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Becoming financially responsible | Vanguard


At a glance

  • Live within your means by earning more than you spend.
  • Prepare for both an income shock and a spending shock.
  • Build a strong credit history.

Most parents aspire to raise happy, healthy children who will become responsible, productive members of society (and move out of the house). Regardless of how we were raised, each of us falls somewhere on the spectrum of financial responsibility—find out how you can improve your position.

Keep income > spending

The math behind living within your means is simple: When you subtract what you spend from what you earn, the result should be positive. If it’s negative, you’re living beyond your means.

If you’re in the positive, keep it up. Try to save even more, if you can. If you’re in the negative, don’t panic. Take control:

  • Distinguish between your wants and needs. This may be easier said than done. If you don’t have easy access to another form of transportation, a car is a need. A nice car is a want.
  • Create a budget. Just having a general goal in mind for how much you can spend on certain expenses—food, entertainment, housing, transportation—over a certain time frame can help you make smarter spending decisions.
  • Avoid your spending triggers. Do your best to maintain your discipline, and try to resist temptation. If bargain shopping is your downfall, unsubscribe from promotional emails to reduce temptation. If you overfill your cart when you go to the grocery store before dinner, don’t shop on an empty stomach.

More information:
How to take control of your debt

Prioritize your savings

Prepare for an emergency

Having emergency money means you’ll be less likely to need a loan from a friend, a family member, or an institution if your car breaks down or your roof leaks. Even if your emergency stash falls short, it can still lower the amount you have to borrow (and pay back, possibly with interest).

There are two types of emergencies you should prepare for: a spending shock and an income shock. A spending shock pertains to a onetime unexpected expense, such as paying for car repairs after an accident. An income shock represents a sudden loss of continuous income (for example, experiencing a layoff).

Getting started may feel daunting, but begin small and build your savings over time. We recommend setting aside at least $2,000 to prepare for a spending shock. Consider keeping this money in a low-risk investment like a money market fund. That way, your money will be easy to access and won’t change much in value over time.

For an income shock, aim to have at least 3 to 6 months of living expenses set aside. If you’re retired, try to have 12 months of living expenses saved. Don’t be afraid to start small and work your way up: Tally your unavoidable living expenses for one month. Divide the amount by 12. Save that amount each month. When you reach that savings goal in one year, do it again until you have a few months of savings to fall back on.

We recommend saving money for an income shock in an easily accessible account like a taxable account or Roth IRA.

More information:
Partner with an advisor
Emergency fund: Why you need one

Get ready for retirement

You’re responsible for your retirement savings. The details of your retirement—the age at which you stop working, where you live, and how—are up to you.

Here are the top 3 things you can do to prepare for retirement:

  • Enroll in your employer’s retirement plan if one is offered. (If you don’t have a retirement plan benefit, you still have options, such as an IRA.) 
  • Save, or work toward saving, 12{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}–15{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of your gross (pre-tax) annual income, including any employer contributions.
  • Invest your savings in a diversified, low-cost portfolio that complements your time frame and risk tolerance.

You’ll need to consider your monthly expenses when you retire. Most of them will most likely stay the same, but you may need to review new items in your budget (such as Medigap or long-term care insurance) as well as expenses you’ll no longer need to consider (such as payroll taxes, clothes, and gas for work). You’ll also need to determine your monthly income from Social Security, pensions, or any other part-time work or passive income that you may be expecting in retirement.

Vanguard offers several tools to help you determine your monthly expenses and income, which you can use to figure out your spending needs.

Calculate your expenses in retirement 
Calculate your income in retirement

If you’d feel more comfortable reviewing your options with Vanguard Personal Advisor Services®, call 800-523-9447 to speak with an investment professional.

Learn more about Vanguard Personal Advisor Services

More information:
The basics: Saving for retirement
Account types you can use to save

Give yourself credit

Your credit history refers to how you use money. Your credit report is a record of money-related activity (balances, charges, and payment history) on credit cards, some bills (such as utility bills), and loans associated with your name and Social Security number. A credit score is a number based on your credit report giving potential lenders a sense of how you handle debt payments and bills.

You need to establish a credit history to get credit. If you don’t have a credit history, it can be hard to get a job, a credit card, an auto loan, an apartment lease, or a mortgage. Before a potential employer, lender, or landlord takes on the risk of giving you something, they want to see evidence you can handle it. In the eyes of a potential lender, your credit report and credit score are good measures of how financially responsible you are. Having a strong credit history and a high credit score can also lower your cost to borrow by qualifying you for a lower interest rate.

For example, if you have excellent credit and qualify for a $20,000 auto loan with a 1.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} interest rate for 5 years, you’ll pay about $772 in interest over the course of the loan. If you have fair credit and qualify for a loan with a 3.5{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} interest rate for 5 years, you’ll pay over $1,800 in interest—a difference of over $1,000 that you could’ve saved or invested.

Review your credit report for accuracy each year. You’re entitled to a free copy of your credit report once a year, but there may be a charge for getting your credit score.

It’s go time

Smart money management skills can take time to develop. Start by holding yourself accountable for the financial decisions you make. You have a lot to gain by spending less than you earn, preparing for an emergency, taking control of your credit, and saving for retirement. But if you don’t take steps to be financially responsible, you also have a lot to lose.


All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Advice Services is provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

The services provided to clients who elect to receive ongoing advice will vary based upon the amount of assets in a portfolio. Please review Form CRS and the Vanguard Personal Advisor Services Brochure for important details about the service, including its asset-based service levels and fee breakpoints.


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