’s going, and what you can do with it.

That’s where budgeting comes into play. Having a budget will allow you to make informed decisions and chart a clearer path for your financial future.

Here’s a primer on one of the simplest (but very effective) budgeting strategies: the 50/30/20 rule.

The 50/30/20 Rule and Why It’s So Great

In our fast-paced world, budgeting can feel like a chore that is easily overlooked. The 50/30/20 rule is a great starting point for many budgeting strategies, thanks to its simplicity and adaptability.

So, what is the 50/30/20 rule? It’s a budgeting strategy that involves breaking your income into easily identifiable categories. Take your monthly expected after-tax  income and separate it into three broad buckets:

• 50% goes to “needs”
• 30% goes to “wants”
• 20% goes to “savings”

Investopedia praises the 50/30/20 rule since it sets the foundation for a straightforward budget that empowers people to stick to their plans over time. Some of the benefits of this strategy include:

• Helps set priorities
• Easy to set up and calculate
• Simplifies money management plans
• Encourages saving as part of budgeting

Let’s take a deep dive into how the 50/30/20 budgeting approach is structured and how one might apply it to their finances.

50%: Money Reserved for Needs

When using the 50/30/20 budgeting method, start with the bulk of your budget, which will be allocated towards “needs.” What exactly are needs? They’re items and expenses that you cannot ignore or live without. As such, they are also financial obligations.

At its simplest, needs are the essential items required for living in our modern society. Examples of “needs” include:

• Groceries
• Debt payments
• Rent or mortgage
• Energy and utilities
• Car payments and fuel
• Health care and insurance
• Communications (phone and Internet access)

30%: Money Reserved for Wants

Next, set aside 30% of your income for “wants.” These are items that aren’t essential for your survival, but would make life more enjoyable and entertaining. In some financial circles, this category of expenses is also classified as “discretionary items” or “luxuries.”

As individuals, we all have preferences that make us unique. Therefore, wants are very wide-ranging. Examples of wants include:

• Snacks and candy
• Vacations and travel
• Electronics and gadgets
• Video games, music, and movies
• Tickets to shows and sporting events
• Memberships to recreational clubs or gym facilities
• Subscriptions to streaming services and periodicals

20%: Money Reserved for Savings

Finally, set aside 20% of your income and place it in a separate category labeled as “savings.” This is money that you aren’t spending immediately, but instead keeping in reserve for future use.

Savings can be used for many purposes, such as in the event of unemployment or a medical emergency. It can also be used for long-term goals. Some items that can be considered savings include:

• Emergency funds
• A down payment for a house or car
• Investment accounts and retirement
• Money set aside for paying down debts

Use 50/30/20 as a Plan for Your Money

You can use the 50/30/20 strategy as a guide for allocating the money you earn each month. This will require some planning, but once you have things sorted out, implementing the strategy becomes much easier.

Here’s a simplified step-by-step guide as an example:

• At the start of the month, calculate how much money you expect to make
• Separate that total into percentages according to 50/30/20
• Put the money into specific savings or checking accounts (or keep track of it in writing)
• Utilize your available money according to needs, wants, and savings

How you keep track of the money in your categories is up to you. Some people prefer to write everything down or use a spreadsheet. Others may download bespoke budgeting apps that help split their money into categories.

The critical takeaway here is that you are setting aside money for specific purposes. Additionally, keeping track of your finances provides a clear reference throughout the month, allowing you to monitor your progress and identify areas that require attention.

One last thing: although the 50/30/20 rule references percentages, you don’t have to follow these numbers exactly. Depending on where you live and the type of lifestyle you wish to pursue, you may need to adjust these proportions.

Realistically speaking, there may be a high chance you’ll have to allocate more than 50% of your income just for living expenses. Alternatively, you may be planning to be more aggressive in saving for retirement.

You can tweak these percentages according to your needs, goals, and preferences. And that’s one of the greatest advantages of 50/30/20: it’s a highly adaptive budgeting guide that can be adjusted to you.

First Florida helps you stay on top of your finances. We offer various savings and checking accounts that can help you practice the 50/30/20 budgeting approach with confidence.