Description of Financial Responsibility

Financial responsibility indicates how an individual manages personal budgets.

Personal financial responsibility consists of methods and practices an individual uses to manage his expenses, invest in short-term assets and plan for the long-term. A financial responsibility adviser, or personal adviser, may help an investor reach her goals. A personal adviser may review the investor's financial data at regular intervals, such as monthly or quarterly, to evaluate progress.

Definition

Financial responsibility indicates how an individual manages his budget, that is, how he allocates resources based on his budget. For example, a sales and marketing associate earns $2,500 per month. Her expenses include rent of $750, $250 for utilities and $500 for groceries. Her monthly budget shows a disposable income of $1,000. Financial responsibility also relates to how an individual invests in long-term assets. For instance, the sales associate may invest $700 in U.S. Treasury notes and transfer the remaining disposable income of $300 in a savings account.

Significance

Financial responsibility is significant in modern economies because consumers who do not plan appropriately may file for bankruptcy or be temporarily insolvent, which may lead to reduced levels of corporate sales. As an example, assume the sales associate loses her job. If she does not plan adequately and cannot find a job rapidly, she may be unable to pay her landlord and utilities company. Consequently, she may default on other loans or file for bankruptcy.

Financial Planning

Financial planning is a process that helps an investor select investment strategies based on his disposable income, employment history and earning potential. An individual's earning potential' indicates how much he may earn before retiring, and it may be affected by education level, occupation and age. For example, an electrician can evaluate his quarterly budget and gauge his financial standing. He may decide to invest in corporate bonds and stocks or opens a 12-month money market account at a local bank.

Expert Insight

A high net worth individual or family occasionally may hire a financial responsibility specialist to help manage assets. This specialist is also called personal financial adviser, wealth manager or private banker. A wealth manager applies financial acumen and securities markets knowledge to evaluate a client's financial data or investment objectives, and help a client reach her goals. A private banker typically works in a bank's wealth management department.

Considerations

Other important considerations also may help an individual be financially responsible and reach his investment goals in the long term. Tax planning, or the practice of actively managing fiscal liabilities and engaging in tax-saving activities, may be one such consideration. An individual can ask a financial adviser to aid in establishing an adequate tax-saving strategy. Another consideration is the use of retirement accounts to reach long-term investment goals and reduce income taxes.

References

• Investopedia: Basics of financial responsibility