Financial responsibility. This term is all over the internet and in people’s mouths, but what does it even mean? The topic is complex. and so is the answer. However, breaking it down to its fundamentals reveals just how easy it is to become responsible with money.
Everyone wants to live a comfortable life, but that is impossible if you can’t be financially responsible. As soon as you start earning, it’s important to develop sound financial management habits. If you’re in debt, there’s still hope, though.
Go through the eight tips in this article to help you become responsible with money.
1. Live Within Your Means
If you don’t take away anything else from this post, take this. It’s the foundation of becoming responsible with money, but what does it mean?
Living within your means is all about living below what you make. You’ve probably heard or read about this tip, but implementing it seems like an impossible task considering the tough financial times. You may be forced to borrow to bridge the financial deficit in your budget, but this is where you should pump the brakes, instead.
Most of the time, borrowing is sparked by the need to acquire something that’s out of your financial reach. As a result, you get into debt. For example, if you earn, £3,000 a month, make sure you live without spending more than this. It’ll be even better if you have some leftovers after the end of the month.
2. Master How to Budget
Ask any financial expert, and budgeting will be the first word they’ll utter when talking about financial responsibility. There’s no shortcut to financial freedom if you don’t know how to create a simple budget.
What’s more, doing so is simple. All you have to do is list all your expenses on one side of a paper. On the other, list down all your income sources. Calculate the total for both categories to come up with a true financial picture.
Don’t worry if you don’t have a record of your income if you are US based, you can use this paystub generator with deductions to help you keep track of salary information, taxes paid, overtime pay and more and you can get copies of your bank statements online.
From there, everything is quite easy. If the expenses outweigh the total income, it’s a clear indication you have poor spending habits. To balance out the two, start by finding unnecessary expenses in the list and eliminate them. This will leave you with some money to save or fund other income-generating activities.
Creating a budget is always an easy step. The hardest and most critical part is sticking to it. If you don’t do this, then this entire process will be fruitless.
3. Set up an Emergency Fund
The future is unpredictable, and there’s little you can do to combat the effects of what the future will throw at you financially. Preparing for it, though, is one way of facing future emergencies, but this is possible only by setting up an emergency fund.
Without one, you’re typically walking on a financial minefield. Your next step could throw your finances into chaos. According to financial experts, it’s recommended to save up to 6 months’ worth of living expenses.
You can lose your job; your car could break down; you can fall sick. These are just some of the emergencies that can throw your finances in a tailspin. With an emergency fund in place, you can feel better about potential problems arising.
4. Get Your Spending Habits Under Control
Poor spending habits can take down your financial life bit by bit, and before you know it, you’ll be stuck in debt.
Similar to other habits, you can change your spending routine and acquire good ones. The first step is to identify the trigger and the routine of the habit. Is it a discount at a local mall? Is it earning points or miles? In other words, identify what it is you crave, what is the reward?
Once you’ve identified all these, you can start replacing the habit with a different one you consider a positive. However, keep in mind, this change will not happen overnight. It requires a lot of determination and, above all, high levels of discipline to change poor habits.
5. Clear All Outstanding Debt
Debts take away a huge chunk of your income and are often the reason why many people end up deeper in debt. By eliminating all outstanding debt, you’ll have more money in your pocket to fund other activities.
On the other hand, if you don’t have any burdening debt, stay that way.
6. Make On-time Bill Payments
Your credit score depends on how you pay off your bills (medical, credit cards, rent, utilities, etc.). Are you a serial late payer or do you pay them on time?
Delaying or skipping even a single payment will be detrimental to your score. However, this will only happen if you cross the 30-day grace period many lenders issue to borrowers. Paying before thirty days is a must, but after 30 days have elapsed, the lender will report your behavior to the reporting agencies.
Keep in mind, your credit score is an important tool in your financial toolkit. This is what lenders look at when you apply for a loan. From this three-digit figure, the lender will be able to determine what type of terms they’ll impose on the loan until they are lenders that specialize in loans with bad credit. However, these are usually short term and with a small amount. In addition, it shows them just how responsible you are with money.
7. Check Your Credit Report
Your credit report contains details of your credit. It’ll let you know where you stand financially. From there, you can plot your next step, including taking out a loan, mortgage, etc. However, many people don’t know that they are entitled to a free report from the three leading reporting agencies (TransUnion, Equifax, and Experian) at least once a year.
Request a report from these three leading agencies and review each report. You’ll do this to make sure there are no anomalies in the report. With 25% of consumers affected by wrong entries, you can see why this exercise is important.
Remember, a negative entry can bring down your score in a single day and with the effort you put over the years to improve it, this can be frustrating if not disappointing.
8. Learn About Taxes
Different types of taxes exist in various situations. There are three types of taxes—local, state, and federal taxes. If you want to be responsible with your money, start by finding out just how much each category takes from your paycheck each month.
That’s not all because you also need to know about withheld taxes. But you will need to understand the following: Will you need to set aside some money to pay taxes later on? Do you know about deductions? When do you need to pay them? Will you get a refund? Do you know how to file your taxes?
There you have them: Eight excellent tips to help you become financially responsible. Now that you have these tips at your fingertips, it’s time to put them into action. Reading them will not help you achieve financial freedom.
Keep in mind, implementing these tips requires a lot of discipline, and the results will not come overnight. Patience is key.