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Financial responsibility is the process of managing money and other assets in a manner that is considered productive and in the best interests of the individual or family. Being proficient at the task of finance and money management involves cultivating a mindset that makes it possible to look beyond the wants of today in order to provide for the needs of tomorrow. In order to achieve a high level of financial responsibility, it is necessary to understand several basic principles.
The process of fiscal responsibility begins with understanding the difference between needs and wants. Making this distinction helps to ensure that the more important purchases are taken care of, while goods and services that are not essential to maintaining a decent quality of life are acquired after needs are met. Some examples of needs that would apply to most people include food, clothing, and shelter. Many people would also feel that earning educational credentials that are at least university level is also a need in today’s world.
Once there is a clear understanding of the difference between wants and needs, the next step in financial responsibility involves learning what to do with money left over once those basic living needs are met. Saving money should be a priority when evaluating ways to spend your surplus income. Even if no more than a small percentage of the weekly paycheck is set aside in some type of interest bearing account, that amount will grow over time and create a degree of financial security that would not be possible otherwise. Being good with money sometimes means saving a portion of available resources for emergencies or for use later in life.
Creating and sticking to a budget is basic to financial responsibility. People are never too young to begin this process. For example, a teenager who is old enough and has a part time job is in a position to make efficient use of a budget. While food and shelter may not be line items for the time being, there is a good chance that setting aside money for meals out, dates, car payments and car insurance will be considered important. By creating a budget that addresses all relevant expenditures and then prioritizing those budget items, it is easier to understand where the pay from that part time job is going and how to use that money to better effect.
Resisting impulse buying is also key to financial responsibility. This can often be difficult for even the best of money managers. There are constant visual and audio stimuli through the various forms of media to entice people to purchase items they do not need and in some cases cannot comfortably afford. Choosing to shop with a list can cut down on impulse buying to some degree. Another way to stem impulsive purchases is to set aside a fixed amount in the budget that is considered “free” money – that is, money that can be spent on any type of whim the individual desires. But once the free money is gone, there is no more impulse buying for the remainder of the budget period.
Because financial responsibility involves wise spending, the savvy money manager will learn to determine if the time is right to make a particular purchase. This often involves asking a few basic questions. Is this purchase to replace something of importance, such as a vehicle? Would it be possible to continue using the current item for a while longer and possibly be able to afford a replacement of greater quality later on? If replacement or acquisition is absolutely necessary at this time, will a product of equal quality but with a smaller price tag be acceptable? Purchases should never be made in haste, but only after weighing all the options.
No description of financial responsibility is complete without mentioning the wise use of credit. Far too many people assume that as long as it is possible to make the minimum payment on credit card balances, they are in good fiscal condition. That is not the case. Financial responsibility dictates that the less unsecured debt an individual has, the better their financial outlook happens to be. Make it a point to limit the number of credit card accounts you have, and make sure the balances are paid off each statement period or at least no more than within three periods. This will help to minimize the amount of interest paid to the credit card companies, and also provide you with a source of emergency funding in the event of an emergency.
BrickBack - I have to say that while the foreclosure rates continue to rise many of these purchases were made by people that wanted to cash in on the real estate market and because of this artificial demand the prices soared and later crashed because the market could not sustain those types of gains.
I think that many banks are requiring up to 30% down for some borrowers because of the high default rate.
When you put that much money down on a property you are less likely to walk away from it. I really do not like the 80-20 loans that offer a primary mortgage on the 80% of the value and a second mortgage on the
remaining 20% value. I don’t know of too many banks still offering this option but it really creates a problem for the borrower if he has to sell his home and the market is declining in value because there was no equity when the borrower first purchased the home so they will be upside down in the mortgage.
I think that it is a better idea to wait until you have the money for at least a 20% down payment because then you will be in a better position should you have to sell.
The home buying class would probably help some potential home buyers understand the financial implications of buying a home because the mortgage is part of it but the taxes and the homeowner’s insurance is another part that many people forget about when they factor their monthly budget for a home.
Icecream17 - I see things like that happening all of the time. Student loans can be deferred but then you end of paying more because the interest accrues.
In addition, these loans cannot be discharged in a bankruptcy so you are stuck with them. I think that thinking about the financial responsibilities of these types of loans should be explained when a student is in high school so that they can make better choices.
I also think that it would be a good idea for first time home buyers to take a financial responsibility class that allows them to understand the implications of buying a home.
Oasis11 - I understand the concern over the cosigning issue. It is usually a bad idea to cosign a loan or a credit card for anyone because there is usually a reason why that person could not get credit on their own.
I think that teaching financial responsibility should begin when a child is young so that they develop respectful habits with money. I also would like to see children learning about personal finance as a part of their math curriculum.
This way when the children grow up they can make better financial decisions because too many parents choose not to talk to their kids about money or may not even have enough financial education to share with their
For example, going to college should be looked as an investment in your future. If you are going to spend $100,000 or more going to a private out of state university in order to get a degree that is not very marketable or in a field that does not pay well then this would not be a wise decision.
For example, I recently read about a lady that racked up $150,000 in student loans to get a PhD in education. When she graduated she was earning only $50,000 a year.
While the education field is a calling and there are a lot of wonderful things about it, the reality is that because of this enormous student loan debt she may not be able to buy a house for a long time.
If she had gone to a public university she probably would have had about a third to one half of the loan balance she has now which would have put her in a better financial position.
Anon67140 - A similar thing happened to my sister. She was placed on a credit card along with my mother.
My mother put her on the credit card when my sister was young so that she could develop a credit history.
Well when my mother died, she had a balance of $5,000 left on the card and my sister became liable for the credit card balance.
Had my mother removed her name before she died then her estate would have been liable and if there was no money in the estate then the surviving spouse has to send a death certificate in order to prove that the card holder actually died.
It might be a good idea to get your husband’s name off of the card because if not he will be liable for the balance should something happen to his mom.
My husband co-signed a credit card for his mom. His mom has been paying the credit card for the last 15 years faithfully. My concerns are, since I'm married, let's say the mother passes away. Then this would make my husband liable for the balance of that credit card.
Let's say my husband should pass away. Would this make me reliable even if it's not on my credit report but it does show on my husband’s credit report.
The bottom line is that I asked my husband to draw up a letter and have his brother and sisters sign that they will be liable for the loan if anything should happen to both of them.
Please concur if I am correct and that I should do this to protect myself from being liable.
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