When I think of the term fiscally responsible, the first thing to come to mind is government spending, a boardroom meeting, or corporate executives discussing next years budget. But fiscal responsibility pertains to the individual too.
There are things we can do as individuals to be fiscally responsible. A set of principles that if followed, will naturally lead to fiscal responsibility. It’s a set of principles I wrote about in detail about in my book Cash Uncomplicated, and that I will outline in this post.
Fiscally Responsible: Definition
What does it mean to be fiscally responsible? My definition contains several elements, including but not limited to:
- Investing a portion of your income and reinvesting the gains
- Avoiding consumer debt
- Creating a sustainable financial plan that allows you to live a robust life
In other words, a budget that includes money for investments, an emergency fund, and the ability to pay for your lifestyle without falling into consumer debt.
The Fiscally Responsible Individual
If you’ve read my blog or book, you know the majority of my writing focuses on the individual and the family. This post is no different as I believe we as individuals have the ability to be fiscally responsible and can manage our personal finances efficiently and effectively.
There are core principles that make up the fiscally responsible individual. The remainder of this post will be dedicated to those principles. Follow these principles and you’ll be on the fast track to fiscal responsibility and financial prosperity.
Principle 1: Be a Value-Based Spender
I put this one first because it is the foundation of my personal finances. Engaging in the practice of value-based spending propelled my personal finances to new levels-and I believe it can do the same for anyone. That’s why I introduced the concept early in my book and listed it first in this post.
Value-based spending is pretty simple. It’s spending money on what you value or need, and not spending on the rest. If you love to travel, you’ll spend money on travel. For someone who loves working out, they’ll spend money on workout equipment or gym memberships.
The person who doesn’t care about cars will buy the vehicle that gets them from point A to point B. But the individual who loves fast cars will spend their money on a fast car and avoid spending on things he or she doesn’t care about.
I’ve found that value-based spending alone can eliminate a lot of the money worry and issues without the feelings of deprivation or falling into consumer debt. It’s the first principle to becoming fiscally responsible.
Principle 2: Pay Yourself First
Principle number two is to pay yourself first. Paying yourself first is a way to make investing automatic so you set it up and don’t have to think about it every month. Here’s how it works.
Determine the monthly amount you want to invest and then set it up so that money is automatically transferred from your paycheck or checking account first thing every month. There are several benefits to setting it up this way.
- It’s automatic because it’s already set up
- You don’t have to think about it
- After a few months, you won’t miss the money
- Allows compounding to occur because investments are being made on a monthly basis
There are several other benefits not listed, but these are the primary ones. Part of being fiscally responsible is making sure your hard-earned money is being invested. When you pay yourself first, it’s an easy way to guarantee that you are investing, because you are doing it before anything else.
Paying yourself first means before bills, living costs, entertainment, and anything else that comes up during the month. Pay yourself first and live on the rest.
Related: Personal Finance Clichés–And Why You Might Want to Follow Them
Principle 3: Avoid and Pay Off Consumer Debt
Avoiding and paying off consumer debt is all about creating a solid financial base, which is a big component of living a fiscally responsible life. When we have consumer debt, our financial foundation is shaky and unstable.
The bills are coming in and it takes away from our ability to invest and live daily life. For example, imagine a scenario in which an individual is making $5,000 per month. They have rent or mortgage, food costs, entertainment, utilities, etc. Plus they are investing because they are following the last principle and paying themselves first.
At $5,000 per month, this person is in reasonably good financial shape. However, if you add in consumer debt, the situation becomes not so comfortable. Whether it’s $500, $1,000, or more per month in consumer debt, it creates a huge financial burden. It’s the difference between having a financial surplus and adding more debt.
Not to mention that consumer debt is compounding in reverse. For those in consumer debt, interest is being paid directly to the bank or credit card company. So extra money is being paid and there’s no opportunity for your own money to compound.
Related:
The Psychology of Paying Off Bad Debt
Principle 4: Have an Emergency Fund
The one guarantee in life is that things are going to go wrong. No matter how responsible you are with your money and choices, there is no way around it. Knowing that things can and will go wrong is where the emergency fund comes in.
Since we know things will go wrong, why not have some money set aside for those very moments? Not only will it help you sleep better at night, but it can turn an emergency into an inconvenience instead of a crisis.
Here’s an example. Someone needs major engine work done on their car that’s going to cost $4,000. Someone with an emergency fund is going to be able to pay the bill and move on. Sure, spending that money hurts-but the funds are there.
Now take someone who has that same car issue, but does not have an emergency fund. They are faced with not-so-great choices. Get the car fixed paying credit they can’t pay back, delay the car getting fixed and find alternative transportation, or a variety of less desirable options.
This creates a whole plethora of issues like struggling to get to work, having to find rides, getting into consumer debt just to name a few. The situation becomes more of a crisis than an inconvenience, while the emergency fund avoids all those pitfalls.
Related:
How Much of an Emergency Fund Should You Really Have?
Why the Pandemic Prompted Me to Increase My Emergency Fund
Principle 5: Invest 15 Percent or More of Your Income
In my book Cash Uncomplicated, I recommended that people invest 10 percent or more of their income. At the time, I was on the fence of whether I should recommend 10 or 15 percent. I ultimately went with 10 percent because I felt like it was a good reasonable number for a beginning personal finance book. Not too big, not too small–it felt right at the time.
I have since revised that number to 15 percent or more because 15 percent or higher gets you to financial freedom that much faster. For example, someone making $100,000 per year would invest $15,000 per year instead of $10,000.
$15,000 invested every year at a 10 percent rate of return over the course of 25 years is $1,622,726. While $10,000 invested per year at a 10 percent rate of return is $1,081,818. To reach $1,622,726 it would take another four years.
Which might not seem like much, but it’s a big difference when it comes to retirement. It’s the difference between retiring at 55 instead of 59 or 62 instead of 66. Those are valuable years and shaving off years by saving 5 percent more makes a lot of sense to me.
Principle 6: Understand the Difference Between Saving and Investing
The sixth principle to being fiscally responsible is understand the difference between saving and investing. I really didn’t clearly understand this principle until I was in my early 30’s so don’t worry if you haven’t thought much about it. There is a difference between saving and investing.
Saving money is taking money from a paycheck, or whatever your source of income is, and putting it into the bank. Normally saving is for an emergency fund, something you want to purchase in the future (like a car), having an extra cushion, etc. There’s certainly value in saving, but it’s different than investing.
Investing on the other hand, is allocating money to something (an investment) with the potential to grow. There are endless ways to invest, some of the most common are:
- Stocks
- Bonds
- Real estate
- ETF’s
These types of investments are reasonably expected to grow, although past performance isn’t a guarantee of future performance. Investments provide future returns, protect against inflation, and eventually financial freedom. When people talk about compound interest, they are talking about money invested.
Principle 7: Budget
Budget. The word itself can provoke anxiety in some people. But it really shouldn’t. Although budgeting isn’t the most fun topic, it’s an important one and part of being fiscally responsible.
Creating a budget doesn’t have to be like pulling teeth. You don’t need spreadsheets, calculators, and endless cups of coffee into a stress-filled night. Budgeting can actually be simplified.
A budget starts with paying yourself first, one of the first principles in this post. After that it’s all about having enough left to pay bills, save up for some fun things, and have enough to live on. That’s it–a budget really doesn’t have to be complicated.
To simplify even more, a budget is living each month without expenses exceeding monthly income. When I say “expenses”, that includes:
- Paying yourself first
- Bills
- Rent or mortgage
- Living expenses
- And more–like saving in an emergency fund, contributing to a vacation fund, other miscellaneous expenses
Budgets are nothing to be intimidated or worried about. Everyone has a budget, even the richest individuals and corporations. There are different ways to go about budgeting, but the reality is that money has to be managed.
Principle 8: Track Your Spending
A shortcut to being fiscally responsible is to track your spending. It’s not a necessity to track, but the simple act of tracking gives the average person great insight into where their money is going.
We all engage in what I call mindless spending. In other words, it’s spending on autopilot where we spend the same amount this month because we spent it last month, and the month before. There’s no rhyme or reason, we just get busy and fall into spending habits we wouldn’t normally fall into if we were paying more attention.
Tracking your spending breaks that cycle and gives valuable insight into where your hard earned money is going. The simple act of writing down what you are spending on is a very powerful force that signals something in your brain. It’s your brain telling you something is off and to make corrections.
For example, even tracking your spending for a few weeks or months creates awareness into things such as:
- Spending too much on certain grocery items
- Holding old subscriptions you never use
- Purchasing items you don’t value or need
- Excessive car payments that are holding back your investing ability
Tracking creates awareness, which leads to taking action to correct the issues. Nothing fancy, it’s just a way to make yourself aware and then take action.
Principle 9: Watch for Blind Spots
Principle number 9 of being fiscally aware is a general category. It’s being aware of the blind spots. There’s an expression that you don’t know what you don’t know. Finding your blind spots is taking the time to look into things you may not know about or be aware of.
This requires a little research, but these are a few common one’s people have communicated to me:
- Having the right types of insurance
- Medical insurance and plans
- Disability
- Hidden fees to financial advisors
- Trust and/or will
- Private mortgage insurance
There are endless other blind spots to be aware, of these are just some of the common one’s people have brought up in conversation. For example, many people don’t realize they still are paying private mortgage insurance when they don’t have to. Or that they don’t have a trust or will when they have a family and children.
I myself have missed some things because I either didn’t know, or wasn’t paying attention. Take some time to think about what your blind spots might be or what you need to adjust to your plan. That little amount of time spent could result in big savings and peace of mind.
Principle 10: Be Generous
Last, but certainly not least in the quest to become fiscally responsible is generosity. Being generous doesn’t just have to be about money. It can also be about:
- Giving time
- Providing insight
- Leveraging your resources
- Connecting people
- And countless other ways
Why is being generous on a list about being fiscally responsible? Because personal finance isn’t lived in a vacuum. It’s about empowering ourselves and lifting up others. Being generous is a way to lift up others, and what most people find is that when they lift up others, they lift up themselves even more.
As we move toward the end of this post, I leave this section with five ideas to be generous:
- Connect a friend to a professional whose services you’ve utilized
- Spend extra time with your children
- Give someone a specific compliment
- Make a donation to a cause you believe in
- Write someone a hand written note
Conclusion: Fiscally Responsible
There are 10 core principles to being fiscally responsible. Those are:
- Be a value-based spender
- Pay yourself first
- Avoid and pay off consumer debt
- Have an emergency fund
- Invest 15 percent or more of your income
- Understand the difference between saving and investing
- Budget
- Track your spending
- Watch for blind spots
- Be generous
Being fiscally responsible doesn’t have to be time consuming or overwhelming. Nor does it require a million-dollar salary or multiple real estate holdings. With a little research and following these principles, it’s achievable for anyone.
What principles do you follow to be fiscally responsible?
