Although budgeting is a key component of effective money management, it can be a daunting task. To make budgeting easier, many people adopt a general budget system such as the 50/30/20 rule.

Briefly defined, the 50/30/20 budget rule means dividing all net income into three categories, allocating 50 percent to “needs,” 30 percent to “wants,” and 20 percent to savings. Needs refers to unavoidable expenses such as food and housing. “Wants” refers to unessential expenses such as entertainment and luxury consumer goods. Savings refers to money put away for unforeseen circumstances and life goals such as retirement.

The 50/30/20 budget rule doesn’t work for everyone, but it can be a helpful way to ensure that you can pay for life’s necessities while saving money for retirement. It is a relatively easy way to prioritize essential expenses and establish long-term financial security. People interested in adopting this system can use various tools including specialized 50/30/20 budget calculators and apps.