Guide to the 50/30/20 Budget

Your needs — about 50% of your after-tax income — should include:

• Groceries.
• Housing.
• Basic utilities, like electricity bills.
• Transportation.
• Insurance.
• Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
• Child care or other expenses you need so you can work.

If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.

Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a cheaper mobile phone plan, an opportunity to refinance your home loan or less expensive car insurance. That leaves you more to work with elsewhere.

» MORE: Ways to Save Money on a Tight Budget

Separating wants from needs can be difficult. In general, though, needs are essential for living and working. Typical wants include dinners out, gifts, travel and entertainment.

It’s not always easy to decide. Are restorative spa visits a want or a need? How about organic groceries? Decisions vary from person to person.

If you’re eager to get out of debt as fast as possible, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.

Every budget needs both wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money you’re entitled to spend as you wish.

Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget — and a good budget is one you’ll stick with.

Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing financial goals.