When most people hear the word, “budget,” they run and hide in the opposite direction.

Trying to figure out how much you should save, invest, and spend is a daunting bridge to cross. If you don’t even know where to start, you’re not alone. Only 30% of Americans have a long-term financial plan that includes savings and investment goals according to the Bureau of Statistics.

Over 80 million millennials have nothing saved because budgeting money is scary and stressful. However, managing money doesn’t have to be an arduous task.

If you’re looking for a simple budgeting formula to start, try the 50/30/20 rule. This term was coined by Elizabeth Warren—U.S. Senator from Massachusetts and named by as one of the 100 Most Influential People in the World by Time Magazine. This has turned into the budgeting rule of thumb for those just getting started with managing their money.

 

So how exactly does it work?

 

50% Needs: housing, groceries, utilities, insurance, car payment, etc.

30% Wants: shopping, dining out, hobbies, etc.

20% Savings: retirement, college fund, children, etc.

Before you get started, make sure you are applying these rules to your after-tax income. Learn more how to calculate yours here.

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Define Needs:

Many people overestimate what “needs” really entails. Needs are the bills that absolutely must be paid along with the things that affect your quality of living (i.e. electricity, groceries, water bill). Things like cable, streaming services, and new work clothes would not be considered in this category.

Be honest with yourself here because this is the foundation of your budget plan.

Define Wants:

Now you may be thinking, “30 percent wants? That’s awesome! I’m going to buy so many clothes!” But let’s pump the brakes for a second. You always have to keep in mind what your needs don’t include (i.e. Netflix account, Amazon account, unlimited data, iced coffee, etc.).

The hardest part of budgeting is picking and choosing what your wants and needs really are. Spend some time mulling over your list of expenses and figure out which are most important for you to have.

Define Savings:

This section includes any student loan debt, 401K, emergency account, college savings, and any other funds you may be saving for. It is important to note that the minimum payments for your credit card, car, and things of that nature will fall under the 50 percent category. Any additional payments towards these will be considered savings and thus fall into the 20 percent.

This is a simple method that is great for budgeting beginners. As time goes on you can tweak these percentages as you see fit. Everyone’s financial situation is different and it’s important to regularly evaluate these numbers as you get the hang of them.

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