The term “fiscally responsible” is usually associated with government and politics. Politicians and government officials use the word when discussing the national budget and how they are using taxpayer dollars. However, the term applies to more than just government, the act of being a fiscally responsible person is important in your personal finances too.
Being fiscally responsible, or financially responsible, involves taking ownership of your personal finances.
Below, you’ll learn more about what it means to be fiscally responsible, and get the 10 steps it takes to become a fiscally responsible person.
Defining Fiscally Responsible
“Fiscally responsible” may sound like a fancy term, but its definition is pretty simple.
Fiscally Responsible: Taking Ownership of Your Finances.
Breaking down the definition when it comes to personal finance:
- Fiscal is a general term that is used to refer to financial matters, or anything related to finance.
- Responsible has a few different definitions that are all similar, but my favorite is from disctionary.com: answerable or accountable.
Putting the above together, you could conclude that fiscal responsibility is defined as being accountable for your finances.
However, to me, if you are responsible or accountable for something, you are an owner of it. This is why I like the definition, “taking ownership of your finances.“
Let’s see how that compares to the government definition…
Fiscally Responsible in Government
As mentioned, this term is often used in reference to the government. The basic government definition is:
“For government institutions, fiscal responsibility describes the ability to balance between government spending and tax”
However, the definition can get much more complex than just balancing a federal budget and minimizing the national debt. Fiscal policy also involves combatting inflation and deflation, enabling economic growth, and managing the overall finances of the country.
It’s actually not that far off from “taking ownership of your finances”, except in this case, it involves owning the country’s finances instead of just one person’s or family’s finances.
Fiscally Responsible in Personal Finance
I’ll admit, the definition of fiscally responsible is a little vague.
Taking ownership of your personal finances can come in many different forms, but in general, the underlying assumption with the term “ownership” is that you do it in a smart way. In a responsible way.
After all, taking ownership of your finances in a poor fashion would be dubbed, “fiscally irresponsible!”
With that in mind, below are 10 steps you can take to become a fiscally responsible person.
10 Steps to Become a Fiscally Responsible Person
These 10 steps below are listed in order, for the most part.
For example, defining your goals (step 1) should come first no matter what. However, you could make the case to invest in retirement (step 6) accounts before paying down all your bad debt (step 7).
In general, you can follow these steps in order, but feel free to make tweaks to the process as it fits your financial situation. With that in mind, let’s get into the details below!
1. Decide to Get Started and Set Goals
First things first, you need to decide that you want to take ownership of your finances. If someone else is making you, or you only kind of want to, it won’t work.
It’s not a lot of work to take ownership, but it is work, and you have to be committed to the process.
Once you are, it’s time to lay out some basic financial goals that you want to achieve. Some ideas on goals to set out for yourself include:
- Retiring in 20 years (or in 10 years, or 30 years)
- Savings for a down payment in 5 years
- Paying down all bad debt in 2 years
- Saving for higher education
- Creating a plan to stay out of debt
- General wealth building
Setting one, two, or potentially three goals for yourself will keep you focused as you take control of your financial situation.
2. Understand Your Budget
You don’t have to build a budget from scratch and track your spending every day, you just need to understand your budget.
You need to have a general sense of three monthly numbers:
- Income (money coming in)
- Expenses (money going out)
- Savings (money leftover)
If you don’t know where to start, tracking your budget for a month or two will help you figure out how much you make, how much you are spending, and how much money is left at the end of the month.
It’s important to know because if you are spending more than you are making, you need to figure out how to either cut costs or raise income to create a balanced budget. Otherwise, at some point, you will run out of money and go into debt.
On the flip side, if you are saving money every month, you need to know how much you are saving so that you can ensure it is enough to achieve your goals from step one (also, congrats on the budget surplus!). You want to be sure you are moving your savings to the appropriate accounts based on your short and long term goals.
For example, if your only goal is to retire in 30 years, saving all of your money in a national savings account is not a smart move.
3. Calculate Your Net Worth
Similar to getting a sense of your budget, you should also have a sense of your current net worth.
Your net worth acts as your financial pulse and helps answer the question of if you are on track for retirement.
Net Worth = Assets – Liabilities
To calculate your net worth, you simply subtract any liabilities from your assets.
Liabilities include things like:
- Credit card debt
- Student loan debt
- Auto loans
Assets include things like:
If you have a negative net worth, don’t panic. It’s common, especially for new graduates and those who just bought a home. The key is to have a plan to grow your net worth to a number that allows you to comfortably retire.
If you need help calculating your net worth, you can head here.
4. Build an Emergency Fund
The first three steps to this point have mainly been around understanding your personal finances. This step is where the real action starts.
The first recommended action is to build an emergency fund.
An emergency fund is exactly what it sounds like – money set aside to pay for unexpected expenses. This could be anything from covering an unexpected medical expense to paying for car repairs.
Most experts recommend keeping 3-6 months of expenses saved in an emergency fund, which is a good rule of thumb. However, there are some factors to consider that can help you better determine how much keep in your emergency fund, like your risk tolerance. The more risk-averse you are, the bigger your emergency fund should be.
Your emergency fund should be store in a liquid account so that you can access it quickly as needed. I store my emergency fund in a high yield savings account for two reasons:
- It’s very safe (FDIC-insured)
- I still earn some interest on it
If you ever have an unexpected expense come up, your future self will thank you for creating an emergency fund.
5. Pay Down Any Bad Debt
After you have some savings set aside in an emergency fund, the next step to becoming fiscally responsible is paying down any bad debt.
In short, bad debt is any high-interest debt, this includes things like:
- Credit Card Debt
- Payday Loans
- Personal Loans for Discretionary Spending
Typically this debt has an interest rate of over 7%, and sometimes it can be 10%, 20%, or higher. You should eliminate this debt as soon as possible because the interest is costing you more money the longer you carry the debt.
Alternatively, good debt is any low interest debt, this includes things like:
- Student Loans
- Auto Loans
While some people choose to eliminate this debt quickly too, it’s not necessary. Since the interest rates are low compared to potential returns in the stock market, you can start to invest before fully eliminating all debt, as long as you have a long term plan to pay off the good debt as well.
It’s just the bad, high-interest debt that you should get rid of first.
6. Invest in Retirement Accounts
Once bad debt is eliminated, you can start to invest in retirement accounts.
This includes investing in accounts like:
- Roth IRAs
- Traditional IRAs
The one exception to keep in mind here is with 401(k)s. If your employer provides a matching option, it likely makes sense to invest in your 401(k) before paying down all of your bad debt or even building an emergency fund, just to get the employer match. That is free money, after all.
When investing for retirement, I like to invest in broad, low-cost, and diversified index funds and ETFs. You can check out our guide on how to invest in index funds here:
7. Continue Investing
After you have started to invest for retirement in the tax-advantaged accounts mentioned above, you can start considering other investment options as well.
First, you’ll want to ask yourself, should you max out your retirement accounts? In 2020, for most Americans, that would mean:
- 401(k): Contributing $19,500
- IRA: Contributing $6,000
Once you have that question answered, you can start to explore other options.
While I wouldn’t put more than 5% of your portfolio into speculative investments like cryptocurrency, art, or even individual stocks, below are some other diversified options you can consider:
- Individual Brokerage Account: You could invest in index funds and ETFs through a regular brokerage account. You will lose out on tax advantages, but have more flexibility when it comes to withdrawing and using your money.
- Real Estate: Whether buying physical real estate (like a rental property) or investing in REITs online, a lot of investors choose to have some form of real estate in their portfolio.
8. Get Properly Insured
Some may argue that getting properly insured should be #1 on the list. Part of being financially responsible is protecting yourself from potential disasters, just like an emergency fund would.
Here are some types of insurance that you should consider purchasing to protect yourself and your family:
- Medical Insurance
- Auto Insurance
- Homeowners or Rental Insurance
- Disability Insurance
- Life Insurance
With a lot of these, you have the option to purchase insurance through work, but not always.
For example, most people have to purchase auto and homeowners’ insurance on their own. One tool that helped me a lot with auto and renters insurance was Gabi.
Gabi compared my current provider’s rate vs the best offers on the market and gave me peace of mind that I was already getting very competitive rates. However, typically they can save you money, or help you find the best, low-cost insurance if you are looking for a new plan.
9. Use Credit Cards
Responsibly! Use credit cards responsibly.
I love credit cards – they reward you for spending money on purchases that you were already planning to make. The key with credit cards is to not go overboard, use them responsibly, and pay your card off on time and in full every single month.
If you do those things, you will earn awesome rewards and build your credit score are the same time.
Speaking of… before applying for a new credit card, you should probably check your credit score. Like your net worth, this is another key personal finance metric that you should know. You can check your score for free at Credit Karma or at freeannualcreditreport.com.
Once you know your score, you can check out the tool below that recommends a card for you based on your personal spending. It ensures that you maximize your rewards and cash back!
Find the Best Credit Card for You
10. Continue to Optimize
Last, but not least, becoming fiscally responsible does not end once you complete every step on the list. It’s an ongoing process.
For one, you need to consistently be checking in your budget, net worth, credit score, investments, and more. Not every day, but once every few months or at least once a year.
Second, the above 9 steps are just covering the basics!
If interested, you can continue to fine-tune more of the details of personal finance, including taking action on things like:
- Finding the best bank accounts for you
- Travel hacking with credit cards
- Optimize your investments and personal finances for taxes
- Taking on a side hustle to create multiple streams of income or to create passive income
- Learning how to spend money only on things that bring value
- And much more…
Your goals change, your situation changes, so being financially responsible means that you need to adapt and change as you move forward as well.
Summary: Becoming Fiscally Responsible
Becoming a fiscally responsible person is not something that will happen overnight, but you can take steps today to put yourself on the right track!
Just tackling one of the 10 steps above per day, or even one step per week, will put you on the path to become fiscally responsible in no time. The benefits of being financially responsible are nearly endless too, as you will:
- Have a clear path towards retirement
- Know exactly what you can afford, and what you cannot
- Maximize rewards from your credit cards
- And at the end of the day… you will make money work for you
Do what many governments can’t and get started today on the path to becoming fiscally responsible!