Why Rachel Cruze Isn’t a Fan of the 50/30/20 Budget Rule

©Rachel Cruze

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The 50/30/20 rule is a common budgeting strategy used by many Americans. It says to allocate 50% of your budget to needs, 30% to wants and 20% to savings.

However, money expert Rachel Cruze says the 50/30/20 budget is no longer the right fit for most Americans. She recommends an alternative strategy called the zero-based budget. Here’s why.

Why Rachel Cruze Dislikes the 50/30/20 Budget

Cruze says the 50/30/20 budget has some benefits. It helps make budgeting a habit and gets people into the routine of saving money. But there are three key cons to the 50/30/20 budget that Cruze says make it the wrong fit for most Americans, as outlined on Ramsey Solutions.

It’s Not Flexible

The first problem that Cruze has with the budget is its locked-in percentages. No matter where you are in life, the budget always says to allocate 50% to needs, 30% to wants and 20% to savings. Cruze wrote that you absolutely shouldn’t be spending 30% of your money on wants if you have debt.

She also dislikes that this strategy has you pursue many money goals at the same time. She and Dave Ramsey recommend following a goal-by-goal approach called the 7 Baby Steps instead.

It Doesn’t Work for Most People

Cruze recognizes that the 50/30/20 budget no longer works for the average American — the average person has to spend over 50% of their income on things they need.

Here’s the math she outlined:

1. The average household income is $74,580.
2. That’s about $5,000 in monthly take-home pay after taxes.
3. The 50/30/20 budget recommends allocating just 50% of take-home pay to needs, which would be $2,500 per month.
4. The average person’s monthly expenses are over $4,000, as Cruze calculated them.
5. That’s about 80% of $5,000 in monthly income, not 50%.

It’s Not a Long-Term Plan

Lastly, Cruze dislikes how much space “wants” get in the 50/30/20 budget. She said spending 30% of your monthly budget on them will make it very hard to get ahead financially.

That means even if you’re the rare American who can follow this budget, it probably still isn’t the right choice. Cruze recommends following a zero-based budget instead.

The Zero-Based Budget

People who follow a zero-based budget make their income minus their expenses equal zero — you allocate each dollar to a specific purpose.

It’s sort of like a version of the 50/30/20 budget that lets you create your own percentages. You put as much of your money toward expenses as you need to, then use the rest in the best way for your unique financial situation.

That could mean using it all to pay off excess debt or putting most of it into your retirement account, if you’re trying to get ahead with long-term saving. It’s entirely up to you and your goals, which is why Cruze recommends the zero-based budget.

How To Create a Zero-Based Budget

The first thing you’ll need is your bank account statements. You’re going to look at these to figure out how you should be allocating your money in your new zero-based budget. Here are step-by-step instructions:

1. List Your Income

Start by adding up all of the income you make across an average month. It may just be your paycheck but should also include any side gigs you have.

When you add each income source together, you get your total monthly income. This is the starting point for your zero-based budget. It’s the amount that you’ll subtract expenses from until you reach zero.

2. List Expenses

This is where your bank statements will come in handy: The next step is to create a list of monthly expenses. Your list should include anything you put money toward in the month you’re looking at, such as:

• Rent, groceries, utility bills and other mandatory expenses
• Savings and retirement contributions
• Debt payments
• Month-specific expenses, such as holiday travel
• Entertainment

Once you’ve gathered all of your expenses, start categorizing them. Put them into groups like “needs,” “wants” and “savings.” This will make it easier to see how much of your budget currently goes to different kinds of expenses. It may give you some insight into how your money habits should change.

3. Subtract Expenses From Income

At this point, you have your total monthly income and a list of expenses. The next step is to subtract the expenses from the income. It should equal zero, but don’t worry if it doesn’t. Plenty of people don’t get it right the first time.

If you have money left over, Cruze and the Ramsey team recommend spending it on your current Baby Step. That could mean building up your emergency savings, paying off debt or pursuing an early retirement, depending on your financial situation.

4. Track Your Expenses Throughout the Month

Moving forward, it will be important to continue tracking your expenses monthly. Even if your spending doesn’t change much, this step keeps you honest. It helps to stop lifestyle creep from impacting your financial goals.

5. Update Your Zero-Based Budget as Necessary

You’ll also want to update your budget as your expenses change over time. Doing so keeps you aware of how you’re allocating every dollar you earn. Curating this type of awareness will help you pursue your financial goals more efficiently.

For example, if you don’t update your budget monthly, you could start spending more and more on luxuries like eating out without realizing it. But you’d catch the problem immediately if you were updating your budget each month.

The Bottom Line

Rachel Cruze believes that following a zero-based budget is better than the 50/30/20 rule for most Americans. It could be just what you need to get more control over your finances or make faster progress toward a particular goal.

However, no two financial situations are exactly alike. The best budget for you may depend on your goals and preferences.

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