You want to be fiscally responsible, don’t you?
Of course you do! Everyone does, whether they realize it or not.
Fiscal responsibility is an economic idea that involves strategies for managing debt and building smart-spending habits.
You have probably heard the term used in reference to government or public organizations. A fiscally responsible organization pledges that it will spend and earn in a way that doesn’t place undue hardship on its citizens or members. This means the organization promises to operate its finances in a responsible way.
Do you know what the number one requirement is for maintaining fiscal responsibility in an organization?
Yep, a balanced budget.
Put simply, a balanced budget has no deficits and no surplus. Furthermore, it’s important that the projected spending and what is actually spent closely align so that the organization can accurately forecast their revenue and expenditures for the year. This forecasting is what allows the organization to make changes to keep the budget balanced in the upcoming year.
Why do we know so much about fiscal responsibility and balanced budgets?
That just happens to be what I (Sebastian) did for one of the departments at the City of Portland for the past couple decades. In fact, one of my biggest responsibilities was putting together the budget forecast. I was pretty darn good at forecasting, as I could predict the budget within a few thousand dollars a year.
Just like a public organization, if you want to be fiscally responsible in your household, you must build a budget.
Trust me. If you don’t have a budget, your chances of living within your means and avoiding debt become much more difficult than you think.
Without a budget, you’ll have no idea of your debts (deficits) or your savings (surplus). You have no idea whether you’re managing your debts or building smart spending habits.
In short, without a budget you have no idea whether you’re being responsible with your money.
And budgets aren’t just for those with low incomes.
Did you know that almost 10% of the people living paycheck to paycheck in this country make $100,000 or more a year!
Unbelievable, isn’t it?
Well, believe it.
More money doesn’t solve money problems, only habits can. If you don’t know what is coming in and going out, you’re putting yourself in financial darkness.
Do you get in the car and just drive without knowing where you are going?
Of course not.
But then why would you do that with your finances?
Just like driving a car, you must have a destination in mind. You must set goals, then have the discipline to work toward them. It might take a while, but you can feel confident that you’re chipping away a little a time. Remember, Rome wasn’t built in a day.
A budget is the map that gets you to your destination. It’s a plan that you prepare for managing your money. A budget helps you allocate all your spending so that your money goes where you want it to.
It will tell you when to accelerate, when to step on the brake, and when to park.
Developing a Personal Budget
There are five major sections to a budget:
- Income – Here you list all your incoming money.
- Fixed Expenses – These are items that are constant, such as mortgage/rent, utilities, insurance, car payments, etc. These expenses are generally the same every month, and must be paid whether you eat or not.
- Variable Expenses – These are items that change from month to month. These include food, clothing, gas, entertainment, etc.
- Debt Payment – These include credit cards or other loans. These can be fixed or variable depending on the debt.
- Balance – This is your income minus all your expenses from 2 – 4.
It is important to monitor your budget regularly to see where you stand.
It is also important to stick to your budget, and to not let impulse buying or unplanned and unneeded purchases derail your budget.
Credit Cards: The Biggest Culprit of a Blown Budget
Actually, unbudgeted and impulse spending is the biggest culprit, but credit cards are the most used avenue for spending unbudgeted money.
Sticking to the budget is the trickiest part of being fiscally responsible, and the majority of people are thrown out of their well-planned budget by credit card expenses.
How do you combat it?
In the old days, every expense was entered into a checkbook, including from credit cards. By doing this, you knew exactly how much money was left in your checking account for the rest of the month. In fact, this is what I did to avoid overspending.
However, checkbooks are largely a thing of the past with the advent of online banking. Unfortunately, simply monitoring your account through online banking does not show your credit card expenses, which could result in you spending more money than you really have.
The good news is there are online tools and apps that can replace the physical checkbook and allow you to track your expenses as you make purchases. Whatever tool is convenient for you, make sure you track your expenses in real-time to avoid spending more than your income.
Even if you’re tracking your expenses in real-time, make sure you look at your budget BEFORE you spend.
An expense is an expense, whether you use a debit card, cash, or a credit card. Before you spend, see if it’s in your budget.
If you’re spending more than you’re bringing in, you’re in debt. It’s that simple.
What if My Budget Is in the Red?
What if you’re not making it through the month with your income? What do you do?
- Review Your Budget – Look for ways to cut your expenses. Can you lower any of your fixed or variable expenses? Can you completely cut things out or find cheaper alternatives?
- Cut out Unneeded Expenses – Do you have cable? Eat out a lot? Buy clothes? Get your nails done every other week? Find items you can live without, then cut them.
- Look for Cheaper Alternatives – Are there things you could find for less? Maybe find a cheaper apartment or living situation, ride a bike instead of driving, or a cheaper cell phone plan?
- Look for Ways to Increase Your Income – If you’ve cut items and found cheaper alternatives but are still struggling to balance your budget, look for ways to increase your income.
Moral of the Story
Fiscal responsibility isn’t just for the government and public organizations.
Public funds serve the people, but your money serves you.
It is in your best interest to be responsible with your money so you can reach your goals.
The way to ensure fiscal responsibility is with a balanced budget, where every dollar is allocated and utilized for what YOU want based on your goals.
It is also important to consider and track EVERY expense made throughout the month, especially those made with credit cards. Don’t let an impulse derail your fiscal plan.
Finally, if your budget is in the red you must look to cut expenses, and perhaps increase your income.
Fair or not, less income means less spending. It is fiscally irresponsible to mortgage your desires with debt.
Spend and earn in a way that doesn’t place undue hardship on yourself.
It’s your choice, but if you expect public organizations to be responsible with money, shouldn’t you expect yourself to be as well?