“Financial responsibility” can be a heavy sounding phrase (and one that you might be hearing aloud in your dad’s voice right now). But being financially responsible simply means that you stay in control of your money—instead of letting your money (or lack of it) control you. It’s a key part of getting your act together on the road to adulthood.
When you’re financially responsible, you’re setting good spending habits that help you to avoid overspending. That way, you can enjoy your money and the security it brings, instead of feeling worried each month that you might not be able to pay your bills.
Money might not buy happiness, but you’ll certainly be happier if you’re not freaking out about it all the time.
1. Create (and stick to) a budget
Setting a budget isn’t just for business owners or the finance secretary; it’s something that everyone needs. Creating a budget is a keystone financial habit that supports all the rest of our financial planning tips, and you probably should have one one no matter what your financial situation is.
Once you have a budget, you’ll have a better sense of how much you can invest; how much you can reasonably pay into your emergency fund; and how much you can use to pay down debt each month.
Here are some tips to help you set and stick to a budget:
- Calculate your total monthly post-tax income. If you’re getting a salary, use your take-home pay as your guideline—not your pre-tax salary. Your employer deducts income tax and social security payments before your pay reaches your bank account, and it can be a serious cut. Your spending habits should be based on that final number on your payslip, not the figure you negotiated when you signed your contract.
- Total your monthly spending. Include fixed costs, like rent and your gym membership, and changing costs, like groceries and your electric bill. If you’re finding it hard to keep organized, budget-tracking apps like Mint and Goodbudget can make it easier. What if your income doesn’t stretch to cover all your expenses? Well, it’s time to start cutting.
- Set realistic goals. It’s good to have short-term goals for the next 1-3 years, like going on vacation, as well as long-term goals, like saving for a down payment on a house.
- Split your budget. Many people choose to divide their budget three ways: Needs, Wants, and Savings/Debt. One popular option is the 50/30/20 rule, where 50% of your income goes on Needs, 30% for Wants, and 20% for Savings/Debt.
It’s one thing to sit down and draft a fancy budget in Excel. It’s another thing to actually stick to that budget.
If you’re regularly going over budget in any category, it’s a sign that you need to review it. Maybe you weren’t realistic about how much you actually spend on Seamless; perhaps your utility bill is eating away at your potential savings, and you didn’t quite account for how expensive it would be to be in your college bestie’s bridal party.
Life happens. Your budget is a flexible tool to put some boundaries around those uncertainties and surprises.
2. Manage your debt
In an ideal world, you wouldn’t have any debt to pay off. You’d have unlimited cash and zero worries.
But in the real world—especially the real American world—most young adults already carry debt. There’s likely student debt (even if Biden’s recent decision trimmed $10k off the top), as well as credit car debt or car loans.
It’s never a good idea to ignore debt. The nasty fact is that it doesn’t go away—it just gets larger and larger.
If you don’t keep on top of repayments, it could affect your credit score, plus your debt will end up snowballing as it collects interest. What was once a modest sum could become an albatross hanging around your neck for years.
One way to keep up with debt repayments is to set an automatic payment from your bank account, so you never miss a payment date.
To keep your debt down as much as possible, be a smart consumer.
- Read the interest rates carefully before you borrow money or use credit for a big purchase
- Pay off debts with the highest interest rates first
- Refinancing, or taking out a lower-interest loan to pay off remaining debt, can help make big-ticket loans, like student loans, more manageable.
If you have a lot of lines of credit, refinancing (through a company like Earnest or SoFi) can bring all your debt together. This means that instead of paying five different debts down each month, you use one loan to pay them all off. This can make it easier to stay on top of your debt, without getting slammed with late fees.
3. Apply for term life insurance
No one wants to think about death. But hey, it happens to the best of us…and you want to know that those you leave behind will be provided for.
While you might be single at the moment, with no dependents, that might not be the case forever. And locking in an affordable life insurance policy when you’re younger is a key part of financial responsibility.
The good news is that life insurance is easy to find and apply for, and it doesn’t have to take up a big slice of your monthly expenses.
There are literally dozens of different life insurance products on the market today, but for many people, buying a term life insurance policy is arguably the most straightforward life insurance option to get the coverage you need.
If you’re making big adult moves like getting married, buying a house, or having kids, a term life insurance policy can help provide financial protection if you were no longer around. We’d be remiss if we didn’t note that Lemonade now offers life insurance—term life, specifically—and we think it’s a pretty great deal. Click below to get your personalized quote now!
Term life insurance helps provide financial protection for your family if you were to pass on unexpectedly during a predetermined period of time, or term. Lemonade’s term life offering provides a one-time, lump sum payment to your loved ones or family members (called ‘beneficiaries,’ in insurance speak), whom you select. These beneficiaries can be modified at any point—for instance, if you get married or have children.
Your loved ones can spend this payout, aka ‘death benefit,’ without limitations, using it for funeral costs, mortgage or car payments, student loans, or any other needs. Death benefits are usually income-tax free. Lemonade currently offers coverage from $50,000 to $1,500,000 with premiums starting at $9/month.
Before you buy a policy, you might want to chat with a financial advisor or a financially savvy person you trust.
4. Establish an emergency fund
No matter how much you’re earning or spending, everyone needs an emergency fund. The size of your emergency fund depends on your lifestyle, but a good rule of thumb is to save enough money to cover your basic expenses (that means your Needs, not your Wants) for 3 months.
If your monthly budget is chugging along and you’re paying off your debt, then an emergency fund should be the first place you send any savings. Once you’ve built up an emergency fund, you can think about saving for other goals, like starting a sinking fund.
Don’t worry, this isn’t “cash you set aside if your entire life starts to collapse.” A sinking fund is simply a savings account that has a specific purpose. It’s not your emergency fund, and it’s not your general savings account.
You could have a sinking fund to bankroll a dream vacation, or to adopt a dog. A sinking fund is a great way to give yourself permission to go wild with your money—within reason. And who doesn’t love going reasonably wild?
5. Start investing
Investing in the stock market isn’t just for rich people with trust funds—anyone can invest, on any sized budget.
There are two main ways to invest:
- Active investing, where you use an app like RobinHood or Charles Schwab to track stock prices and buy and sell stocks. This tends to be higher risk, higher reward. Apps can also “gamify” the investing process, which might be dangerous, depending on your personality.
- Passive investing is buying a fund like an ETF, which tracks a specific basket of stocks and leaves your money to (hopefully) grow. This form of investing is more “low and slow” or, as some say, “set it and forget it.” You can use an app like Acorns with easy, automated investing options and start investing with spare change today.
Beginners might feel more comfortable with passive investing, or a robo-investing app like Wealthfront or Betterment, which uses AI to manage your investment.
Whichever method you prefer, always set a budget for investing and make sure you don’t exceed it. Your investing money should be money that you can afford to lose, because there are no guarantees on the market.
It should also be money you can afford to not have liquid for the next 5–10 years, as this is about how long you might need to wait to reap the benefits. After all, we’re talking about financial responsibility—which doesn’t mean “risking it all on the latest meme stock.”
Financial responsibility doesn’t mean boring
Death, taxes, construction, bills, moving: these are the harsh, inevitable realities of adult life. (But hey, there’s a lot of fun stuff along the way, too.)
Getting a handle on your finances is one way to stop stressing about money and start enjoying your life to the fullest. Take your finances—and yourself!—seriously, even if you’re not currently raking in the dough. Things like proper budgeting, term life insurance, and modest investing are within reach for everyone.