What does it mean to be financially responsible as an adult? Does it mean graduating from the $10 bottles of wine to the $20 bottles of wine at the supermarket? It’s probably a bit more than that. Many of us think that being a financially responsible person means simply managing our money, buying mostly needs instead of wants, and saving. This all sounds simple enough, but perhaps it’s even a bit more than that. What may seem intuitive might not actually be what reality is. Here are some things people mistake for being financially responsible.
1. Buying a New Car
For many of us, buying your first car yourself or your first brand new car is almost a rite of passage into adulthood. A vehicle is one of the largest assets most people purchase and buying one ourselves gives us a feeling of both financial independence and pride. First off, we tend to mistake financial independence with financial responsibility. Just because you are capable of being financially on your own, doesn’t mean you are being financially responsible. Unfortunately, this sense of pride and excitement is also exactly what auto dealers hope to bank on when trying to push you into a car. In our excitement, this leaves many of us vulnerable to a making number of financial mistakes.
Now, for most of us purchasing a car often comes as a need, either needing to replace an older vehicle or needing a different sized car due to changing needs. But many of us skip the question of do we need a brand new car or would a slightly used car do? As most of us know, cars are depreciating assets, meaning they lose value over time, and a car loses a good amount of value as soon as it’s driven off the lot. Most new cars lose nearly half their value within the first two or three years! Consider a slightly used vehicle, maybe just a couple years old, as it could save you a significant amount of money.
Another mistake many of us make is focusing on just the price when purchasing a vehicle. Where we become irresponsible is when we forget to consider the effects of financing the car, which really has the much larger impact of the car’s price. Dealers often want to negotiate in terms of monthly payments because it’s easier to hide the total amount you’re spending on the car over time. That isn’t to say you shouldn’t consider cash flow impact and the monthly payment amount you can afford, but you should also keep in mind what you’re truly paying for a car over time when you calculate in your APR. You may find you’re actually paying thousands more on the car.
If you want to be truly responsible with your car purchase, use an auto loan calculator to see the impact of your loan terms. Don’t just haggle your cars price, also haggle the financing terms. They are not take it or leave it deals. Your financing is just as negotiable as the purchase price of the car. In fact, bring in several offers from other lenders and see if the dealer is willing to beat it. You might save quite a bit of money.
2. Buying the Most Affordable Option
There is nothing wrong with being frugal and managing your spending. But, living too frugally can also be a problem. Sometimes buying the cheapest option is not always the best option, as fixating on price is financially irresponsible. What you should also be keeping in mind is the importance of value. If a cheaper item consistently breaks and needs to be fixed or replaced, you might end up spending more in the long-term than if you just paid for the more expensive, better item, upfront. It will last longer and save you money. The old adage, “you get what you pay for,” does hold true sometimes.
When considering the value of a good or service, however, be sure you are basing that value on something measurable and tangible, not just perceived value. Marketers spend millions of dollars each year trying to distinguish their product from others and influence your perception of how valuable their good is. Do you product research, compare them side by side, and read other customer reviews. Don’t fall for the market speak.
Still, to be fair, this won’t always apply to those who simply cannot afford to purchase the more expensive item up front. It doesn’t help if something costs $200 more and is better if you don’t have $200 more to spend. If that’s the case, though, see if you can forgo having the item for a while and save up over time for the better, more durable good. Delay the gratification and buy something better later.
3. Over Saving Their Money
Saving money is a responsible thing to do, and you should always try to keep at least 3-6 months of expenses available on hand in case of an emergency. However, simply saving cash is not the best way to be financially responsible. Cash sitting in a savings account is actually dead money. It provides you no actual benefit. In fact, leaving money in a savings account is likely causing you to lose money as most people’s interest gains in savings likely don’t keep up with annual inflation.
Don’t keep excessive amounts of cash on hand. Keep just enough for an emergency, and invest the rest. Put it into a retirement account, towards your child’s education fund, or towards generally appreciating assets such as a home. Invest in stock or any investment that could yield you interest, dividends, or capital gains. Still, don’t take foolish risks with your money. All investments carry some measure of risk and therefore the possibility of losing money. Balance out your portfolio and consider the value of insurance. You work hard for your money. Let your money work hard for you in return.
4. Thinking They Are More Responsible than Broke People
Unfortunately, there is a mindset that those who are financially stable are actually more financially responsible than those who aren’t. And those who are broke are just financially irresponsible, unaccountable, and inherently instable people. This is an unfounded general assumption.
Are there people who are financially unstable because of their own fiscal irresponsibility or choices? Certainly. There are many people who are accountable for their own money misfortunes. But, there are also many people who are having financial difficulty due to circumstance and to lump all people facing money woes as irresponsible doesn’t necessarily actually make you more financially responsible than them nor correct in your assumptions.
Many people face financial issues due to circumstances beyond their control. Others might face medical debt, student loans, or debt from unexpected life events. These can all affect one’s financial status which can then trickle into personal lives. For those who have money and financial stability, they see many of life’s small problems, such as fixing the car, as a minor annoyance. But, for those who don’t have money, small problems can be a major setback. Not having a car, for example, means not being able to get to work, which means not making money, which then further feeds the already existing problem of not having money. The difficulty sometimes for many is that it’s not having money that leads to instability, not instability leading to not having money.
If you are financially stable and are lucky enough to have the financial freedoms that comes with that, then that’s excellent. No one is looking to blame you. But don’t mistake that alone for you being financially responsible or fully to your own credit. Don’t look down on others because of where you are in financial relation to them.
Financial woes can hurt many people’s credit. But there are lenders today who look beyond just a credit score and will take the time to get to know you and what your situation is. It isn’t charity, and you’ll still need to provide your fair share of proof that you can be responsible, but it’s worth it to at least try to seek out these lenders and build a long-term relationship.
5. Transferring Responsibility to Experts
It’s good to seek financial advice from experts and ask for help from industry experts. But financially successful and responsible people don’t yield complete responsibility to those experts regardless of how seemingly knowledgeable they are. Take time to ask questions and evaluate the value of the advice an individual is giving you. Dig deeper into their guidance and ask for explanations to their suggestions and why it may be a better alternative than another option. Seek a second opinion if necessary. Find someone you can trust to provide you sound advice, but keep the power to act on that advice in your own hands.
It’s reasonable to use expert advice as an empowerment tool and to gain further knowledge for yourself. Their advice and opinions can help you to make better decisions. But don’t yield the power to make those decisions for yourself, as only you can determine how comfortable you are with moving forward with any financial decision. Remember, it’s your money.