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What does it mean to be “fiscally responsible?”
It’s about knowing your money intimately, creating a financial plan, setting financial goals, and making informed decisions about where your money goes. It’s about understanding that every dollar has a job to do, whether it’s covering your living expenses or building up your savings and investment portfolio.
If you want to start making good money decisions that positively impact your life, this is for you.
Let’s dive right in.
12 Steps to Being Fiscally Responsible
Becoming fiscally responsible begins with understanding your financial situation, improving your financial literacy, setting realistic goals, and taking actionable steps toward those goals.
1. Setting Financial Goals
Financial goals give you a sense of direction.
It guides your financial decisions, helps you prioritize your spending, and motivates you to save and invest.
So, how do you set practical financial goals?
Start by visualizing your financial future. Do you see a house? A comfortable retirement?
Now, break down these dreams into achievable goals using the SMART goal-setting method. This process turns your dreams into concrete goals with clear steps to achieve them.
2. Calculating Your Net Worth
Calculating your net worth gives you a clear picture of your financial health, a reality check of where you stand today.
Here’s how:
- Start by listing all your assets
- Then, list all your liabilities
- The difference is your net worth
3. Building a Budget
A budget is a tool to help you live within your means, save and invest for the future, and monitor and stay on track with your financial goals.
To create a budget, start by tracking all your income and expenses.
Next, categorize your after-tax income into 50% ‘needs,’ 30% ‘wants,’ and 20% ‘savings.’ Then, organize your expenses into each category. This gives you a clear picture of where your money is going and where you can make adjustments to improve your finances.
But remember, as your circumstances change, so should your budget.
4. Tracking Your Spending
Knowing where your money is going is a crucial step to managing your money efficiently.
Here’s how:
- Keep your receipts, note your expenses, and review your bank statements.
- You could also use budgeting apps such as Mint and Honeydue (for couples).
5. Understanding & Tracking Your Credit Score
Your credit score tells lenders, employers, landlords, and others how reliable you are.
You can get a free annual report from the credit report agencies: Equifax, Experian, and TransUnion. Alternatively, you can visit AnnualCreditReport.com to request for your report.
To improve your score:
- Pay your bills on time
- Keep your credit utilization rate below 30%
- Avoid incurring unnecessary debt
Building a good credit score requires consistent and responsible financial behavior over time.
6. Managing Your Debt
Being fiscally responsible doesn’t necessarily mean being debt-free.
It means managing your debt effectively. Timely debt repayment not only saves you from hefty interest payments and late fees but also frees up resources for your other financial goals.
There are two ways to manage and pay off your debts:
- The Avalanche Method: Pay off high-interest debts first while maintaining minimum payments for the rest. These debts cost you the most; eliminating them early can lead to significant savings.
- The Snowball Method: Pay off the smallest debts first while making minimum payments on the rest. This approach creates a sense of accomplishment with each debt cleared, giving you quick wins and the momentum to tackle larger debts.
Whether you prefer the avalanche or the snowball method, the key is consistent, timely payments to gradually pay off your debt, while being mindful not to accumulate unnecessary future debt.
7. Creating an Emergency Fund & a Sinking Fund
An emergency fund covers unexpected expenses such as medical bills or job loss.
A sinking fund covers anticipated expenses like car repairs, yearly taxes, family vacations, anniversaries, etc.
So, how do you build these funds?
For an emergency fund, aim for three to six months (depending on your circumstances) of living expenses. For your sinking fund, estimate the anticipated cost and when you’ll need it, then save accordingly.
Automate the process if you can.
8. Investing & Diversifying Investments
Investing is how you make your money work for you.
The main idea of diversification involves spreading investments across asset classes to reduce overall risk. This allows the stronger-performing assets to offset the poorer-performing assets and fosters long-term financial growth and resilience.
Do note that diversification does not guarantee against investment losses.
So, how do you start investing?
Start by understanding your financial goals and risk tolerance. Then, explore different investment options – stocks, bonds, mutual funds, real estate, etc. You can start small with low-cost index funds or robo-advisors.
However, if you’re a beginner with minimal financial knowledge, you should focus on studying and learning before dipping your toes into investments. Alternatively, you could work with a financial advisor.
9. Creating Multiple Streams of Income
Multiple income sources are crucial for a financially secure future.
Even if one stream dries up or is cut off, you will still have other sources of income to sustain your lifestyle and family.
So, how can you create these streams?
Start with your expertise. Can you turn your knowledge into a side business? Can you freelance or consult?
Next, invest your money. Do you possess the financial knowledge to invest? If not, work with a financial advisor.
The best income streams are those that align with your interests and strengths. To be fiscally responsible, we must diversify our risks by building multiple income streams.
10. Managing Your Risks
Insurance is like an umbrella.
You may not need it now or ever, but it will keep you dry when it does rain.
Insurance provides financial protection against significant losses, safeguards assets, and ensures that savings are not drained for unexpected medical emergencies.
Here is a list of possible insurance policies you should consider:
- Life insurance
- Health insurance
- Homeowners’ or Renters’ insurance
- Disability insurance
- Long-term care
- Umbrella insurance
You’ll want to consider the risks you’re exposed to and the assets you must protect. Also, shop around for the best rates and consider working with an insurance advisor for guidance on how best to protect yourself and your family.
Here are some critical factors to consider:
- Coverage specifics: Specify the events you want your policy to protect you from.
- Affordability: Weigh the costs of premiums, co-payments, coinsurance, deductibles, and out-of-pocket expenses. Cheaper isn’t always better if it doesn’t meet your needs.
- Coverage duration: Policies can range from a short holiday trip to lifelong coverage.
11. Continuing Financial Education
Knowledge is the cornerstone of being fiscally responsible.
By continuously educating yourself and improving your financial literacy, you increase your ability to make informed financial decisions, avoid financial pitfalls, and recognize and seize opportunities. The value of ongoing financial education cannot be overstated. Like a tree that never stops growing, our financial knowledge should be continually nurtured and expanded.
These websites offer a wide range of content, from basic budgeting to complex financial topics.
- Financial Literacy Resource Directory
- MyMoney.Gov
- Budgets Are Sexy
- The Penny Hoarder
- The Motley Fool
- Dave Ramsey Education
12. Planning Your Retirement
Getting a head start on retirement planning and being meticulous in your approach is crucial.
And the sooner you start, the more bountiful the harvest will be.
What is the essence of being fiscally responsible? It’s about making sound decisions today to create a secure future. And retirement planning is a prime example of that.
So, how do you start planning for retirement? Here’s how:
- Early Bird Gets the Worm: Starting early means more time for compound interest to work on your savings and investments.
- Forecast Your Future: How much will you need in your golden years? Visualize your future lifestyle, calculate your retirement years, and that’s your goal.
- Juggling Financial Priorities: Assess, prioritize, and find your balance.
- Invest Wisely: While youth may allow for a bold approach, move towards more conservative options as the years advance.
Master Your Money, Don’t Let It Master You
Which is your first step?
Is it the budget you’ve been wanting to create? The spending you need to track? Or the retirement planning you’ve been putting off?
It’s time to step up and start building the future you dream of.
Let’s get going today!
You will not regret this!
