Personal Finance: How To Develop A Responsible Approach To Money

Is your opinion of money “easy come, easy go?” This is the fast track to a life of poverty or just getting by. A view that money is for recreation and fun creates an environment that militates against saving, investing, and preparing for the future. It is important to develop a responsible approach to money in order for you and your family to have financial security over the long run. In order to do so, it is important to devise ways to cut down expenses which will save you in a difficult situation.

Set new priorities in your personal life.

Most money issues in your life evolve from your personal priorities. If security, retirement, and saving lurk near the bottom of your priority list, you will have money difficulties. The same is true if recreation, entertainment, and fun are your first three primary priorities. Being financially responsible requires you to have saving money and your future financial needs sitting at the top of the list.

Talk to people who do a good job of managing their personal finances.

The problem is that those who do not save usually do so because of ignorance about handling money. Easy credit, a steady job, and enough money to buy food feel like enough to them. They do not realize that credit limits can be maxed out, the job can become not so steady, and money may become scarce. People who manage their finances well have money for emergencies and steer clear of credit whenever they can.

Save first.

If saving is not a priority, you will not save enough to matter. Make it such a big priority that you pay your savings account before you pay your bills and buy food. Slow steady saving will build wealth for you if you start while you are still young enough. Older people who are late bloomers to financial management may have to suffer a little to save at a higher rate.

Learn to pay cash.

Giving away money in interest payments will keep you from building up financial reserves. If you pay cash, you do not have to keep paying for the item on a credit card for years to come. You can use the interest savings to increase your investments or to pay cash for other necessities.

Realize how expensive money is for you to obtain.

People view money as cheap. Most people earn money by trading hours of their lives for it. The traditional model of a 40 hour work week means that almost 25% of your life is given away to get money. If you are going to trade that much of your life for approximately 45 working years, you should treat what you get in return as precious. Think of early retirement as getting those hours of life returned to you instead of having to keep trading them for more money each day. It takes good money management for this to happen.

Think about your money before you think about your wants.

When you are considering buying something, take time to consider the impact of the purchase on your future finances. All purchases come with an opportunity cost. This cost is reflected by what you have to do without to have this item.

Most of the time this opportunity cost will not be felt for decades.

It will hit you about the time you are heading into retirement and realize that you retirement account is severely under funded. This is the cost for the “buy now and pay later” mentality. Interest on a credit account is not the only cost of satisfying your immediate desires without regard to the future.

Whenever possible, avoid debt.

It is common to apply this idea to unsecured debt like credit cards. However, you are far better off if you adopt a policy to avoid all debt. This requires you to learn to live with lesser products in your life. You may have to drive older used cars for a while until you can realistically afford to buy and drive better ones. Add to your possessions only with cash purchases. The one exception might be to buy a house. Try to maximize rather than minimize the down payment. By putting 50% or more down, you can reduce the interest and amount of time that it takes you to pay off your mortgage.

Make plans for your financial future.

A responsible approach to money means planning for the future. You need a significant savings account of available cash. This should equal about 6 months worth of after tax income. After this, you need to invest between 10% and 20% of your income toward your retirement. If you are starting later try for the upper limit.

If you have children at home, set aside money toward future college costs.

Start funds that you contribute to for paying for large items like cars, home repairs and remodeling, and other big ticket expenses. Your investments need to be spread over investment vehicles like an IRA, 401(k), and real estate. This will spread your risk and give you various levels of tax help. Consult with investment advisers to get the best mix for your specific situation.

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