Personal finance encompasses the whole universe of managing individual and family finances, taking responsibility for your current and future financial situation, and setting financial goals. It also includes handling individual financial tasks and saving for emergencies.
What does it mean to be financially responsible? It's a complex question, but at its core is a simple truth: To be financially responsible, you need to live within your means. And to live within your means, you must spend less than you make.
Key Takeaways
- It's not enough to pay the minimum on your credit cards each month. To be financially responsible, you need to pay them off in full every month.
- It's crucial to know the difference between what you need and what you want—and then only buy your 'wants' if you can afford it.
- If you don't have an emergency fund of three to six months' worth of expenses, today is the day to start saving for one.
Credit Cards and Debt
If you're really looking to be financially responsible, just being able to make your minimum monthly credit card payment doesn't cut it. In fact, the fact that you aren't able to pay your balance in full shows that you already spend more than you earn. Responsible use of credit means paying the balance on your account in full each month.
Consider the Interest
The same logic applies to all recurring payments that involve paying interest. Think about it: Paying interest on anything means that you are spending more on that item than the purchase price. Does that sound like the most responsible choice or just the most convenient?
When the interest payments are factored into the purchase price, you are spending more to obtain the item than even the item's manufacturer thought it was worth.
Of course, certain interest payments are unavoidable, like with mortgages and car payments. In these cases, minimizing the amount you spend in interest each month is the most responsible action.
Necessities vs. Luxuries
For many people, cutting down on interest and borrowing is easier said than done, but in practice, it really comes down to knowing the difference between necessities and luxuries.
For example, buying a home in a financially responsible manner means that you should purchase one that won't break the bank. In financial terms, this means it shouldn't cost more than two or 2.5- times your annual income. Another rule of thumb is that your monthly mortgage payment should not cost more than 30% of your monthly take-home pay
