The Basics of Financial Responsibility

Having financial responsibility is important. It reduces stress and gives you more freedom and control over your life. But what does being financially responsible actually mean? More importantly, how does one be it?  

Keep on reading to find out the answers to these questions and more.

What is Financial Responsibility?

Financial responsibility means paying your bills on time, not taking out more debt than you can afford, and being able to take care of yourself and those who depend on you. It also means being prepared for the unexpected so that a financial liability will not ruin you.

As simple as that sounds, being financially responsible can sometimes be hard. Bad money habits are easy to fall into and sometimes difficult to get out of. Perhaps that explains why the average Canadian is shouldering a debt of $23,800, excluding mortgages.  

But here is some good news. The tips discussed in this post will help you identify bad money habits and cultivate beneficial ones, as well as give you a roadmap on how you can secure your family’s financial future today.

Budgeting

Being financially responsible means managing your money in a way that promotes financial stability. It does not mean no weekend trips, big purchases, or eating out, but rather saving enough so that you can enjoy these things without maxing out your credit card.  

Creating a budget is the first step to financial wellness. It helps you gain a sense of control over your money, allowing you to track your spending and prioritize it.Here is how to set one up.

1.    Note your net earnings

Gross income refers to how much you make before deductions and taxes, while net income refers to the money you have earned after these have been accounted for.For budgeting purposes, you must focus on the latter.

2.    Track your spending

The nextstep is to track your spending and categorize it. This will help you figure out:

• things on which you spend the most money from your bank account

• the expenses that are the easiest to cut

Start by listing all the fixed expenses you have. These include regular monthly bills such as mortgage or rent, utilities payment, etc. You are not likely to find much room here to cut back, though knowing how much the monthly fixed expense is can be helpful.

Next, write all the variable expenses, like groceries, entertainment, etc. Cutting back on these is often easy, so identify areas where you can reduce spending.

3.    Set financial goals

Without clear-cut financial goals and financial terms, you are likely to keep feeling like all that you are doing is spinning the wheel. Personal finance goals can help you decide whether you are moving in the right direction and measure your progress.

Set both short-term and long-term goals. The former should typically take a maximum of a year to achieve, while the latter — like saving for your child’s college education or emergency savings account — may take many years. Once you have identified your priorities, planning a budget and sticking to it becomes easier.

4.    Make a plan

By now you know your monthly net income, monthly expenditure, where you spend, and how much you need to save per month. The only thing remaining is creating your budget so that your spending matches your priorities — and sticking to it.

It helps to break down your monthly expenses even further — those that you need and those you want. When the time comes to make adjustments, you may find reducing spending on things that you want (like a monthly iTunes subscription) is easier than on things you need (like gasoline).

How to stick to your budget

No amount of budgeting will help you if you cannot stick to it, but maintaining financial discipline is easier said than done. Here are some tips to help you reach your personal finance goals without too much hassle.

Sleep on big purchases

Take a week to think on a big purchase. Will the purchase throw your budget off track? Weigh the pros and cons to ensure the purchase will bring value into your life without creating financial stress. If you are unsure after seven days, that probably means it is something you do not really need.

Do not spend more than you can afford

Carrying a balance on a credit card month after month is the easiest way to accumulate debt (opposite of good debt management). If you do not want that to happen, never spend more than you can afford.

Want to take a vacation? Save for it first. Eating instant Ramen noodles every day of the week for two months after a vacation, much-needed or not, is not exactly what you would call “living your dream life”.

Make budgeting fun

Budgeting is not only about discipline. At the end of day, it is a tool to help you live the life you want to live. Make saving money a fun thing by rewarding yourself every month you stick to your budget.  

Using Credit Cards Responsibly

Credit cards are a true double-edged sword. When used carefully, it can get you out of a bind and prove to be a great financial tool. But if used carelessly, you can soon find yourself under a mountain of debt.

However, most of us use credit cards almost on a daily basis, so it is important to knowhow to make them work for you — not against you. Here are six tips you cannot ignore if you want to avoid credit card debt.

Make payments on time

You should pay your credit card balance in full each month. This helps build credit and ensures you will never be charged interest. Late or missed credit card payments, on the other hand, mean you will have to pay late fees and interest rate. Plus, they look bad on your credit report (credit scores) and will affect your ability to get a loan in the future.  Setup electronic reminders or automatic payments to ensure you do not miss a credit card payment and improve your credit report score.

Pay more than the minimum

It is possible that you may spend more than you can afford to once in a while. Learn from your mistakes and try to show better restraint in the future, but meanwhile do your best to pay more than the minimum required payment.

Pay the minimum. It helps you avoid penalties and fees and keeps your credit card account in good standing. However, try to do better. The more balance you carry from one month to the next, the more interest is added. While it may seem not much at first, the interest can quickly add up.

Additionally, it is a good idea not to use the card until you have paid off the current balance in full. Otherwise, you might find yourself trapped in a mountain of debt that can end up costing you hundreds of dollars in interest alone.

Keep the limit low

Is your card’s current limit too high for you? If so, call the provider and have it reduced. You do not require high credit limits to build a positive credit history, nor do you need numerous cards. What matters is whether you pay your bills on time and maintain a healthy credit utilization rate.

The credit utilization rate (also known as the credit utilization ratio) is the percentage of the total available credit that you are presently using. For a healthy credit score, your credit card utilization ratio must be low. The general rule of thumb is not to let it go over 30%.

Earn cash back

Many people use credit cards to earn travel rewards or cash backs. When used correctly, they can help you reduce your monthly expenditure by making purchases cheaper. To reap the maximum benefit, use one or more rewards or cash back credit cards for almost all monthly purchases. If you spend $3,000 a month on average on a 2%cash back credit card, you save $60 every month — or $720 a year.  

Financial Planning

As your life changes, your financial needs evolve too. Your financial requirements when you have two kids will be completely different than those you had as a student.

But it does not hurt to plan. Otherwise, you may find achieving your life goals harder.Before making a big purchase, do not just consider whether you can afford it.Also, think how it will impact your future.

Is it really necessary to buy the $1,200 phone you have got your heart set on or can you continue using your old phone for a year longer? Would not it be better if you put that money into a balanced investment portfolio or a savings account to build your down payment fund?

Here are a few pointers to help you plan ahead:

• Finishing college?You may want to start saving for a house down payment with your first pay check. With skyrocketing real estate prices, your dream house may remain just that if you do not start saving early.

• In a serious relationship? You may want to start thinking about the cost of raising a child. Estimate suggests that raising a kid is likely to cost anywhere between$10,000 and $15,000 a year until the age of 18. So, it will not hurt to start saving early for your child’s future.  

• Starting your first job? Start putting a little bit of money every month into your retirement fund to leverage the power of compound interest.

Investments

Saving and investing go hand in hand. Without one, the other is not possible. Unless you grow your savings, you cannot afford to start investing. And without investing, inflation will eat your savings.

If you plan to invest in stocks, you may want to employ the services of a financial advisor. They will help identify investment vehicles that are right for you, depending on your personal finance goals and risk tolerance.

Another sound investment can be purchasing a house. Because of the investment size, you should consider a few factors first. These include how many years you plan to stay in the new home, if it will appreciate in value, and if your mortgage payments will be more than 25% of your net income.

Lastly, start saving for retirement as early as possible. When you do so, compound growth can give your savings a huge boost and you can better weather unexpected market events. There are several options that help you save for retirement, like:

• Tax-free Savings Account (TFSA)

• Registered Retirement Savings Plan(RRSP)

• The Canada Pension Plan (CPP)

• Old Age Security (OAS)

• Employer-sponsored Pension Plans

• Guaranteed Income Supplement (GIS)

Debts

“Live within your means” is good financial advice. It means spending less on your lifestyle than what you generate in earnings. Not all debts are the same, however. When used wisely, certain debts can be a powerful financial tool.

Take the mortgage, for example. It helps you build what is likely to be your biggest asset. A student loan is another example of a good debt, defined as a loan that has future value or increases your net worth.

However, consumer debts should be avoided. Take credit cards. While they are immensely useful — a good reward program makes your purchases cheaper and consistently paying your credit card bills on time helps improve your credit score — credit debt can ruin your financial health.

Spotting abad debt is easy. It loses value the instant you take ownership. To avoid credit card debt, use the card only when you can pay off the balance in full each month.

A payday loan is another example of a bad debt. In fact, it is many times worse than credit debt because of the high fee. You pay anywhere between $15 and $30 for every $100 you borrow.  

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Conclusion

Your finances affect almost every aspect of your life. People who are financially disciplined often have more control over their lives. Budgeting is the first step to becoming financially responsible, but it is only half the battle. Cultivate good habits — like using your credit card wisely and saying no to consumer debts — to ensure you stick to your budget. Lastly, make sure you are saving enough money for the future.