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3 Basics of Financial Responsibility

By Angelita Williams

We’ve all seen articles giving advice on how to budget, where to invest, and when to save. Certainly, these tips can be worthwhile, but it can be very difficult to sort the useful tips from the less useful ones. Moreover, personal finance tips don’t help much unless you understand the basics of personal finance and financial responsibility. A huge part of becoming truly responsible with your finances is having a good grasp of your personal financial situation. Before you swear off going out to eat or shopping sprees, use these tips to help you gain a better understanding of your financial situation.

Make What You’re Worth

Money management starts with your earnings. You can’t gain a true grasp of your finances until you have a full understanding of how much money you are dealing with. Many people think that financial responsibility is all about saving and budgeting. While this is an important aspect of financial responsibility, it is not the entire picture. Savings cannot be accomplished until you understand exactly what it is you are saving. Evaluate how much money you are making. Is your position paying you what you are actually worth? Are you being underpaid for the duties that you are performing? This can be an extremely difficult thing to judge and must be done from an educated standpoint. Evaluate what other individuals with the same credentials and position you have are making and see how you compare. You can use sites like salary.com or Payscale.com’s Salary Calculator. Although in this economic climate negotiating a better salary might be difficult. Also look at how much you actually take home after taxes, Social Security, and any payroll deductions. This is called your “Net” income. “Gross” income is your paycheck before all the deductions. Knowing your “Gross” is important but doesn’t help when it comes to deciding how much you have available to spend. Once you have a better understanding of how much money you are actually making, you are ready to learn how to save more and spend less.

Spend Less Than You Earn

The secret (even though it’s no real secret) to responsible financial health is spending less than you earn. Sure, this may sound basic and easy, but it’s an important point to look at. Many people know this basic but confuse the issue by postponing spending through the use of credit cards and paying only the minimum. If you are paying the minimum you are only fooling yourself thinking you are spending less than you earn. When you pull out your credit card you have spent that money. It doesn’t matter if you take one month or 10 years to pay it off. The money is gone, you’ve spent it, you’ve obligated yourself to a debt. The money has moved from your asset column to your liability column. You have consumed it now and are hoping to pay for it with future earnings. Unless your future earnings increase drasticly this is a recipe for disaster. You should get in the habit of only buying what you can pay for that month i.e. pay your credit card bill in full every month.  You need to know and understand your spending habits and spending potential before you can make an educated plan for your budget. So, don’t fool yourself. Whether you make a lot of money or a little, you can’t add to savings if you spend more than you make. Look at what your monthly bills are and evaluate where your paycheck is going. The real trick to saving more of your earnings is finding simple ways to spend less than you make and not fooling yourself.

Really Know Your Spending Habits

Budgeting is one of those terms we all hate to hear. But, of course, actually saving money is all about creating a successful budget. Before you make a plan to save money on various extraneous things in your spending, you have to take note of the actual spending that you do. Keep a record of the spending you do and see where your money is really going. Gaining a clear picture of your spending habits is a great way gain control over your finances. Do the calculations and figure out exactly where your money is going.

Think in terms of monthly expenses. How much do you spend each month on food, entertainment, housing, transportation, utilities, etc.? Don’t forget to include interest and payments on your credit card balances if you have them. If you haven’t paid them off in full you have increased your monthly expenses. Suppose you buy that newest gadget or pair of $120 shoes and charge it on your credit card, and only pay $10/month… by the time you get it paid for (in addition to paying tons of interest)… is it now in the back of your closet gathering dust, not even being used? If you continue in this fashion your monthly expenses continue to grow month-by-month and you get further and further behind.

Also look carefully at things that charge you regularly, like subscriptions, cable bill, cell phone bill. Even if these items sound small, they add up…  $10/month is $120 a year.  How many hours do you have to work (net) to make that $120? If you earn $12 per hour but only take home $10/hr you are working 12 hours a year for that item. Is it really worth 12 hours a year? If you think in hours worked rather than dollars you will be much less likely to waste money. How many hours a month do you work for food? How many for housing? How many hours for transportation? Insurance?  And if you really want to really get depressed see how many hours you work for the government including Federal, Social Security, State, Sales Tax, Real Estate Tax, etc. Even pennies add up. Saving a few cents on a gallon of gas may not sound like much but 10 cents a gallon times 15 gallons per tank is $1.50 and how many tanks a year two a week? Or approximately 100 a year? At that rate, 10 cents a gallon could cost you $150 a year or how many hours of work?

Once you have a complete snapshot of your typical spending routines, find areas that can be improved. Don’t make huge changes that you won’t be able to keep up. Look at the smaller details especially the recurring autobill ones that are easy to forget about. Make small changes and develop good habits.