9 Easy Ways to Be Fiscally Responsible

This article originally appeared on Parent Portfolio and has been republished with permission.

For some, it’s surprising the amount of consumer and student loan debt a person has. This financial situation is a future you likely won’t want for your children. So, “How do I prepare my children for the future and be fiscally responsible?“

This simple question of “How?” can unlock the way you think about money. It often isn’t enough to graduate college and work a stable career.

What Does It Mean to Be Fiscally Responsible?

Fiscal responsibility describes a person who has self-control and accountability for their spending.

Government institutions’ fiscal responsibility is about how wisely those who hold an office spend tax-payer dollars and manage money in the federal reserve bank. Defining fiscally responsible for personal finances is about how wisely an individual spends their earned income.

Why Is It Important to Be Fiscally Responsible?

Even with a decent-paying job, it often isn’t wise to spend money unconsciously. You might be left waiting for your next paycheck to cover unplanned expenses. This can put your family’s finances at risk.

If you don’t make changes, debt may never go away. That is why it’s so essential to becoming fiscally responsible. You need to control your money and not let your money be in control of you.

How Do You Become Fiscally Responsible?

There isn’t a magic number that indicates that you’re fiscally responsible. Instead, the kind of behavior you have when it comes to spending can be a deciding factor.

Below are nine easy ways to become fiscally responsible. You can perform each method in any order. Most of them you can do simultaneously.

Know Your Net Worth

Net worth is an indication of someone’s financial situation. It’s not how much a person makes in a year. Instead, net worth is the dollar amount of one’s assets minus their liabilities or debt.

For example, a person has $50,000 in stocks and $10,000 in consumer debt. Therefore, this person’s net worth is $40,000 ($50,000 – $10,000 = $40,000).

On the other hand, a different person has $20,000 in a retirement account and $40,000 in student loan debt. This person’s net worth is negative $20,000 ($20,000 – $40,000 = -$20,000).

Having a negative net worth is a reality check that tells a person they need to start making changes to their financial habits. There isn’t an exact dollar amount that considers someone financially stable.

Instead, the key is which direction is one’s net worth trending: Up or down?

Create a Budget

A proper budget can help prevent anyone from overspending. People may not like budgets because it makes them feel restricted. In reality, a successful budget can give people freedom with a planned amount.

There are different budgeting strategies, such as a proportional budget. A proportional budget assigns a proportion of your paycheck to a category like the following:

Essential expenses: 30%
Wants: 30%
Savings: 40%

Other examples of budgets are a “Pay Yourself First” budget, an envelope budget, and the zero-based budget.

This budgeting strategy gives every dollar from your paycheck a purpose! Whether a portion of your income goes towards bills or a college fund, every dollar gets an assignment.

A budget isn’t a plan that you set once. Instead, it is a plan that you need to review periodically (i.e., every month). A periodic review can optimize your budget by reducing limits in some categories and reallocating them to others.

For example, you budget $150 for gas for January. At the end of the month, the actual amount spent on gas was $50. Realizing the difference between the money spent and the budgeted amount offers an opportunity to reduce the budget.

For February, you can reduce the budget to $75 and allocate the extra $75 to a category that may need help or go towards savings.

Track Your Spending

Once you create a budget, the next step is to track your spending and follow it. Tracking doesn’t have to use any fancy software. Instead, it can be as easy as using Google Sheets.

Make sure you strive to spend money with the budgeted amounts. This way, you can avoid overspending!

Fiscal responsibility comes into play primarily here. If you’ve already spent the amount budgeted for a particular category, then you will need to hold off until next month.

There might be instances where you might go over a budgeted amount. Reviewing your budget and comparing it to your actual spending is vital. Tracking your spending will help determine more accurate budget amounts.

Pay Off Consumer Debt and Student Loan Debt

Reducing your debt is one of the ways to increase your net worth. Unfortunately, it’s becoming common among generations to have credit card debt and student loan debt.

However, just because something is expected or acceptable does not make it responsible!

Debt can consume most of your paycheck and prevent you from doing more productive things with your money, such as growing it or building up a savings fund.

One strategy that can work for you is the debt snowball method. This method doesn’t focus on paying the bad highest interest debt first. Instead, it focuses on paying down the lowest debt balance first.

Below are the simple steps for this strategy:

Identify all your debt (excluding your mortgage)
Order your debt from lowest balance to highest balance
Pay the minimum monthly payment on all debt
Budget extra money towards the lowest balance
Repeat Steps 3 and 4 until you pay off the lowest balance
Reallocate the money from paid off debt to the next lowest balance
Go back to Step 3

As you pay off the lowest debt, you can use more money to attack the next lowest debt. After each debt payoff, the payment gets more prominent, increasing like a rolling snowball.

Furthermore, this will not impact your lifestyle because you’re just shifting the money you’re used to not spending. What you need to avoid is lifestyle creep.

If you have to use credit cards, don’t revert to paying only the minimum payment and add more to your overall balance. Instead, take advantage of the rewards that credit cards offer and pay back the entire balance.

Build an Emergency Fund

There might come a time when a person is negatively impacted financially due to an unforeseen event, such as a car accident or a job loss. Therefore, it’s essential to build up an emergency fund to handle these unplanned situations when you need money now!

A fair dollar amount to have for an emergency fund is three to six months of monthly expenses. For example, if a person’s monthly expenses total $3,000, then an emergency fund for six months would be $18,000 ($3,000 x 6).

An emergency fund relieves your normal budget pressure and avoids the need to acquire unnecessary new debt.

Develop Savings Goals

Make a plan for your money by creating different savings goals. These goals can be saving for a house down payment, a wedding, or paying for college tuition.

Estimate how much is needed to fulfill each goal. With a budget, you can see what rate you’re saving and have an idea of when you’ll reach your goal.

For example, a saving goal for a house down payment is $10,000. A person can budget $200 a month towards this goal. Therefore, it would take this person four years to reach their targeted down payment.

Once you reach your goal, then you can confidently make significant payments. The irresponsible action would be to make a big purchase and wonder how you’re making up that money.

Invest Your Money

The dollar value is not the same as it was five or ten years ago due to inflation. And, if you think you’re getting a pay raise, that’s just your income trying to keep up with inflation.

Hence, investing your money is the way for you to increase and grow your money. According to Investopedia: “Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.”

Here’s a list of ways you can invest your money:

Mutual funds
401k
IRA
Real estate

Diversify Your Investments

There is a saying, “Don’t put all your eggs in ONE basket.” This statement is also true for your investment strategy.

If you have started investing your money for retirement, pat yourself on the back! Keep in mind, putting all your money in one kind of investment vehicle can put you at risk.

Therefore, you should diversify your investments and create multiple streams of income is the surest way to protect your wealth!

Mutual funds provide the opportunity to allocate your money into different product classes, such as stocks and bonds. Mutual funds are a form of diversification that can counter an economic downturn.

Mutual funds can take it one step further by investing outside of the stock market, such as real estate.

This kind of diversification protects us in the case that the stock market OR housing market is suffering. My husband refers to the time when both markets crash as the Zombie Apocalypse!

Get Proper Life Insurance

Part of fiscal responsibility is also preparing for your untimely death with life insurance assistance, specifically, term life insurance.

Term life insurance provides life insurance coverage for a set period, such as five or ten years. The term can vary depending on the insurance provider. The beneficiaries of the policy will receive an amount in the event of your death.

The payout from a life insurance policy isn’t a reason for your spouse to stop working. Instead, this insurance temporarily replaces your income, mainly if you’re working on paying down debt!

There also exists whole life insurance, which does not expire after a set term. Instead, it lasts for your entire life. For that reason, this kind of insurance has a higher premium!

However, having whole life insurance isn’t entirely necessary. As long as you have a sufficient emergency fund, no debt, and can start withdrawing from your investments, you no longer need to be insured!

Conclusion

Fiscally responsible people have a plan when it comes to spending their money. No one wants to live in debt forever but rather be debt-free. Once you become intentional with your money, achieving these fiscally responsible goals becomes natural.