Money – Are you fiscally responsible?

We often hear the term ‘fiscal responsibility’ bandied around in the media with regards to government and local government spending, but what does it actually mean when applied to us as consumers and managers of our own finances? Actually, the correct question should really be, what does it really mean to be financially responsible? It’s a complex question with a complex answer, but at its core is a simple truth: to be financially responsible, you need to live within your means. And to live within your means, you must spend less than you make.

If you’re really looking to be financially responsible, just being able to make your credit card payments doesn’t cut it. The fact that you have a credit card payment at all and aren’t able to pay your balance in full shows that you already spend more than you earn. Responsible use of a credit card, then, must mean paying the balance on your account in full each month. Credit cards should be used for convenience, not to make ends meet. Credit cards are handy because they eliminate the need to carry cash, and you can even generate reward points. And credit cards can be very helpful in an emergency. That said, however, if an emergency does force you to put a large amount on the card, living in a financially responsible manner means curbing your spending until that balance is paid off. The same logic applies to all loans and borrowing that involve paying interest. Think about it: paying interest on anything means that you are spending more for that item than just the purchase price. Does that sound like the most responsible choice, or just the most convenient? When the interest payments are factored into the purchase price, you are spending more to obtain the item than even the item’s manufacturer thought it was worth. As such, avoiding paying interest on anything should be a major objective. Of course, when it comes to the cost of housing and transportation, avoiding interest is almost impossible for most of us. In such situations, minimising the amount you spend in interest each month is the most responsible action. Have you looked at and taken professional advice on how you can minimalise the amount of interest you pay on your home loan, for example?

You need to act in your own best interest. For many people, cutting down on interest and borrowing is easier said than done, but in practice, it really comes down to knowing the difference between necessities and luxuries. For example, you might need a car, but you don’t need a brand new, latest and greatest car and, unless you can afford to pay for it in cash, you shouldn’t be driving one. Likewise, you might need a place to live, but you don’t need a mansion. And, although most of us must have a mortgage to be able to buy a home, purchasing a home in a financially responsible manner means that you should purchase one that you can afford the payments on and still be able to pay all the other day-to-day living costs without causing hardship. In New Zealand, the recent introduction of the responsible lending code requires lenders to make reasonable enquiry as to whether borrowers can afford payment and living costs before any loan is approved. This has resulted in plenty of people being declined for loans or being able to borrow substantially less than they thought they could since it was introduced. This is not a bad thing in my opinion; you only have to look at how much household debt we have as a nation ($511 billion). In 2000, debt payments were at 100% of our disposable income, in 2017 this is forecast to reach 175% of disposable income.  So, how fiscally responsible are you? If in doubt, seek help from a good financial advisor, use sorted.org.nz or get free advice from citizen’s advice at cab.org.nz