There is more to financial responsibility than you might think. Ultimately, it is about doing three things:
- Taking care of yourself
- Taking care of people dependent on you
- And keeping your promises
It means not only should you fend for yourself but also for your near-and-dear ones. Planning not only for the present but also the future, while ensuring you don’t make any financial commitments that you can’t keep.
Essentially, these five things can make you financially responsible:
1. Be on a Budget
Budgeting is the cornerstone of financial planning. It tells you where your money goes – item-wise and category-wise – and helps you stay on course. Are you overspending on eat-outs? Are you saving enough for a comfortable retirement? You will be able to answer these questions, only if you create a budget.
So pull up your bank and credit card statements for a year and enlist all expenses into various categories – housing, utilities, food, transportation, medical expense and insurance, savings, recreation and personal spending. Furthermore, account for any one-off expenses such as tuition fees or annual vacation expenses.
2. Live within your means
Budgeting exercise highlights if you are spending more than your salary. Many people resort to credit to bridge the difference which gets exposed when one constructs a budget.
At the outset, have a look at spends in each of the above mentioned categories and streamline your budget by cutting the ‘excesses’. While the necessities cannot be done away with, the discretionary spends should be tempered to balance the budget.
How do you figure out which expenses to knock-off the list?
You can know this by converting absolute expenses into percentages (of overall budget). Arriving at budget percentages for each expense lets you analyze each expense as a part of a pie. By comparing share of each expense vis-à-vis its recommended budget percentages, you will know whether you are crossing the limit.
One might be saving 20% of income yet unable to make noteworthy progress towards financial goals. So, if you are not earning enough, work towards building your career rather than simply cutting your expenses to the bone.
3. Save enough
Financial experts recommend saving between 20-30% of one’s take-home salary. Based on the life-stage, it could get invested towards meeting various financial goals - be it that of retirement or children’s higher education.
Furthermore, one needs to save a decent amount every year. One might be saving 20% of income yet unable to make noteworthy progress towards financial goals. So, if you are not earning enough, work towards building your career rather than simply cutting your expenses to the bone.
Also, work towards channelizing your savings towards various investments in an automated way.
4. Shun debt
When you buy things on credit, you pay more than the product’s MRP. For instance, a car with a price tag of Rs 5 lakh effectively becomes Rs 6 lakh for you, if you are taking a car loan for five years. Buying a smart TV or imported bike in ‘easy’ instalments makes little sense since its value keeps depreciating.
In contrast, buying a house on credit might be worth it if it is for staying purposes (saves on rent) and provided you are not overstretching your budget.
Use your credit card responsibly and always pay your full bills on time to keep up the credit score. If you are repaying multiple loans, seek financial help to come out of the debt trap.
5. Set goals
Are you thinking of owning that jazzy mobile phone? Set a financial goal that will make you more responsible with saving. Buy a phone only when you hit the target by saving for it every month.
Similarly, set various other short-term and long-term financial goals to provide for the future. For instance, a retirement goal in terms of target retirement kitty that will let you know how much to save each month. Or a vacation fund to provide for your dream destination. Not the least, have an emergency fund that takes care of contingencies in case of medical emergencies or a job loss.