The most universal piece of financial advice is to create a budget, but sticking to it long-term is easier said than done. Budgeting requires significant restraint, discipline, and sacrifice, so maintaining momentum can be difficult.
Historically, times of heightened inflation and economic uncertainty signal decreased consumer spending, but 2024 has seen consistent increases in consumer spending.
This affinity for spending may be due to cultural and lifestyle changes impacting consumers' ability to budget effectively — half of those with social media accounts have made an impulse purchase advertised on the platform. And 68% regretted the purchase afterward.
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83% of Americans report overspending, and 84% of those with a monthly budget note that they often exceed it. Instead of prioritizing a realistic budget for their income, people get fatigued by rigid, unattainable goals.
TheStreet met Liz Miller, CFP and Founder of Summit Place Financial, to discuss how consumers can effectively budget in a way that is tailored to their income and lifestyle. The firm is based in Summit, N.J.
Prioritizing the 50/30/20 rule
Miller starts by shedding light on the most effective budgeting strategy.
“There are a few people who love detailed spreadsheets that list out what you’re going to spend for the next six months, but most people can't stick to that,” She said. “The 50/30/20 rule is a great starting point.”
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Tailoring the proportion of your essentials budget to your income level and geographic location can be a great way to make budgeting more attainable.
“50% of the money you have coming in should go to your essentials,” She continued. “Now, if you live in New York City, that might be a little higher because housing costs are so high here.”
“So don't worry if it goes a little higher than that if you live in a major city, particularly when you're starting out. For the most part, roughly 50% should be your rent or mortgage and those fixed payments that you can't do anything about.”
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Practical tips for cutting on non-essentials
Miller explains that the trick to decreasing your costs while enjoying your life is making tradeoffs on your spending based on what’s most important to you.
“30% should be allocated to the things you choose to spend money on,” she explained. “Maybe you need to cut back on one or two streaming services. You should track how much you’re spending on going out with friends. What does that weekly brunch cost you in the long term?”
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“You might need to make tradeoffs and ask yourself, ‘Do I go out this weekend or do I buy new clothes?’”
“The remaining 20% should be your target for monthly savings,” She notes. “Some of that may go towards paying down debt, but most of it should be funding your first account — an emergency fund. Once you’re debt-free, the next step to building wealth is saving enough money to cover emergencies or unexpected expenses.”
Once all debt is paid and an emergency fund is established, the budget can help consumers prioritize other goals, such as retirement savings, 401(k) contributions, and building an investment portfolio.
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