Over the years, we have all grown accustomed to specific spending habits and patterns. We have formed our own beliefs and even adapted some from those people we closely interact with. But at the start of the year, there is merit in revisiting that behavior and assessing if it still works in today’s economy. Figure out if it is still an acceptable practice with the current earnings we bring in.
Financial responsibility is simply defined as living within your means. To some extent, some associate this behavior by scrimping and saving. Others look at it as adapting a frugal lifestyle and to some, it is just being more aware of their needs over their wants. Each has their personal definition and approach to being financially responsible but all these actions has a common objective – being debt free and living life to the fullest.
An Investopedia.com article even went to define this attitude and related it to getting a mortgage. It said that the monthly house loan payment should be well within 30% of your total monthly income and that the total mortgage should only add up to a total of two and a half (2.5) times the worth of your annual take-home pay.
A lot also has to do with the money mindset we have adapted over the years. It could be that we keep on focusing on the items we do not have like a big house, fancy new car or that new mobile phone everyone in the office seems to have. Or even focusing on skills you can not do and in return, miss out on some life-changing opportunities.
There are a lot of harmful beliefs we have been carrying around for years that affects that way we live financially. This time of the year is a great opportunity to evaluate those beliefs, plot our strategy to being financially responsible and change the wrong mindset we have about money.
Earning money to spend it is not being responsible
We did not work hard the whole year to spend everything during the holidays. There are tips to staying out of debt during the holidays to guide you through this. Simply put, we do not earn money to spend them all. There are inevitable expenses such as food and clothing but there are those that can be passed up to make way for other financial options.
According to a 2012 Huffingtonpost.com article, almost 50% of Americans are overspending and using more than what they bring in every month. But only about ten percent admitted to a lifestyle of financial decisions beyond their means. The article further stressed the point of overspending to the point that in 2011, almost 25% of American families did not possess liquid assets or those that can easily be converted to cash. And the amount of debt per family is up from 2009 to 2011 to 8.5%.
What is more alarming is that Americans do not see the value of savings. CNBC.com reported during the first half of 2013 that the personal savings rate went down to 2.6% from a high of 5.5% in 2011. It gradually went down the following year to 4.2% and as low as 3.9% in 2012. Saving up for the rainy day does not seem to sit well with most earning individuals and is not a way of life.
All these articles are leading to a few disturbing conclusion, people are overspending with little regard to forward financial planning. They do not have assets and on top of that, not much emergency fund or savings that could tide them through unforeseen circumstances in life.
There is one simple rule to follow to start addressing this concern – do not earn to spend. This is the same as not living to eat but eating to live. Just as eating should only be a tool to live and not the end-all and be-all of living, money should only be a tool to a better life. You earn not to spend everything in one instant but you plan to maximize all your hard work.
Optimizing is very much different from just plain spending. If you need a new phone, you have to know how you intend to use it based on your needs and not your wants. If you do not need the specifications of a high-end phone versus your lifestyle, you do not need to splurge on that item if a lower end phone would do the job. Same goes for homes, you do not need to stretch your finances to buy a mansion when a 3-bedroom would be just right for you and your family.
Flip the switch whenever you receive your pay. Instead of thinking how to spend, find ways to save up and look for ways to use the money wisely. Would it go to savings or investment or probably as extra payment to some existing loans such as student loans or credit cards. Whatever it is, optimize the use of your hard day’s work.
Get the right mindset to be more financially mature
Maturity takes time experience and this holds true even for financial maturity. One way to achieve financial maturity is to learn from your mistakes and to learn from other people. Even athletes can teach you a thing or two about credit card use. People around you and friends can also offer pieces of advice that you can use to further improve your finances.
One great tip that is recurring with most people that are debt free is frugal living. Living below your means has done great wonders for a lot of people. This is a financial mindset that has to be taken in and lived everyday of your life. It does not only apply to you but also to the members of your family. It is an everyday decision and will be a way of life that has to be ever present in all facets of your financial decisions.
Another tip to adapt a more mature financial mindset is to have a goal at the end. You need to determine something you want at the end of the year and save up for it. It could be an item you have always wanted, a trip you have been wanting to make, that course you want to pursue or that loan you want to pay off. Having a target at the end of the year makes your efforts quantifiable in terms of objective versus progress.
Here is a short video of how even the military try to teach financial maturity:
Some motivation tips to succeed in being financially responsible
Here are some tips to help you become more financially mature with a correct money mindset:
Choose a goal – having a target is great but it should be something that matters to you. Would you be a better person with that home-theatre system at the end of the year or is it better to pay off that student loan? Would that new car be of more use to you or would you rather spend on a camera and pick-up a nice online side-job selling photos online? Choose a goal that matters.
Measure – know your goal, break down the effort needed every month and monitor your progress. This gives you a checklist of things you still need to accomplish and tells you how you have performed towards your goal. If at the end of the year you want to make an extra $3,000 payment over to your student loans, you can divide this into $250 every month or even $9 a day. Track your progress and see how you are doing.
Repeat until it comes as second nature – with a goal and a tracking process, you need to keep yourself motivated and stick to the plan. One of the hardest thing to do is to take the first step but even ultra marathoners who excel in their field admit that it all takes a first step and as you put on foot in front of the other, the next thing you know, you are running.