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Budgeting is one of the most powerful steps you can take to gain control of your finances. But it can feel overwhelming when you first start out. Adopting a straightforward method, such as a 50/30/20 budget, is a great way to begin because it provides a simple framework that you can implement right away.

What Is a 50/30/20 Budget?

The 50/30/20 budget is an approach that organizes your expenses into three categories: needs, wants, and savings. When using this approach, you allocate 50 percent of your income to your needs, 30 percent to your wants, and 20 percent to savings, investments, and debt repayment. It's a simple way to ensure that you're covering your essentials and making progress toward long-term goals.

As a general guideline, the 50/30/20 approach can help you organize your finances and get clarity on your expenses. But keep in mind that you might need to tailor it to fit your specific circumstances. If you're carrying significant debt, for example, you may need to allot more than 20 percent of your income to those payments each month. Or, if you're earning a higher salary, you might opt to save or invest more than 20 percent of your take-home pay. Variable incomes also present budgeting challenges; your best option might be to budget based on a number you know you can consistently earn and then adjust if you earn significantly more or less in a given month.

Distinguishing Between Wants and Needs

The category for needs makes up the largest portion of the 50/30/20 budget. But sometimes we mistake wants for needs, and our list of essential expenses grows. Your list of needs should include nonnegotiables, such as your mortgage or rent payment; utility bills; recurring medical costs, such as insurance premiums and medications; and commuting expenses. Minimum debt payments also fall under this category, along with child care expenses and groceries. However, it's important to be mindful of your grocery list. Staple products make the cut but items such as specialty cheeses and coffees should be added to the "wants" category. Be sure that your needs list only includes vital items.

After you've identified your monthly needs, it's time to pinpoint your wants. This category encompasses costs such as dining out, streaming subscriptions, gym memberships, clothing, and leisure travel. You may want to create a hierarchy of wants in case you need to cut some of these expenses for the sake of your budget. Maybe your gym membership is more important to you than your Hulu subscription. If you find you've been living outside of your means, it helps to know which wants are high priority and which you're willing to give up for a while.

Allot the remaining 20 percent of your budget for savings, investments, and additional debt payments. As noted above, you may need to reduce your wants budget so you can put more money toward your debts. The sooner you pay off your credit card and loan balances, the more money you'll have for saving, investing, and indulging in more of those items and activities on your wants list.

Once you find the ratio that works best for you, the 50/30/20 approach can help you manage your money, reduce debt, and improve your quality of life.

This information and recommendations contained herein are compiled from sources deemed reliable, but are not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or are offering any tax, accounting, or legal advice.

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