Financial responsibility: it’s something most of us know is important, but it isn’t always easy to define. How do you improve your financial situation? Is it as simple as saving a bit of money each month? And what does it mean to be financially responsible?
Like we said, these things aren’t always immediately evident to everyone, and even if they were, putting them into practice is a whole other issue. That’s why we’ve decided to break down some of the key tenets of this subject to help clear the air!
Generally, the process of getting your finances on track starts with getting informed, and then putting some basic but important financial skills into place. So, we’re going to go over some of these skills and break down some important concepts that can be important to anyone trying to make sure they stay financially responsible.
1. Create a Budget
When it comes to being financially responsible, the first step is generally going to involve putting together a proper budget. While it’s not the most exciting of projects, it’s also one of the most important things you can do. And this isn’t just for people who are making ends meet. No matter how much money you make, you’re going to need to have some sort of framework for your spending to keep things in check.
The point of a budget is to give you some insight into where your money is going and help guide it to the right areas of your life. It can keep you on track in your pursuit to do things like pay your bills, pay down your debt, and save for retirement. Without one, you may end up wondering where all your money went by month’s end.
Putting together a budget and actually sticking to it diligently isn’t always easy, but there’s more than one way to budget, so it’s up to you to find which way works best for your situation. Maybe you and your partner are supporting an entire household, and would find something like a family budget to be really useful. Or maybe you’d need that tangible feeling of having cash in your hands and would be well suited to an envelope budget. See what’s out there and try to find what aligns with your needs.
2. Be Smart with Your Credit Cards
Credit cards can be an important and useful part of your financial toolbelt. They can help you make big purchases, like booking a vacation, and may help you positively affect your credit history. Having a strong credit history can be especially important when you’re looking to make large purchases, like buying your first home or purchasing a car.
But the key component in this equation is to make sure you’re using your credit cards properly. What does this mean exactly? Let’s take a look at an example.
Let’s say you have a bill you pay every month, like your phone bill, and it comes out to the same amount each cycle. So, you decide you’re going to set up an automatic payment to have this bill paid through your credit card. To make sure you’re actually keeping up with these payments, put money aside that’s equal to the size of your phone bill into a savings or a checking account, and then have that money be automatically put towards your credit card bill every month. By doing this, you’ll build up a balance on your credit card each month, but you’ll also be ensuring that you’re paying it off at the same time.
Just remember that you should never use your credit card for something you can’t afford. If you don’t have the money in your checking or savings account, you generally shouldn’t be making that purchase with credit. Making late payments – or missing payments altogether – can do all sorts of damage to your financial profile, with one of the most significant things being the damage it’ll do to your credit score.
3. Start an Emergency Savings Fund
One of the most financially responsible things you can do is to put together an emergency fund. Its purpose is fairly straightforward. It’s a financial safety net you put in place to help you handle emergency expenses. This may include things like emergency home repairs, auto repairs, or an unexpected trip to the emergency room.
One of the most important aspects of having an emergency fund in place is making sure you use it responsibly. This means that you need to have an understanding of when you shouldn’t be using it. For example, this fund shouldn’t contribute to your vacations, shopping, or entertainment of any kind. It even shouldn’t go towards any sort of long-term savings plans you’re putting in place.
So, we’ve established the importance of an emergency savings fund, but how much money should you have in yours? The real answer is that it depends. Every person’s situation is unique, so you’ll need to assess where things stand for you first. For example, if you have a steady and comfortable income and feel secure in your place at work, three months worth of living expenses may be fine for you. But if you’re self-employed and your income is sporadic, you may want to play things a little safer and work towards having six to twelve months of living expenses saved up.
If you want to learn more about an emergency savings fund and are looking for some tips to help you build one, you’re in luck! We’ve written about this very subject in more detail on our blog, which you can see right here.
Learn More About Your Emergency Options
As important as an emergency fund is, it does take some time to build up. And if you run into an emergency before you have the money saved up to deal with it, it’s important that you know what your other options may be.
This is where online personal loans come in. They’re personal loans that are generally intended to help you in times of emergency, and can come in the form of personal lines of credit, installment loans, and more. Educate yourself on what your options may be to make sure you’re prepared to handle emergencies.
4. Pay Yourself First
This may seem like a tough piece of advice to follow, especially if money is tight and you’re struggling to pay bills, but it’s still an important principle of financial responsibility. In very simple terms, paying yourself first involves putting a small portion of your paycheck aside towards your savings on a regular basis, before putting money towards anything else. This includes things like rent, bills, and discretionary expenses.
This money can go towards your emergency fund, your retirement, or some other type of savings account. The general idea is that by putting this money towards some sort of a larger savings goal right away, you’ll avoid spending it on things that may be unnecessary or inessential. Like we’ve said, this may seem like a tough task if you don’t have a lot of money to spare, but just make an effort to put any money you can towards this goal, even if it’s only a really small amount each month.
5. Financially Responsible Investing
Investments can be one of the cornerstones of your financial profile and can help you make substantial contributions to your financial well-being. The type of investing you do should be specific to your goals and could be things like investing in real estate, managing a stock portfolio, or even contributing to your retirement fund. Whatever this looks like to you, it can be a big part of your future.
If your goal is to start investing in stocks, you may want to work with a financial advisor. They can help you figure out how much risk you’re comfortable with, how much money you should be putting into your investments, and which actual stocks, bonds, or mutual funds you should be investing in. You can also go through your bank or certain financial institutions and have them manage your portfolio for you.
You may also want to focus your investments on simply owning a home of your own. This is obviously a big investment, so you’re going to have to make sure you’re considering the right factors. This can include things like:
- Will the area of your home help it to go up in value over time?
- How long will you live there?
- How much of your paycheck will need to go towards your mortgage payments?
And finally, we arrive at your retirement. You may have already known that your retirement fund is important, but it may not be immediately obvious just how important it is when you’re trying to stay financially responsible. Whether you’re saving for retirement through an IRA, a 401(k), or any number of ways, you’re putting money towards a fund that’s meant to support you through a substantial chunk of your life. So that’s why it’s important to make this a priority.
Don’t Live Outside of Your Means
When you’re striving to have a certain type of life, it can be tempting to stretch your funds beyond their breaking point just to get your hands on the newest iPhone, or that car you’ve always wanted. But if you want to live a stable and financially healthy life, you’ll likely need to make financial responsibility a priority. This means living within your means, educating yourself on what it means to be financially responsible, and trying to put these things into practice. Remember that your education is an ongoing task, and we hope this article helps in your journey!
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