The 50/30/20 budgeting approach does all of this by splitting your income between three main buckets. The basic premise is quite simple: put 50% of your income toward needs, 30% toward wants, and 20% toward savings or debt repayment. How it works in reality will differ from person to person, but allow us to walk you through it, step by step.

Step 1: Defining the Buckets

50% for needs, 30% for wants, and 20% for savings and debt repayment: but just how do you decide what’s what?

The first step is to calculate your net income, also known as your after-tax income. Start with the amount of money you make each month, then subtract taxes, Social Security, insurance costs, and any other paycheck reductions. If you don’t make the same amount of money every month, calculate the average based on how much you earn in a year.

Next is to figure out your needs, which you’ll use 50% of your budget for. Make a list of everything essential that you have to pay for each month in order to survive, from food and gas costs to rent or mortgage payments. If this number already ends up being close to 50% of your after-tax income already, then that’s great! You’ll be able to use the 50/30/20 method much more easily. But if it’s much greater than 50%, you may need increase that 50% figure slightly until you’re able to increase your income or lower your expenses — but more on that later.

Now, set 30% of your income aside for “wants.” We all want to enjoy life with our money, which is exactly what can make budgeting so hard! That’s why it’s important to set a sensible limit for yourself for spending at restaurants, movie theaters, the mall, or craft store. Make a list of the things that bring you the most joy, so you can focus your spending on those things and keep the 30% figure from becoming a frustrating constraint.

Finally, put the final 20% of your income toward savings and debt repayment. It’s easy to find yourself at the end of the month with a little less money to save than you’d hoped, so you say to yourself, “I’ll just save more next month.” Until that next month comes around and it becomes just as challenging. The solution is to consistently set yourself up for future success by using that 20% of your income to tackle high-interest debt first and earn more with a high-interest checking or savings account.

Step 2: Adjusting and Adapting

While 50/30/20 is a smart distribution that works well for a lot of people, it’s also flexible by design, so those spending and saving ratios can be adjusted based on where you’re at in life.

If you find that needs like food and housing are taking up way more than 50% of your budget, it may make more sense to adjust that ratio to 60/30/10 or even 70/20/10, so you can prioritize what’s most important while still allowing yourself to have fun and save — to ensure a better financial situation in the future, when you’ll be able to reassess your spending and saving ratio.

For middle-class earners, 50/30/20 could really be optimal. But, since life is unpredictable, you can still adjust it in anticipation of otherwise unpredictable circumstances. If your needs are stable and your debt is manageable, consider putting more money toward an emergency fund or reliable, long-term savings.

If you make a lot of money, you may be able to scale down the proportion of your income that you put toward your needs. However, it can be to overspend when you feel you have money to burn, so it can be helpful to allocate 40% or more of your income toward savings and debt repayment, while scaling your needs and wants buckets appropriately.

Step 3: Preparing for Challenges

Sure, the 50/30/20 budgeting approach is simple, but that doesn’t mean it’ll always be easy to stick with.

If your income isn’t consistent enough to allocate your money equitably each month, try to calculate your distribution based on how much you earn on average over the course of the year. It can also help to set up an additional savings account that you contribute to in higher-income months use to supplement your lower-income months. As you might’ve guessed, you should aim to allocate more of your budget toward the savings bucket in those higher-income months.

If an unexpected medical bill, car or home repair changes your available income for the month, you can temporarily reduce the amount of money you put toward wants, while using your savings bucket to set up a modest emergency fund to prepare for future emergencies.

If you’re finding that your debt is too high to make a substantial dent in it with just 20% of your income each month, lower your wants percentage to put more money towards repaying the debt. Be sure to focus your energy and income toward your highest-interest debts first, exploring debt consolidation solutions, the SAVE plan for student loans, and lower-interest credit cards to keep future debt more manageable.

Staying disciplined with the 50/30/20 method may be the hardest challenge of all. If you’re feeling tempted to spend more on wants and less on savings and debt repayment, consider setting up automated payments or easy Bill Pay services to make it easier to put money toward your future. Consider exploring budgeting tools and apps to better visualize where your money’s going, and set calendar reminders to yourself to make payments, move your money into savings, and review your spending for the past month.

Most of all, don’t despair or give up if the 50/30/20 approach isn’t a perfect fit right away. More than anything, it’s designed to get you thinking more about your money, so you can stay aware of your financial wellness and make the appropriate adjustments to align yourself toward growth, stability, and peace of mind. Happy budgeting!

If you want to take your budgeting skills to the next level, check out the Envelope System Course in LMCU’s Financial Wellness Center!