It took me a long time to get to a place where I could take responsibility for my bankruptcy. Though a mystery illness racked up hundreds of thousands of dollars in medical bills and forced me to leave my job, it had nothing to do with my existing credit card debt or sky-high car payments. If I had been financially responsible, I would have had an emergency fund and wouldn’t have been carrying such a high balance on my credit cards. I wouldn’t have had a car with such a high monthly payment. In fact, if I had been financially responsible, I might not have had to file bankruptcy at all.
But I wasn’t financially responsible. I had far too much debt, and it was completely my fault.
It’s a hard truth to swallow, but most of the debt we take on is entirely within our control. Acknowledging that is a big part of accepting and assuming financial responsibility — both of which are crucial after a bankruptcy.
To be financially responsible, you need to live within your means — that is, you need to spend less than you make. Unnecessary debt should be avoided at all costs. Being responsible for your own finances means you’re independent. You have your own stream of income, you manage your own bank accounts, credit cards, debts, and investments, you set and manage your own budget, and you pay your own bills.
Let’s take a closer look at what constitutes financial responsibility and how to properly attain it.
Most financial missteps are a result of impatience and the need for instant gratification. Financial responsibility doesn’t mean being able to make your credit card payment — in fact, carrying a balance that you aren’t able to pay in full indicates you’re spending more than you earn. You should only be using credit cards for everyday purchases if you have the money in the bank to cover said purchases in their entirety. Responsible use of a credit card involves paying the balance on your account in full each month.
Of course, credit cards can be very helpful in an emergency. If an emergency does require you carry a balance on your card, being financially responsible means reining in your spending until that balance is paid off.
Recurring payments that involve paying interest are best avoided. When you pay interest on a purchase, you’re spending more to obtain the item than even the manufacturer thought it was worth. Does that sound like a financially responsible choice — or just the most convenient one? This is why you should refrain from any minor purchases that require paying interest.
Responsible Home Ownership
When it comes to the cost of housing and transportation, avoiding interest is pretty much impossible for the vast majority of the population. In these situations, minimizing the amount you spend in interest is the most responsible action. You have to understand the difference between necessities and luxuries. For example, though you might need a car, it’s unlikely you need a luxury sedan or a top-of-the-line sports car.
In much the same way, you need a place to live, but you don't need a mansion or penthouse apartment. Purchasing a home in a financially responsible manner means buying one that doesn’t break the bank. It shouldn't cost more than two and a half times your yearly income — or your monthly mortgage payment shouldn’t be more than 30 percent of your monthly take-home pay. Be sure to make a down payment that’s large enough to avoid having to pay for private mortgage insurance. If you don’t have the means to meet these simple guidelines, rent until you can afford to buy.
Having a budget is absolutely key to financial responsibility. Many people are turned off by the term “budget,” associating it with restrictions, limitations, and a whole lot of hassle. However, budgeting is one of the easiest ways to reach financial freedom. It helps you save money, prevents you from overspending, and reduces financial stress. Budgeting puts you in control of your money.
Saving money is essential — it must be taken seriously. When you get paid, take care of your bills and then try to put at least 10 percent of your check into your savings account. If that’s not possible, put in what you can. Even if it’s only a dollar, just getting into the habit of saving is important.
Being prepared for emergencies is also a big part of financial responsibility. Experts say you need to save enough to support yourself for at least six months without an income. If you’re in a relationship and live on dual incomes, this means being able to pay the bills on one income — or neither. If you’re one paycheck away from financial ruin, it’s time to start putting together your emergency fund..
Being Tax Smart
I can’t stress enough just how important it is to understand how taxes work — especially income tax. In order to budget your money appropriately, you have to know how much will be taken out of your check for social security, medicaid, and so on. You’ll also need to have a good understanding of tax brackets so you know how to file properly.
Again, financial responsibility means living within your means — no matter what those means are. Take some time to examine your financial situation, assess your spending habits, and make the necessary modifications to put yourself on the track to financial responsibility. If you don’t — that is, if you fail to take responsibility for your finances — you’ll end up broke, in debt, and facing bankruptcy again. And after everything you’ve been through, that’s the last thing you want.
About the Author:
Liz Greene is a makeup loving, dog hugging, anxiety-ridden realist from the gorgeous City of Trees, Boise, Idaho. You can follow her on Twitter @LizVGreene or catch her latest misadventures on her blog, Instant Lo.