Everything You Need To Be Fiscally Responsible

What Does It Mean To Be Fiscally Responsible?

‘Fiscally responsible’ refers to a large number of topics. These topics can be anything from government spending to the actions of the Federal Reserve Bank (aka “The Fed”).

However, our focus isn’t on politics or economics. We’re here to discuss being fiscally responsible when it comes to personal finance. This is the way you handle and manage your household income and spending.

The Personal Finance Definition Of Fiscally Responsible

Fiscal responsibility in a personal finance sense means behaving in a way that makes the best use of your money. Fiscal loosely means relating to money and responsible is self-explanatory. This definition may seem somewhat flexible and vague. To be honest, it is. But, that flexibility can be a good thing.

For example, if you’re swimming in credit card debt, it makes the most sense mathematically to pay off that debt first. After you’ve done that, you’ll probably want to worry about investing and saving money in high-yield savings accounts.

The rationale behind this is basically that credit card debt grows faster than your investments probably will. We’ll talk more in-depth about this in a moment.

Most credit cards have interest rates from 15% to 25% per year! This means that the balance can grow dramatically, even if you don’t spend another dollar! This debt will continue to grow until it is paid off.

So, you should focus on keeping your high-interest debt like credit cards and payday loans paid off. Otherwise, you’ll have a tough time ever getting enough money to save, invest, buy a home, and achieve financial freedom.

What If I’m Not In Debt? Am I Fiscally Responsible Yet?

Let’s now pretend you’re someone who has a good handle on your credit card debt. What might being fiscally responsible look like for you?

First, you’ll probably want to check and make sure you have a solid emergency fund built up. Even if you’re not currently in debt, not having an emergency fund is a fast way to ensure that won’t last long.

If you don’t currently have an emergency fund, don’t feel too bad. You’re far from alone. According to a 2019 report from The Fed, around 40% of Americans lack enough funds to cover a $400 emergency without going into debt.

As you can see, the meaning of fiscal responsibility can have different consequences depending on where you’re at financially.

Why Is Being Fiscally Responsible Important?

Fiscal responsibility is important because it lets you strike a balance between being overly stingy and spending without thought.

What Fiscal Responsibility Helps You Avoid

When a lot of people think of being frugal, they picture penny pinchers who haggle over even the smallest expense. This is not only an incorrect view of fiscal responsibility, it’s downright unhealthy. 

You work hard for your money. You shouldn’t have to hoard it all away. Trying to force yourself to live on only the bare necessities when you have enough money to spend a little more is probably not the best decision.

Taking such a rigid approach usually makes people miserable, and it also makes their fiscal responsibility short-lived. By instead searching to find a balance, you’re actually doing yourself a favor!

Now, let’s talk about the other side of the same coin. Just like it’s possible to be unnecessarily cheap and make yourself miserable in the short term, it’s equally possible to spend like there’s no tomorrow.

This way of managing money is just as bad because it leads to misery in the long-term. Most people don’t want to be in their mid-80s and still have to work a 9-5 job every day because their past self didn’t know how to manage money.

Many people spend much of their lives fluctuating between these two extremes. They spend without thinking, usually on a bunch of things that don’t even make them that much happier.

Then, they think, “Oh crap, what have I done?” and over-correct. Some people get scared by a large credit card bill at the end of the month. Others feel guilty when they see a low balance in their savings account.

Whatever the reason may be, it causes a lot of people to subject themselves to an unrealistically strict lifestyle. And sooner or later, it becomes too much, and they break down to go back to their old ways.

The Importance Of Fiscal Responsibility

Being fiscally responsible helps you break this cycle of tiresome back and forth. By being smart with your money and making conscious decisions about what you do and don’t spend money on, you can satisfy your present self without screwing over your future one.

Fiscally responsible people also often have less stress in their daily lives. There’s a good reason for this⁠. Fiscal responsibility can give you the confidence to get through the small disasters life throws at you.

If your car gets a flat tire, a bit of discipline and prior planning can be the difference between a day’s inconvenience and the start of a long downfall.

On the one hand, having the savings ready to buy a new tire means you’ll be up and running again in a few days. A month from now, you’ll probably barely be able to recall that moment.

On the other hand, if you were never able to act fiscally responsible and don’t have any cash or savings, you’ll probably have to use credit cards or payday loans to fix your car. Then, because you didn’t plan for this unexpected cost, you’ll have a higher credit card bill at the end of the month.

If you can’t quickly pay this off, the high interest rate on your credit card will soon make this debt snowball out of control. Or worse, you might not be able to repair your car or get to work.

A month from now, you could find yourself without a job or in fast-growing debt, cursing that one flat tire for being the thing that set you back years in your financial plans.

While that situation may seem extreme, it illustrates the point. Fiscal responsibility means you never have to feel like you’re putting yourself in debt when you spend money. At the same time, being fiscally responsible is flexible enough to still let you get the things you really want.

How Can You Be Fiscally Responsible?

Now that we’ve talked about how fiscal responsibility can help you, how can you actually go out and do it?

Even though there are many tools like Mint and Personal Capital to help manage your finances and make fiscal responsibility easier, being fiscally responsible isn’t just an app you can download. It’s a lifestyle and a mindset.

Read: Personal Capital vs. Mint

Like we said earlier, fiscal responsibility can look different for different people. With that in mind, here’s a breakdown of how you can be fiscally responsible based on your current financial situation.

If you want a more in-depth breakdown of everything below, we recommend checking out our beginner’s guide to personal finance and how to manage money.

Getting Your Financial Situation Under Control

Make A Budget

First things first, you need to learn how to make a budget if you don’t already have one. This is so important because it lays the groundwork for everything else you’ll be doing later. 

Without a budget, you can’t keep track of how much money you’re earning or spending, where it’s going, or how much or little progress you’re making towards your goals. 

It’d be like building a bed blindfolded. You have no clue what kind of mess you’re currently making, and you’ll have to lie in it eventually.

After you’ve made a budget, your best bet is to max your 401k match, if you have one. Since most employers match either 50% or 100% of whatever you deposit, you’re earning free money here! You’ll have a tough time finding another way to get 50% – 100% returns on your earnings.

Paying Off High-Interest Debt

Once you’ve hit the limit for your employer match, it’s time to pay off any high-interest debt. This is usually stuff like credit cards and payday loans. 

The reason to do this is that if you don’t, your debt will grow exponentially and will soon be nearly impossible to manage. You’ll save yourself such a headache later if you can get ahead of the problem now.

Building An Emergency Fund

Now that you’ve gotten out from under your fastest-growing debt, you’ll probably want an emergency fund. We’ve already talked about the benefits of having one, but you may be wondering, “how do I know how much to save in an emergency fund?”

As a general rule of thumb, aim for at least three months of expenses. That way, someone briefly losing their job won’t spell financial disaster if they can’t get unemployment benefits.

The Exciting Parts Of Being Fiscally Responsible

At this point, you’re more fiscally responsible than almost half of all Americans. Congratulations! Now, it’s time for the fun part.

Getting Started With Investing – Making A Passive Income

This is where you get to grow your wealth and make your money work for you. The secret lies in investing.

But, you’ll want to dispel any notions you may have of Wall Street traders making multi-million dollar trades, where a few seconds could mean the difference between a win and a loss.

The kind of investing we’re talking about is long-term investing. Do you know the old saying, “slow and steady wins the race”? Well, it turns out it applies to investing, too.

We have a more in-depth guide on how to start investing, but if you’re just looking for a few quick tips, here they are. 

You’ll want to open a Roth IRA, which is a tax-advantaged account. This will help you save money since your investment gains won’t be taxed.

You can use an app like Betterment, M1 Finance, Webull, etc. to get started.

A good number to shoot for here is around 10 to 20% of your annual income. The more the better. If you’re able to put away that much into a Roth IRA, you’ll be in fantastic shape twenty years from now. IRAs have contribution limits so just do your homework first. If you max it out, you can then invest in other investment accounts.

There are so many different ways to invest that it’s often best for you to choose the method that fits you best.

If you’re looking for a source of passive income, you may want to invest in assets that pay dividends. If you instead prefer investments that grow in value over time and take advantage of compound interest, high growth investments are probably your best bet.

Whatever strategy you decide to employ, however, you might want to check out investing apps like Acorns, Webull, Robinhood, and Fundrise to help you get started.

The Parts Of Being Fiscally Responsible That Nobody Talks About

Unfortunately, not every aspect of being fiscally responsible is as exciting as growing your money. Sometimes, you have to take care of the parts that aren’t fun and aren’t pleasant to think about.

We’re talking about insurance and estate plans. Yes, this can be boring (though services like Policygenius ease this process), but it’s just as important as investing or paying off debt.

Getting The Right Insurance

Without insurance, all of your hard work becoming fiscally responsible can be dashed away with one catastrophic accident. And without an estate plan, you may be missing out on one last chance to help a loved one.

It’s important to know and understand what types of insurance you need. It’s a good idea for most Americans to get life insurance, and sometimes you can bundle this with your auto insurance.

If you rent a home, you need to know what renters insurance is and what it does and doesn’t cover. If you own your home, the same goes for homeowner’s insurance.

While that’s by no means a complete list, it covers the basics of what most people need. Now, let’s discuss estate plans.

Creating An Estate Plan

Simply put, these aren’t fun to think about. Nobody enjoys thinking about what may happen after they’re gone. But, having an estate plan can help you rest easy knowing you’re providing for your family and loved ones.

An estate plan usually includes a will along with any trusts or transfers of guardianship. Combined, these three types of legal documents dictate a plan for what happens to everything you own in the event of your death.

Trust and Will is one company that makes the process of getting a trust, will, or guardianship transfer fast, simple, and cheap. If you’d rather go to an in-person attorney, that works too. But it’s important to think about these things before they happen.

You can read our full review of Trust & Will to learn more!

By creating an estate plan, you’re taking care of a necessary aspect of fiscal responsibility. You’re putting yourself in charge of deciding what happens to your assets, and you’re making the process of executing your last wishes easier on your loved ones.

You’re Fiscally Responsible – Now What?

With insurance covered and an estate plan in place, you’re done. You did it! You’ve become fiscally responsible. There may not be any sudden fireworks, but you should feel proud. You just accomplished something very few people ever fully do.

Now, all that’s left is to continue following the plan you laid out and enjoy your financial freedom!