Are you tired of drowning in credit card debt? Do you have a problem spending money? If so, you might need a crash course in fiscal responsibility.
Being smart with money doesn’t mean that you have to live the life of a monk. It just means you need to have some strategies to keep your monetary situation under control.
Defining fiscally responsible is tough as “Fiscal responsibility” is one of those terms that can mean different things depending on who is saying it. Some say fiscal responsibility is a matter of spending less and working more while others say it is a matter of making sure you are investing appropriately.
Regardless of the specific definition, one thing is clear; fiscally responsible people are good with money in a way that lets them efficiently make, allocate, and spend money appropriately. An ideal fiscally responsible person can make money, spend money, and save money wisely, no matter how much they are making.
So we put together this comprehensive list on how to be fiscally responsible. Whether you make a lot of money or not a lot of money, you can be an ideal fiscally responsible person, and here is how. Your future self will be thankful for the financial guidance.
Set Financial Goals and Stick to Them
One thing that separates fiscally responsible people from others is that they can plan ahead for their financial future. Money-wise people plan out exactly what they are going to do and when they are going to do it. Moreover, they actually follow through on their plans and do not renege.
Have you ever wanted to get a handle on your personal finance but couldn’t get a hold of your spending or some other aspect of your finance? Fiscal responsibility is about being able to make plans with your money and stick to them. People who get wealthy create multiple streams of income for their personal finances.
So, sit yourself down and investigate your financial goals. Ask yourself:
- What do I want out of my finances?
- What kind of timetable am I on?
- Do I have a budget laid out?
- How much do I need to save every month?
These are the kinds of questions that should direct your financial behavior, so start by figuring out what is important to you in terms of money.
Related: How to Become Independently Wealthy
Set a Budget
If you haven’t already, the first thing you should do with your personal finance is find a budget. People always complain about the federal government and government institutions’ spending habits. Just as our government officials need a federal budget for government spending, so you need a plan on how to manage your household income. Planning for the government is a lot like planning in the private sector.
Part of building a balanced budget is crafting it around your lifestyle and spending habits. The very first thing you should note is your essential expenses. Essential expenses include things like rent, food, utilities, and other basic necessities for your life. Next, figure out how much you need to save. Savings includes retirement accounts and emergency savings.
Next, establish how much that you need to allocate to recurring expenses, like student loan debt, auto insurance payments, house payments, and the like. Lastly, plan a budget for personal spending. You can tweak these categories however you like, but ideally, you want about 50% of your income going to living expenses and at least 20% going to savings. The remaining 30% extra income can be discretionary spending. Budgeting is a basic part of personal finance and fiscal responsibility so it should be the first thing you do to save money.
Want more tips on balancing your budget? Check out these posts:
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- 67 Cheapest Foods to Save Money
- Frugal Living Tips from the Great Depression
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Establish Emergency Savings
The next thing to do after planning a budget is to get an emergency fund. Ideally, you want to have at least 6 months of living expenses saved up. So if your living expenses are $2,000 a month, then you should try to have around $12.,000 in liquid savings you can tap into to cover emergencies such as car repairs, medical expenses, or if you lose your job and need a cushion to survive.
Establishing an emergency fund is incredibly important before doing other things. It should take precedence over other financial goals in the immediate future. If you try to focus on other goals without having some kind of emergency cushion saved up, you can be out of luck if disaster strikes and you lose your main source of income.
It is important that your emergency fund is in liquid cash form too. If your emergency fund is tied up in some other asset, they can be too difficult to get and you might not be able to access your emergency fund when you need to. You need enough money that you can cover all your necessities for about half of a year.
Figure Out Your Net Worth
Net worth is a total measure of how much wealth a person has. Net worth is not necessarily how much money a person has on hand at any given moment, but a measure of the total value of all their assets. In other words, a person’s net worth is what they theoretically could make if they sold everything they owned for cash.
Net worth is a useful metric to help you gauge your overall financial health. The way to calculate your total net worth is to calculate all your assets and subtract the total number of any debt that you have.
So for example, say you have an income of $80,000, $15,000 in a savings account, $50,000 in a retirement 401(k) and you have a fully paid-off car worth $18,000. Further, let's say that you still owe $100,000 on your house and have $4,000 in outstanding credit card debt. In this case, your total net worth is the difference between your assets and debts. Your total net worth would be $59,000.
This is a simplified calculation, but it will give you a good estimate of your financial position. What is important is not so much how high your net worth is but how whether it is positive or negative. If you have a negative net worth, it means that your total debts outweigh your assets and you owe more money than you actually have.
Most experts agree that you want a debt to asset ratio of around 40% or lower. That means that at any time, the total amount of debt that you have should not exceed over 40% of your total assets. This is a general figure, and in some cases, it is ok to have a higher ratio value, such as just after taking out a loan and buying a house. But over time, you should try to hit that 40% mark.
Pay Down Any Debts
The next most important thing to do is settle down as much debt as possible. Debt, especially high-interest debt, can balloon out of control and prevent you from getting your finances stable.
Whether it is student debt payments, lingering car insurance payments, or even the national debt, it is hard to get a handle on your finances when so much of it is being eaten by debt every month. You need enough money to pay your debts and manage your other expenses.
Debt takes priority over other goals here. The problem with bad debt is that it can spiral out of control.
If you have high interest rates, the longer you take to pay off the high-interest debt, the more you will have to pay in the long run. You may have to cut some of your spending or rework your budget so you can pay down your debts as quickly as possible.
We recommend a debt strategy known as the snowball method. Basically, you try to pay off any smaller debts you have first before tackling the larger ones. Common sense might dictate it would be better to pay off large debts first, but human psychology is weird. Paying off small debts first gives you a much-needed psychological boost so you can continue making future payments. You can see your debt payments ‘snowballing’ into larger and larger payments as you chip away at your bad debt.
Start Investing for Retirement
Once you have a handle on your debts, you should put a focus on your retirement savings. Most retirement savings should be done through investing. Investing is a way to make your cash work for you and there are several investment options with tax advantages to help you maximize your returns.
For example, a traditional IRA will let you put pre-tax income away into a stock market account where it can grow tax-free. You then pay tax on that cash when you actually use it during retirement. This kind of tax structure can save you money in the long run so you can enjoy more of your retirement savings.
Other retirement options involve a company-match 401(k), Roth IRA. high-yield savings account, and more. Many kinds of these accounts give you a good interest rate on deposited funds, but the stock market is always the best way to really grow your wealth for retirement. You can invest according to your risk tolerance and financial situation. Investing in compound interest accounts is basically free money and goes well when there is good economic growth.
The key is to invest for passive income. Passive income comes from investments in the form of dividend payments and capital growth. Passive income will give you a stream of income as you go into old age, so you do not have to rely on static saved funds. You can make your money work for you to generate both income and growth.
A popular option to generate passive income is to invest in a rental property. Start investing in rental real estate to give you an asset that will increase in value simply by owning it and also provide you with a steady stream of liquid rental payments. Real estate investment can be a great way to set yourself up for retirement in the long term.
Related: Peerstreet Review
Insure Your Belongings
Fiscally responsible people are always ready for whatever unexpected expenses get tossed their way. Whether it is healthcare costs, property damage, or sudden loss of employment, financial responsibility involves getting the right asset insured and protected. You do not want your expensive assets to be worthless if they are damaged in an accident and you don’t have a backup plan.
Common types of insurance that you should look into getting include renters insurance, homeowners insurance, life insurance, health insurance, and unemployment insurance. Life insurance will ensure that your family can maintain their standard of living in the event that you pass away, and unemployment or disability insurance can safeguard you and your family in case you lose your job or suddenly become disabled and cannot work.
Fiscally responsible people know that life will hit them with unexpected curveballs. That is why they take every step they can to protect themselves and their belongings. The right insurance can help you with saving money.
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Use Some Credit
Credit, in essence, is a measure of how “financially trustworthy” a person is. The higher your credit score, the more likely it is that banks and institutions will accept your applications for financial products like loans, credit cards, debit cards, bank accounts, and more. Consequently, a low score may bar your access to these kinds of products.
There are 2 major types of credit: installment credit and revolving credit. Installment credit includes any payments that you make on a regular basis, like utility or phone payments. Revolving credit is a kind of account with a credit limit you can use at will. A credit card is a classic example of revolving credit. Having a good score involves smartly managing the different types of credit. A fiscally responsible person excels at the credit part of personal finances.
Credit is determined by 5 major factors:
- Payment history
- Amount owed
- Credit history length
- New credit lines
- Types of credit in use
Keep in mind that other things such as your employment, marital status, location, age, or receipt of public assistance are not considered when calculating your score.
Base FICO credit scores range from 300 to 850, where a higher score means better credit. Most credit cards and loan opportunities require applicants to have a credit score over 600 or higher to be eligible.
The single most important factor that determines your credit score is your payment history. That determines about 40% of your score. So if your credit score is faltering under 600, then you should focus on making your payment on time as much as possible.
You should also focus on reducing your total credit usage. Credit usage does not mean the absolute amount of credit you are using but how much of your total allotment. You could have $5,000 in credit card debt but it will not have a huge effect if your total credit limit is $50,000.
Pick Up a Side Hustle
A fiscally responsible person does not become wealthy just by sitting at their day job and doing nothing else. Wealthy people often become wealthy by earning as much money as they can in their spare time. Establishing a side hustle is a good way to give yourself an extra stream of income that can help if financial disaster strikes.
There are lots of things you can do for extra money. If you have any professional skills you can offer them a consulting position or you could pick up a second job on the side in your spare time. A side hustle does not have to be a big deal either. Even if it is just an extra $100-$200 a week, that can be an extra $10,000 grand a year that you can put towards your debt or put into your savings account for retirement.
Below are some of my favorite side hustles you can start!
Related: Side Hustle Ideas for Moms
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Set Up Your Wealth for the Future
Making money is only half the battle, fiscally responsible people also need to make sure that it will persist through the future.
Securing your money for your children is something a fiscally responsible person should do. Try to see a professional to put together an estate plan and last will and testament. Through your investments, retirement accounts, assets, and savings, you can ensure that your family will be well situated long after you are gone.
These legal documents will ensure that your wealth goes where you want it to when you pass away.
Making sure that your finances and that you have an estate plan is one of the most fiscally responsible things a person can do as the burden of organizing an unmanaged estate falls to the closest living relatives. Financially responsible people make sure that their wealth will be managed for decades to come.
Related: How to Live Below Your Means
Final Thoughts on Becoming Fiscally Responsible
Being fiscally responsible is not so much a state of being as it is an action. It is the action of being smart with how you spend money and save it. Being fiscally responsible is one of the best things you can do to ensure that you can tackle life’s problems head-on. You never know what kind of things will happen in life, so it is important to have your finances secure in the event of an emergency.
If you think you are “behind” in terms of money, don’t fret. Even if you are behind, smart saving and spending can put you back on track to being fiscally responsible. The key to being fiscally responsible is having good long-term planning skills. If you can plan for the future, then you can be fiscally responsible. Financial freedom comes from being financially responsible.
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