By Sabrina Karl

Many of us know that budgeting is a smart way to keep spending in check. But creating and then tracking a budget can feel overwhelming to some.

Enter the 50-30-20 budget method, which keeps budgeting simple by boiling things down to three large categories, rather than a dozen or more detailed categories. The three categories are needs, wants, and savings, and the most important one to start with is savings.

Begin by calculating your after-tax income. Look at your take-home pay but add back any amounts deducted from your paycheck for non-tax items, such as healthcare and retirement savings.

The next step is to multiply the 20% savings rate in the 50-30-20 formula by your after-tax income to determine the amount you should put either towards savings or extra debt payments.

That leaves you with 80% of after-tax pay, which the 50-30-20 method suggests you break down as 50% going towards needs and 30% towards wants.

Needs include housing, utilities, transportation, groceries, basic household supplies, and necessary personal items. These are expenses you simply must pay each month to live a standard lifestyle. It should also include the minimum required payments on any outstanding debts.

After that, you have 30% left to spend how you like on discretionary purchases. This can include paying for cable TV, going out to eat, buying the latest tech device, or going on vacation. The list is endless, but the common thread is that these are expenses you are opting to make, but could live without if you needed to.

If you find you have extra room in your 50% or 30% categories, it’s wise to add the surplus to your savings category. Simply tweak the three percentages to what works for you, and continue tracking those three broad categories to stay on track.