This story is part of CNBC Make It’s One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.
Managing your finances and setting a monthly budget can be challenging.
But if you’re overwhelmed with where to start, the 50-30-20 strategy can simplify the process.
The plan divides your income into three broad categories: necessities, wants, and savings and investments. Here’s a closer look at each.
50% of your paycheck should go toward things you need
This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments.
If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.
20% of your paycheck should go toward savings and investments
This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account.
Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses. Some also suggest building up your emergency savings first, then concentrating on long-term investments.
And if you have access to a 401(k) account through your employer, it can be a great way to save a portion of your income pre-tax.
30% of your paycheck should go toward things you want
This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun.
This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.
There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.
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