The phrase “fiscal responsibility” might conjure images of tweed jackets with elbow pads and old-school calculators, but this concept is more relevant than you may think. And it's definitely relevant to you!
Let's get into it.
What does it mean to be fiscally responsible?
Anytime money is involved (that’s where the “fiscal” part comes in), some level of wise decision-making (aka “responsibility”) is required.
Accumulating wealth shouldn’t be the ultimate goal, but it’s a means to an end. You need cash to bankroll the life you want to lead and for the change you want to bring in the world. How money gets spent matters, not just for you and your family, but also in the context of the global economy.
We can hold ourselves, our loved ones, the companies we invest in, and our government accountable for being fiscally responsible.
Fiscal responsibility as it relates to the government
In politics, we expect our elected and appointed officials to fundraise, allocate, and spend money appropriately. That means sticking to the approved budgets and not siphoning funds for personal use.
Fiscal responsibility in the government is most often associated with avoiding overspending. Ideally, the spending done by our leaders should be equal to what is earned through taxes. But this isn't always the case.
One of the biggest questions surrounding fiscal responsibility is the national debt.
Most people support one of two solutions with the same end result which is lowering the national debt. Some people believe we should raise taxes for the wealthy to pay down the debt. Others feel we should cut spending to bring down the national debt ratio, generally in the form of social services.
While it’s easy to feel disempowered and disconnected from how government money gets spent, you do have some say in the matter.
Parks and activities, police, roads, water, education—they’re all funded by your taxes and are allocated by your elected officials. So you can vote for and speak with your representatives, especially locally.
By doing this, you highlight to them the causes that are important to you.
How can you be fiscally responsible with your personal finances?
Being fiscally responsible is not just about urging the government to make changes, it's also personal.
Claiming responsibility for your finances comes down to two pillars: everyday choices and creating a vision for the future. The main strategy is controlling what you can and planning for what you can’t.
Here are some key ways in which you can be fiscally responsible:
Create a budget
When it comes to budgeting, the easiest formula you can follow is 50% for essential expenses, 30% for non-essential expenses, and 20% to save and invest. However, this is just a guideline.
Budgeting is highly personal and should be adapted based on your income, season of life, and your money goals. It's all about finding the budgeting method that works best for you.
Track your spending
There’s no point in making a budget if you’re not going to track to see how it aligns. Tracking your spending not only informs future budgets, it can also serve as a gut check as you evaluate your spending.
For example, "Oops, I spent $45 more dollars than I expected on coffee this month—I need to cut back next month". Or, "Wow, I’m consistently spending $20 less on gas each month—I can put this toward my debt instead".
These are reflections points that can help you be more mindful of your spending in the future.
Establish emergency savings and sinking funds
Unexpected expenses happen. There’s no avoiding them, but you can build up savings so that when disaster strikes—or even happy surprises pop up—you aren't left scrambling for cash. This is what your emergency savings are for.
Got planned upcoming expenses? You want to plan ahead and put those expenses aside and that's where your sinking funds come in.
Pay off debt
If you are paying interest on your debt, its sucking the potential out of your longer-term savings and investments. Especially if you have high-interest debt.
So focus on eliminating your debt as soon as you have an emergency fund built up. It’s a relief to be free from the weight of debt, and paying it off is definitely the fiscally responsible thing to do.
If you use credit cards, ensure you have a plan to use those credit cards wisely. This includes budgeting your spending and paying off your balance each month.
Create multiple streams of income
Rather than being entirely reliant on a single source having multiple streams of income is a great idea. Keep in mind that it's not just for business owners and social media influencers. Whether you have a special skill, an artistic passion, space to rent out, or any other potential source of revenue, why not leverage it?
While your time is precious, you likely have a small amount to spare that’s worth the extra income. If you’re not totally sold on the idea, consider putting your side hustle income toward something specific and “extra,” like that vacation or fancy gadget or day at the spa.
You don’t need to be a millionaire to start investing. Remember, there’s no “right” way to invest. One of the first things you should tackle is regular contributions to a retirement fund, especially if your employer has a match program. (That’s free money that will compound over time!)
In general for other investment options, decide how much you’re willing to risk (because there’s always some level of risk) and try it out. Remember that leaving your life savings in cash is also risky because it loses value over time with inflation.
Seek professional help if you’d like the support, but also consider the robo-investing options.
Get the right kind of insurance
Having the right insurance is quite possibly the most boring topic, but still very important. For example, you want to make sure you’re covered with disability insurance so that you have an income if you can’t work. This is especially relevant if you’re self-employed or your job doesn’t have policies in place to protect you. If you’re a homeowner, make sure your coverage is comprehensive enough.
Renters, don’t think you’re exempt—all the stuff inside your rented home can be covered at an affordable rate with renters insurance.
And then especially if you have a family that’s partially or fully dependent on you, consider buying life insurance. If you die unexpectedly, you know they’re taken care of financially, at least for a few years.
Build generational wealth
Life insurance is one way to pass down wealth to future generations. Owning property is another. Your other investments, both retirement and otherwise, can also leave a legacy of wealth for your descendants.
Although it sounds grim, make a will and estate plan early in life. It’s worth the small investment now to guarantee that your family members will receive what you intend to leave them.
Remember, being fiscally responsible is not just a technical term that you hear on the news or something that just applies to the government. You can apply the principles from it to your life by taking control of your finances.
Your future self will thank you for all your work toward being a fiscally responsible pro.