The French writer Antoine de Saint-Exupéry once wrote, “It is much harder to judge yourself than to judge others. If you succeed in judging yourself, it’s because you’re truly a wise man.”
In this article, we’ll examine what being fiscally responsible means on a personal level, and outline eight steps you can take to become fiscally responsible with your own finances — no matter your age or net worth.
What Is a Fiscally Responsible Person?
A responsible person is one who is accountable for their actions and choices, even when things don’t go as planned. A fiscally responsible person, therefore, is someone who holds themself accountable for their financial choices.
How to Become Fiscally Responsible with your Personal Finances
Fiscal responsibility can be tough to master, because it’s not just about actions; it’s a mindset. However, there are a few steps you can take to help you begin developing this important characteristic.
#1. Don’t Hide From the Truth
I get the opportunity to talk with a lot of people about their finances. And one thing I’ve learned is that often, those in the worst financial shape are the least likely to know how they’re doing.
Here’s a common scenario: rather than figure out the amount of high-interest credit debt they have, they only have a vague idea about how much they owe. Plus, they usually have no clue how long it would take to pay that debt off by making only the minimum monthly payments (nor how much extra that will end up costing).
It makes sense. Short-term pain — which can be spurred by accepting the truth about your finances — is hard to put yourself through. But that pain can compound over the long-term.
A fiscally responsible person accepts the truth of where they are today. They know and track basic personal finance ratios and their credit score, they can tell where their money goes, and they understand the realities of where their existing financial habits will take them.
#2. Make A Realistic Plan
A fiscally responsible person has a realistic financial plan. This doesn’t need to be a complex plan, but one that outlines how to realistically achieve their most important financial and life goals.
For those just starting out, this could mean a realistic plan to build an emergency fund or pay down debt. For those whose goal is retirement, this could mean understanding how much they need to contribute to their retirement fund each month.
One can even make a realistic plan to build wealth.
A fiscally irresponsible person relies on low probability events to help them achieve their plan:
“I can finally buy that vacation house when the stock I invested in goes up by a multiple of 10.”
On the other hand, a fiscally responsible person designs a plan tied to factors in their control:
“I can afford that vacation house after setting aside 15% of my income over three years, with automatic withdrawals into a high-interest savings account each time my paycheck hits.”
#3. Eliminate Bad Debt
Fiscally responsible people understand how debt works. And because of this, they prioritize paying off their bad debt, such as high-interest credit cards. After all, they know what that debt actually costs them.
Making the minimum payment of $200 on a credit card with a $5,000 balance and an interest rate of 18.9% requires you to pay a total of $8,109.16 over the course of 127 months!
Long-term, they implement a plan for not needing to go into debt in the first place.
Basic strategies here include:
- Building an emergency fund.
- Tracking your income and expenses to make sure you’re not spending more than you earn.
- Saving ahead of time for inevitable large purchases that are often financed with debt but can indeed be planned for (such as a car, weddings and travel).
Learn more: In our article on how to pay off debt fast, get a step-by-step plan for eliminating your debt as fast as possible.
#4. Build an Emergency Fund
Bad things happen. It’s inevitable. A fiscally responsible person knows that and takes steps to help minimize the impact — primarily by building an emergency fund.
While an emergency fund won’t prevent bad things from happening, it will reduce your exposure and allow you to meet expenses without having to resort to high-interest credit card debt.
Jesse Mecham, the founder of the popular financial budgeting software YNAB, recommends including a “Stuff I Forgot to Budget For” category in your budget.
Every month, a surprise expense will pop up. And if there’s no room in your budget to account for these unexpected expenses, that’s setting yourself up for failure.
I really like this concept too, as it means not having to dig into your emergency fund each and every month for these unexpected expenses.
Learn more: 11 Personal Budget Categories You Don’t Want To Miss.
#5. Plan Ahead for Big Purchases
An emergency fund should be used for unexpected emergencies. Your roof needing to be replaced, which has a lifespan of 15 years and is going on its 17th year, shouldn’t come as a shock.
So, a fiscally responsible person manages their money, plans ahead and, whenever possible, has the funds saved for what they know is coming up in the future.
Pro tip: Even just planning out your big expenses for the next year, compared to the more ideal three to five years, is one of the best financial planning strategies I know.
#6. Buy the Right Insurance
There’s insurance that’s required by law, such as auto insurance. Then, there’s insurance that makes financial sense to buy to protect yourself and your family from financial catastrophe.
Long-term disability, health care coverage and life insurance are all examples of insurance that you never want to have to use but that you should own for peace of mind.
Fiscally responsible people understand the importance of this type of insurance and prioritize their protection accordingly.
Check out our review of Sproutt, a company that makes purchasing affordable life insurance in minutes a reality.
#7. Get Your Estate in Order
Estate planning isn’t just for the rich.
As an example, anyone with children should have basic estate planning documents like a guardian designation in place. (This simple document designates who will care for your child in the event of your death.)
In addition, both a will and a living will are important to have — even if you’re not yet a high-net-worth person.
Having these documents in place ensures that your family understands how to locate your assets and knows your wishes, as well as that those wishes are carried out after you pass away.
Read our Trust & Will review to learn about an online tool that helps you easily create, edit, store and share your estate plan.
#8. Invest Wisely
When it comes to investing, a fiscally responsible person has a realistic plan for achieving their savings goals. They’re not relying on beating the market to reach these goals, but instead, they have a plan in place that has historically worked.
They understand that investing does carry risks. But since they’ve educated themselves on how investing works, they’re able to ride the short-term ups and downs and not get too emotional.
Since a core trait of being fiscally responsible is focusing on what you can control, a fiscally responsible person doesn’t look to take unnecessary risks in the market. If they’re not on track to reach their goals, they look for what’s in their control — mainly their savings rate and income — to readjust their plan.
One Last Thought
Anyone, no matter their age or net worth, can benefit from applying the principles of being fiscally responsible.
Knowing exactly where you stand, having a realistic plan to achieve your goals, focusing on what you can control, holding yourself accountable — these are principles for how to win not only in finance but also in life more generally.