What does it mean to be financially responsible? Simple; you spend less than you make.
Save First Before You Spend
Does being financially responsible mean that you have to live frugally and save? Maybe, but only if that is what it takes to live within your means. For most people, the concept of saving is to keep whatever that’s left after spending. That may work suppose if the particular individual has plenty of excess and is still keeping enough after spending for retirement. However, for the majority average that’s not the case. In this respect, one should be mindful enough to make it a commitment to first decide on how much one needs to keep before one starts spending.
Having a budget is one of the core pillars of financial responsibility. You should know where your money is going. The problem with spending is similar to preparing a good meal. It takes much effort to prepare the ingredients and to cook them but to consume it thereafter is simply so easy. Money disappears easily if we fail to keep track of our spending. There’s so much temptation out there to make us spend. Hence, to be financially savvy it is important for us to be mindful of where our money is flowing.
Credit Cards and Debt
Credit card is a double edged sword. Use correctly you’ll reap benefits for making full use of the money spent as you may earn points and various different kinds of benefits including free insurance for some credit cards. But used wrongly, you may be trapped in a painful situation of compiling interests on debt accumulated. Responsible use of a credit means paying the balance on your account in full each month. Some may argue that certain times this may result in a poor credit score for the person but falling into a vicious trap of servicing interests for debt is even worse!
Credit cards should be used for convenience, not to make ends meet. Credit cards are handy because they eliminate the need to carry cash – you can even generate reward points. And credit cards can be very helpful in an emergency. That said, if an emergency does force you to carry a balance on your card, living in a financially responsible manner means curbing your spending until that balance is paid off. This leads us to our next point; one should have already factored in the need for emergency fund before swiping the card.
Financial responsibility also means being prepared for the unforeseen. A safe formula to go about doing this is to have enough funds to sustain oneself for six months suppose if one is to go without an income for that period of time. If one is married and is used to living on dual incomes, one should factor in the necessary bills such as the mortgage, food and utilities on one income – or even neither income! If a missed paycheck would ruin you financially, it’s time to rethink your spending habits and reorganize your finances all over again before the unforeseen hits!
Paying Yourself First
Spending every dime that you earn is simply irresponsible unless you already have a steady secondary source of passive income. For most people, especially those of us hoping to retire someday, saving is an activity that must be taken seriously. Without which, to build a secondary source of income safely is next to impossible. A wise way to do this is when you get your paycheck – pay yourself first. A good goal to save minimally 10%. Having said this, one should also take into consideration the liquidity of the savings. Meaning, if some savings is already fixed and channelled into retirement schemes such as EPF/KWSP which may not be easily cashed out in times of need; one may want to have another pool of savings which can be easily cashed out for cashflow purposes.
When it comes to saving, investing in the stock market might be the most profitable choice available. Sure, investing involves risk, but taking calculated risks is sometimes a necessity. The responsible way to go about it is to have a plan.
Start by examining asset allocation strategies to learn how to choose the right mix of securities for your investing strategy.
Acting in Your Own Best Interest
For many people, cutting down on interest and borrowing is easier said than done, but in practice, it really comes down to knowing the difference between necessities and luxuries. For example, you might need a car, but you don’t need a luxury sedan and, unless you can afford to pay for it in cash, you shouldn’t be driving one. Likewise, you might need a place to live, but you don’t need a mansion. And, although most of us must have a mortgage in order to afford a home, purchasing a home in a financially responsible manner means that you should purchase one that won’t break the bank. Preferably your monthly mortgage payment should not cost more than 30% of your monthly take-home pay.
Ultimately, financial responsibility means living within your means, regardless of the level of those means. So take a close look at your financial situation, evaluate you earning and spending habits, and make the necessary adjustments to put yourself in a financially safe and responsible position.