How to become a fiscally responsible adult in 7 steps
It’s never too late to take steps toward fiscal responsibility. However, it is important to take the first step. Getting started is more important than becoming a money management expert overnight. You’ll make mistakes on your path to becoming fiscally responsible, and that’s OK. I like to follow the 85% rule: Get 85% of the way there and move on with your life. Here’s how to start.
Assess your current financial situation
Fiscal responsibility means living within your means, whatever those might be. Start by creating an overview of your finances by tallying up the following:
- Your monthly income, including rental income, paychecks, etc.
- Your monthly expenses, including rent, utilities, food, education, health care, life insurance, health insurance, renters insurance, etc.
- Your assets, including stocks, bonds, and other investments
- Your debts, including student loans, mortgages, credit card debts, car payments, etc.
Rethink traditional personal finance advice
With your list of income and expenses in hand, it’s time to get organized — that means creating a budget. However, that doesn’t mean you’re about to forego all of your favorite life pleasures. The aim of your budget is to structure your spending in a way that fits your lifestyle. Budgeting shouldn’t mean punishing yourself.
To this end, consider the conscious spending model of money management. This strategy promotes positive spending habits and smart money management by creating space for guilt-free spending. It’s based on organizing your expenses into four buckets:
- Fixed costs, which covers necessities like rent and bills
- Investments, like putting money into retirement accounts (e.g., a Roth IRA or 401(k))
- Savings for an emergency fund or for long-term goals like a big vacation
- Guilt-free spending on those perks that make your life more enjoyable, from happy hour drinks to dinners out
When it comes to your guilt-free spending, it’s important to consider your Money Dials. What nonessentials truly add value to your day-to-day life? Maybe it’s your fancy gym membership or perhaps it’s pricey scented candles. Understanding your Money Dials can help you prioritize how to spend your money, allowing you to cut back on expenses you don’t need and leaving more for things you love.
Monitor your spending
To implement the conscious spending approach, you need to establish guidelines for how to allocate your monthly funds. For example, you might spend 50% on fixed expenses, 30% on wants, and 20% on savings and investments. How you divvy up your spending will depend in part on the amount of money you earn and your expenses.
Then, put a system in place to monitor your spending. You might try using the cash envelope system, for example. There are also many useful apps that can help you keep track of where your money is going. Some link directly to your bank account, credit card, and debit card, recording all of your transactions.
Create an emergency fund
When creating your conscious spending plan, make sure to include an emergency fund. This can be used to cover everything from medical care to car repairs. When you save money, you’ll be able to manage these unexpected expenses without having to borrow cash or use credit. This can help you avoid taking on high-interest debts, which can be enormous liabilities (and can potentially damage your credit score).
Pay off debt
Debt can be both a drain on your finances and an emotional drain, leaving you stressed about unpaid IOUs. Tackling debts, especially high-interest debts, is another important step toward fiscal responsibility and financial freedom. There are a few different ways to pay off debt, including the debt avalanche method and the debt snowball method.
Grow your income
You can further enhance your fiscal responsibility through economic growth. Establishing multiple streams of income is one way to enhance your earnings and boost your net worth. There are many side hustles that can serve as a responsible means of making extra cash, from delivery services to selling goods on Etsy.
Passive income streams are ideal because they don’t require a great deal of time and attention, allowing you to grow your money without constantly hustling. Examples of forms of passive income could include real estate property rentals, real estate investment trusts, certificates of deposit, and peer-to-peer lending.
As with most aspects of money management, when it comes to growing income, success starts with the right mindset. Being able to look beyond the limits of your current earnings and identify new opportunities is critical. Earnable can help you get a better sense of what’s possible for you.
Invest
Investing can be another means of generating income and saving for retirement. When you first start investing, stick to the basics, like putting money toward a 401(k) and a Roth IRA. You can later expand from these baseline investment vehicles. Asset allocation, including a mix of short-term and long-term investments, helps divide up your investments in a way that makes sense and is sustainable.
Creating a bright financial future starts now
As you start on the path toward becoming a fiscally responsible person, you’ll have a lot of learning to do. There are many resources to help, from our “I Will Teach You to Be Rich” book to spending tips, retirement guides, and more.
Continue to read up as your knowledge expands. The financial freedom and peace of mind that smart financial planning brings are great motivators. Your future self will love you for it.
Download the first chapter of I Will Teach You To Be Rich below and learn how to take control of your finances for good.
