There’s more to financial responsibility than having a budget. It’s a great place to start, but living within your means is a crucial money-management skill.

financial responsibililty basics.jpegHere are some important aspects of financial responsibility:

Saving

An important part of making your budget work involves planning for unexpected expenses, seasonal expenses, and emergencies. Consider having a percentage of each paycheck automatically deposited into a separate savings account by filling out an automatic deposit form with your employer. If the payroll department where you work doesn’t offer that service, you can transfer the money every payday.

If you aren’t consistently depositing money into a savings account, you may not be able to act in your own self-interest when you have to handle an emergency car repair, deal with a health issue, or replace a broken appliance. These are things that happen to everyone.

Preparing for Retirement

Some people don’t understand Savings and Retirement (Savings) are two separate things. While money from your Savings may be used when a need arises, it is wise to never pull money from a Retirement account, 1) because it’s for retirement and 2) there are usually early withdrawal fees and taxes which must be paid on them.

Even if it is only a small amount, try to contribute some money to your retirement on a regular basis. Many retirement plans, such as a 401k, let you make contributions before taxes are taken out, so this lowers your overall taxable income. Also, over a long period of time, compounding interest will help your retirement grow.

Using Credit Cards Responsibly

Having a credit card is a good way to build a positive payment history in your credit file. Many people misunderstand the pros and cons of having this financial tool in their wallet, though.

If you aren’t paying off the full balance each month, you are paying interest charges. This means that you are actually paying more for everything you bought with the credit card than you would have if you had paid with cash or a debit card.

If you are facing an unexpected expense and there’s no extra room in your budget, consider taking out a small personal loan as an alternative to using a credit card. Personal installment loans offer equal payments for a set term. This allows you to look for a loan which fits into your budget.

Living Within Your Means

This basic financial rule gets ignored by many people. For example, getting approved for a higher auto loan than you thought you would qualify for. Maybe you started out thinking I can handle a $300 monthly payment, without considering the length of the loan. Instead of having payments of $300 for 4 years, you end up paying $300 for 6 years. Even without interest, that’s an additional $7200 over the life of the loan.

Mortgages can be similar to a vehicle loan but on a greater scale. A suggested rule is that your mortgage payment is less than 30% of your total take-home pay. It may help to work backward to get to this number. For example, if your monthly take-home income is $2,300, you should try to keep your mortgage payments under $660 per month. If your bank offers you an interest rate of 3.92%, you can spend about $140,000 and still have a monthly mortgage payment of less than 30% of your take-home pay.

It’s also important to make a 20% down payment so you don’t have to pay high PMI (private mortgage insurance) payments. Setting up a separate savings account and having a certain amount of each paycheck automatically deposited is a terrific way to save for big goals like a mortgage down payment.

Lastly, another example is students who use Student Loans to pay for living and other expenses. At the moment it may seem like a good idea, but more often than not, it puts the borrower in more debt than necessary once the loans cease to be deferred.

Living within your means is the only way to actively improve your financial situation. Of course, everyone’s financial situation is different. Do yourself a favor and try not to worry about meeting anyone else’s standards. Adjusting your spending or earning more money are two ways to increase the amount of money in your budget. Being financially responsible just means you are making decisions about your money that help you reach your goals.

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