Being a Responsible Spender
Financial fortitude depends on your responsibility as an economic agent. When you’re aware of your expenses, your responsibility to yourself and those under your care, as well as your financial goals, you are better equipped to build your financial strength.
This begins with acknowledging your expenses.
Frugality is the quality of being economical with money or food, that is, carefully managing your resources so you spend only on what’s necessary. It probably isn’t the most popular idea, but when it comes to decreasing expenses, frugality is a tried and true method.
Fixed expenses are predictable and consistent from month to month, since these are usually “need” items like rent. Variable expenses, primarily “want” items like entertainment, are less predictable and change from month to month.
Just because fixed expenses are, well, fixed, doesn’t mean they can’t be reduced. For example, consider renting a less expensive apartment to reduce your rent expenses!
Variable expenses are, by definition, easier to reduce. If you’re in a tight spot financially, you can’t keep spending all your money on new clothes, so buckle up, make a spending plan (budgeting), and get through the tight spot!
A budget is a monthly spending plan that can help you manage your spending and savings. Budgeting is the first step towards achieving your financial goals. It lets you identify where you’re spending your money, where you can cut back, and what your current financial situation is, thus helping you prioritize your spending to achieve your financial goals.
Similar to a budget, but a bit more complex, is a personal spending plan, or PSP.
A personal spending plan (PSP) is a document used to determine the cash flow of an individual or family. A PSP shows where income is earned and expenses are incurred (where expenses happen).
A PSP is more than a budget since it shows more information about each item. By keeping track of all sources of spending, individuals and families can better understand whether expenses are taking place that are preventing them from saving and reaching their financial goals.
Generally, a PSP will calculate a net income, that is, your income minus your current monthly expenses. The net income is the money left over that you can save towards your goals. The objective of a PSP is to increase your net income.
Financial goals are the key part to a PSP. Once you identify your personal goals, such as saving for a vacation or a car, you will know how much money you will need to be saving and it will even motivate you to want to save. Saving will become easy!
To make a PSP work, you have to commit to it. Once you set your financial goals and determine how you will be spending your money, stick to it! Being in charge of your money and committed to your PSP is a great way to achieve financial success.
Your family plays an important role in setting and reaching your financial goals.
Household finances are all the expenses that have to do with the home, such as rent, groceries, cleaning, etc. Managing household finances can be broken down into five skills: budgeting, saving, tracking, disputing, and holding everybody accountable.
Every household should follow a budget. Make sure you note how much money comes into the household and how much is being spent. Then make (and stick to) a budget for how much you think the household should be collectively spending. Make sure to keep saving in mind!
A budget only works if you stick to it. Be sure to track all your expenses so you know if your plan is being followed. Then, you will see if there are any differences between what you think you paid and what was charged. If you were overcharged or there is an expense you didn’t make, call your financial institution to correct this!
In the end, your best efforts will save money for the household only if everybody sticks to the plan. Talk to everybody in the household (your roommate, spouse, children) to make sure they are aware of the budget. By making sure everyone knows what they should be doing you will be reducing future conflict.
Negotiating is a big part of household finance. You’re always trying to save money, so why not lower the price of household services? When you are given a rate for a service, try to (respectfully) lower it. A babysitter is asking for $12 per hour? Ask if she can do it for $10! Someone will mow your lawn for $25? Maybe she’ll do it for $20!
All of this is part of your responsibility as a spender.
Financial Responsibility means living within your means, or spending less than you make. For example, you might need to buy a car, but you shouldn’t buy a luxury sports car unless you can afford to pay for it without borrowing.
As your circumstances change, so will your definition of Financial Responsibility. Living within your means will look different for everyone, and may change throughout your lifetime. For example, your income may fluctuate, you may choose to get married and raise children, or you may be planning to retire.
Spending all of the money you earn is irresponsible. A great way to start saving is to put aside a percentage of your paycheck. The higher the percentage, the more prepared you will be for emergencies and meeting your financial goals.
If you have a spouse or dependents, you have a financial responsibility to someone else. Usually, your willingness and ability to assume risk decreases and your desire for more financial protection increases.
Financial irresponsibility can lead to serious consequences. You may get into debt, be unable to retire when you had planned, be unprepared for emergencies, or be unable to provide for your family.
One way to promote financial responsibility is to develop spending plans.
When building your spending plan, it is important to record your take-home pay, the money you actually receive, and not your pre-tax income, so that you can build a realistic plan. You should then begin recording your expenditures to see exactly where your money is going.
Divide your expenses into categories personalized to your lifestyle. For example, someone who has a dog will need a category for pet supplies and vet bills, while someone without any pets will not. Use your spending plan to develop a strategy to decrease spending in non-essential categories. Over time, you should adjust your spending plan to keep up with your changing financial circumstances.
If your income exceeds your expenses, you have a net gain. You can add more money to your savings or pay down another liability.
If your expenses exceed your income, you have a net loss. You need to increase your income, decrease your expenses and liabilities, or do a combination of both.
Changes in life circumstances will affect your spending plan. Over time, you will need to account for changes in living expenses, plan for the months ahead, and evaluate your spending patterns.
Being a responsible spender means taking into account not only your personal needs and financial goals, but also those of the people in your household. It is key to fully understand your expenses before building any financial plan – once you have that down, you can focus on building wealth!