Here’s a trick to help with your budgeting, spending and saving. The 50-30-20 says that half of your income should be spent on needs and 30% on wants, with 20% going to savings.

The 50-30-20 rule first appeared in the book All Your Worth: The Ultimate Lifetime Money Plan.* It's designed to help balance our spending plans, making sure our needs are covered while still having some money allocated for wants and an adequate portion of our after-tax income going into savings.

50% Needs

For most of us, the largest portion of our needs are spent on rent or mortgage payments. Experts suggest not spending more than 30% of your after-tax income on housing. If you follow the 50-30-20 rule, that leaves 20% available for the remainder of your needs budget, including debt payments, insurance, food, utilities, transportation, health care, etc.

“The needs create a guideline to keep us from overcommitting in this category,” says Jamie Fatheree, a Certified Financial Counselor at American Airlines Federal Credit Union. “If half of our income is already committed in this category, it’s going to be hard to justify another car payment. It can also force us to pay down debt and shop around for better rates.”

30% Wants

Wants include the things that would be nice to have but aren’t necessary, incluing subscriptions, movies, concerts, coffee, designer clothes and any sort of upgrade. The book notes that before credit cards, controlling wants was easier – no cash, no movie! Today with credit, it’s a lot easier to let wants get out of control, so it’s important to see them in our budget.

“Making room for wants is important. We work hard for our money and should enjoy it,” Jamie says. “A realistic plan includes wants and lets us know it’s OK to live life and treat ourselves on occasion.”

20% Savings

Savings can include money that we put into our 401K, emergency accounts, mutual funds and other savings products. Unfortunately, this category is often the first to suffer when our needs go beyond the 50% guideline. That’s acceptable from time-to-time as unexpected, mandatory expenses are the reason we have an emergency fund. It’s not recommended to sacrifice savings for wants, however.

Jamie says it’s also important to realize not every budget can be broken down this way without some work.

“It’s a goal,” she says. “The 50-30-20 plan is meant to help provide flexibility and spending power throughout our financial lives. It may take some work and adjustments to get our spending into these categories, but once we’re there. it eliminates a lot of the guesswork from financial planning.”

Want help with your budget? There are lots more stories on budgeting throughout or blog as well as articles and videos on the Navigator at Navigator.AACreditUnion.org. Our Financial Wellness team is also available to help you create a budget or work on a 50-30-20 plan. Counselors are available for a confidential, no-cost consultation. For an appointment, call (833) FIN-WELL (833-346-3955) or email financialwellness@aacreditunion.org.

* All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi, 2005