Financial responsibility is the key to reaching your financial goals. You can make as much money as possible, but if you aren’t responsible for it, you will have just as many problems as someone on a lower income.
What is Financial Responsibility?
Financial responsibility means making wise choices with your money. When you’re financially responsible, you control your money; your money isn’t in control of you. Financially responsible people know where their money goes and reach their financial goals.
Is it impossible to be financially responsible?
Absolutely not.
However, it takes some consistency and effort. You must know where your money should go and what you need to achieve. Financially responsible people also carefully follow a budget and adjust it as needed.
Why Does it Matter?
You might wonder why financial responsibility matters if you pay your bills and always have enough money. But being responsible with your money is more than about covering your bills.
When you are financially responsible, you have money set aside for emergencies and your financial goals, and you always know where your money goes. It puts you in financial control and doesn’t allow for economic crises like the pandemic caused millions of people.
The Key Components of Financial Responsibility
Financial responsibility may look different for each person, but here are some key components.
Living Below Your Means
When you live below your means, you lower the risk of experiencing a financial crisis. You don’t live paycheck-to-paycheck, and when an emergency occurs, you don’t have to turn to credit cards or loans to cover it.
Living below your means is one of the most challenging parts of financial responsibility because it’s easy to let lifestyle creep occur. When your income increases, it’s easy to let your expenses increase, too, but where’s the responsibility?
Instead of increasing your lifestyle to meet your higher income, you should save that money and set more financial goals, letting your money work for you instead of the other way around.
Limit Spending
Spending mindlessly is a sign of financial irresponsibility. Instead, have a spending plan and limit it. Avoid using credit cards needlessly or spending without tracking how much you spend.
Set a budget, like the 50/30/20 budget, that allocates 50% of your income to necessary expenses, 30% to ‘wants’ or unnecessary spending, and 20% to savings and debt payoff. This guide will help you avoid overspending.
Save Consistently
Saving is the key to financial responsibility. Make savings a regular part of your budget, like a bill, to ensure you always have money set aside for emergencies and other financial goals.
10 Ways to Be Financially Responsible
Being financially responsible can feel like a significant burden. Here are ten ways to make it a regular part of your routine.
1. Create a Budget
You can’t be financially responsible without a budget. It tells you where your money must go and how to save for your financial goals. A budget doesn’t mean you must sacrifice everything; instead, consider it a roadmap for your income.
Most people don’t realize that budgets are flexible, too. You can create one, try it for a month or two, and then make changes as needed.
Your budget should include all of the following categories, plus any that are personal to you:
- Fixed expenses (housing, transportation, utilities, insurance, medical care, etc.)
- Variable expenses (entertainment, eating out, gifts, holiday spending, etc.)
- Savings (emergency savings, financial goals, rainy day fund, etc.)
2. Track your Budget
Creating a budget is only the first step. You won’t be able to make sound financial decisions without tracking your progress.
Set a monthly date to check your progress on your budget. Have you exceeded spending in specific categories and underspent in others? If you notice this, swap your categories and amounts to create an adequate budget for your needs, or change your habits if there aren’t enough funds.
You can track your budget manually, using spreadsheets or pen and paper, or download budgeting apps that automatically sync to your bank account. YNAB, EveryDollar, and Goodbudget are a few good examples.
3. Set up Automated Savings
Automated savings is the key to financial responsibility. Rather than waiting to ‘pay yourself’ after you’ve spent all month, automatically have your money transferred to your savings account.
Your employer may offer this option via direct deposit, allowing you to allocate specific funds to your checking and savings account. If not, check with your bank, as most have automated transfer programs that will enable you to set up your transfers once and always have the money transferred.
Don’t forget, as your income increases, your bills decrease to increase the amount you send for automatic savings. This prevents lifestyle creep and increases the amount you save.
4. Pay your Bills on Time
Financial responsibility, of course, means paying your bills on time. Late payments damage your credit and accrue interest and penalty fees. Paying your bills on time eliminates unnecessary fees and ensures a higher credit score.
Set as many bills as possible on autopay to reduce your workload while ensuring you don’t miss any payments. Also, monitor your bills and renegotiate or shop around for better deals to save money.
5. Set Financial Goals
Financial goals are an integral part of any financial plan. They help you plan for the future and achieve your goals. Consider setting the following plans:
- Short-term: Think about what you want to achieve in the next couple of years and how much you must save monthly to do so.
- Mid-term: Consider the goals you want to achieve in the next 2 – 5 years and include the amounts in your budget to achieve them.
- Long-term: These goals take longer than five years and usually include retirement. They may seem far off, but they will be here before you know it.
When setting your goals, consider how you want to invest the funds. Short-term goals typically require conservative investments, like savings accounts and bonds, because there’s little time to rebound should the investment fail. Longer-term goals allow riskier investments, such as stocks or ETFs, because there’s more time to compensate for losses.
6. Track your Financial Goals’ Progress
Setting financial goals is one thing, but you must also track them. Just as you check your budget monthly, check on the progress of your goals, especially short-term ones. If you’re falling short, you may need to adjust the monthly amount you save or invest to reach your goals.
7. Monitor your Credit Report
Your credit report is a big part of financial responsibility because it showcases how well you manage your finances. Credit scores range from 300 – 850; while no one needs an 850 score, the higher your score is, the easier it is on your financial life.
Everyone gets free weekly access to their credit reports, so take advantage. Pull your reports and look for issues like late payments, overextended credit, or fraudulent activity. When you notice adverse information, immediately increase your credit score.
8. Limit Credit Card Usage
Credit cards aren’t meant for spending beyond what you can afford. They can be a great personal finance tool for protecting large purchases or earning rewards, but you must always pay the balance in full.
If you must carry a balance, be sure it’s 30% or less of your credit line, or it will damage your credit score. Accrued interest costs you more money and depletes other financial goals.
9. Get out of Debt
If you’ve already gotten into credit card debt, prioritize repayment. Make much larger payments than the minimum required, and consolidate credit card debt onto a 0% APR card when possible. This will make it easier to eliminate debt, and you must avoid using credit cards moving forward.
10. Limit Interest Charges
Interest charges only deplete money you have for other financial goals. Avoid borrowing money as much as possible; if you do, make more than the minimum payment required to limit the interest you pay.
Final Thoughts
Understanding financial responsibility and how to make it part of your life is important. This will help you reach your goals, have more options, and live a fulfilling retirement without financial strain.
Additional reading: What To Do 6 Months Before Retirement
