How to become a financially responsible adult in 7 steps
It’s never too late to take steps toward financial responsibility. However, it is something it is important to take the first step. Getting started is more important than becoming a money management expert overnight. You will make mistakes on your way to being financially responsible, and that’s okay. I like to follow the 85% rule: Get 85% of the way there and move on with your life. Here’s how to get started.
Assess your current financial situation
Financial responsibility means living within your means, whatever that may be. Start by creating an overview of your finances by including the following:
- Your monthly incomeincluding rental income, fees, etc.
- Your monthly expensesincluding housing, utilities, food, education, health care, life insurance, health insurance, employer’s insurance, etc.
- Your goodsincluding stocks, bonds, and other investments
- Your debtsincluding student loans, mortgages, credit card debt, car payments, etc.
Rethink traditional personal finance advice
With your list of income and expenses in hand, it’s time to plan — that means creating a budget. However, that doesn’t mean you have to sacrifice all of your favorite pleasures in life. The purpose of your budget is to plan how you spend money in a way that fits your lifestyle. Budgeting doesn’t have to mean punishing yourself.
To do this, consider the conscious spending model of money management. This strategy promotes good spending habits and smart money management by creating an environment for guilt-free spending. It’s based on organizing your expenses into four buckets:
- Fixed costswhich includes needs such as rent and debts
- Investmentsuch as investing in retirement accounts (eg, Roth IRA or 401(k))
- To save for an emergency fund or for long-term goals like a big vacation
- Innocent spending to those benefits that make your life more enjoyable, from happy hour drinks to dinners
When it comes to your innocent spending, it’s important to consider your Cash Dial. What trivial things really add value to your daily life? Maybe it’s your gym membership or maybe the expensive scented candles. Understanding your Money Dials can help you prioritize how you spend your money, allowing you to cut unnecessary expenses and leave more for the things you love.
Monitor how you spend money
In order to use a conscious spending method, you need to establish guidelines for how to allocate your monthly funds. For example, you can spend 50% on fixed expenses, 30% on necessities, and 20% on savings and investments. How you divide your money will depend on the proportion of your income and your expenses.
Then, put the system in place to monitor your spending. You could try using a money envelope system, for example. There are also many useful apps that can help you track where your money is going. Some connect directly to your bank account, credit card, and debit card, recording everything you do.
Create an emergency fund
When creating your conscious spending plan, be sure to include an emergency fund. This can be used to cover everything from health care to car repairs. If you save money, you will be able to handle these unexpected expenses without borrowing money or using credit. This can help you avoid taking out high-interest loans, which can be huge debts (and can hurt your credit score).
Pay the debt
Debt can drain you financially and emotionally, leaving you saddled with unpaid IOUs. Dealing with debt, especially high-interest debt, is another important step towards financial discipline and financial freedom. There are several different ways to pay off debt, including the debt avalanche method and the debt snowball method.
Increase your income
You can also improve your financial responsibility through economic growth. Creating multiple streams of income is one way to improve your income and increase your overall worth. There are a number of scams that can serve as a responsible way to make extra money, from delivery services to selling goods on Etsy.
The income is good because it does not require a lot of time and attention, which allows you to increase your income without constant hustle and bustle. Examples of types of passive income would include real estate rentals, real estate investment trusts, certificates of deposit, and peer-to-peer lending.
As with all aspects of money management, when it comes to growing your income, success starts with the right mindset. Being able to look beyond the limitations of your current income and see new opportunities is important. The findings can help you get a better sense of what’s possible for you.
Invest money
Investing can be another way to earn money and save for retirement. When you start investing, stick to the basics, like putting money into a 401(k) and a Roth IRA. You can later expand on these basic investment vehicles. Asset allocation, which includes a mix of short-term and long-term investments, helps diversify your investments in a rational and sustainable manner.
Creating a bright financial future starts now
As you start on the path to becoming a financially responsible person, you will have a lot of learning to do. There are many resources that can help, from our book “I Will Teach You to Get Rich” to investment tips, retirement guides, and more.
Keep learning as your knowledge grows. The financial freedom and peace of mind that smart financial planning brings are great incentives. 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 manage your finances well.