How good are you at making financial decisions? Are you able to analyze a situation and quickly make a decision? Or are you a “waffler,” finding it tough to make decisions and putting things off until the last minute or the minute after the last minute?
The fact is that the health of your finances is tied very closely to how good a financial decision maker you are. Whether you’re poor, rich or someplace in the middle depends a great deal on the quality of your financial decisions. Some people were fortunate enough to be born into very advantageous circumstances so that their decision-making skills aren’t really that critical. However, for most of us, the quality of our lives is tied very closely to how good is our financial decision making.
While good decision-making is more of an art than a science there are some keys or guidelines that will Improve your decisions, making it easier for you to achieve your life’s goals.
1. Weigh all the pros and cons of your financial decisions
If you are about to make a decision that will have a major impact on your life you need to first weigh the pros and cons whether there’s money involved or not. Scott Vance a financial advisor in North Carolina has shared how when he was a boy and needed to decide something his father would make him get a piece of paper and divide it into two columns. On the right column would be the positives and on the left the negatives. His father would require him to list as many things in both columns as possible. Scott says his father made him do this for decisions such as buying a used car as well as non-financial decisions that would seriously effect his life such as joining the Army and choosing a college.
This would be a good habit for you to develop. When you list out the potential positives as well as the negatives of a choice this forces you to weigh the bad and the good so you’ll be able to decide what to do while knowing full well what the negatives could be.
2. Think why are you making this purchase
A second thing you need to do is ask yourself why you’re buying this thing. In fact, this is something everyone should do, according to Brian Massie, a communications consultant in Virginia. He believes too many people buy things without really thinking why they’re doing it. And that you need to ask yourself whether the thing you’re buying is a “need” or a “want” as it’s easy to confuse the two. For example, you may want to upgrade to a new cell phone because it has a couple of neat features that your current phone lacks, but do you really need it? If you ask yourself the “want” or “need” question before making any financial decisions, the odds are that you’ll make better ones.
3. Live like it was 2011
If you feel you’re not getting ahead financially, despite the fact that your income has increased over the years, then ask yourself this question before making a major purchase — could you have afforded to make this purchase five years ago. This gets into a thing called “lifestyle inflation,” a fancy way of saying that as you earn more are you simply spending more? As an example of this, think about that new car you’ve been eyeing. Could you have afforded it in 2011? If not, and you buy the car, you’re falling victim to lifestyle inflation. And how well you can control this will be a big factor in determining whether you’ll end up poor or rich. According to Ryan McGuinness, the founder of a wealth management firm in Illinois, there are people making nearly $1 million a year that have practically no savings. If your goal is a comfortable, stress-free retirement you need to be saving money every year and the key to this is not falling victim to lifestyle inflation.
4. Get the emotions out of your decision-making
According to Rob Jupille, president of a California-based financial management firm, one of the major reasons why people make poor financial decisions is because they let their emotions take over. And, unfortunately, one of these emotions that often drives decisions is fear. He believes this is especially true when it comes to selling stocks. When people see what’s happened in the market due to a significant change such as Brixit, fear tends to take over and they end up selling stocks they should’ve held onto. What he suggests to counteract this is to not make a decision until you have asked yourself the question has anything changed besides the stock market that would cause you to buy or sell stocks. If the answer is no, then don’t either sell or buy.
For that matter, Jupille has also said that sometimes all you need to do is just take a couple of deep breaths before making a financial decision as this could keep you from making a poor one.
5. Just make a decision
Crystal Stranger, a California tax accountant, reminds us that to not make a decision is to make a decision. While, yes, you do want to weigh the positives and negatives and think seriously about the decision you are about to make, you will eventually have to decide something. She points out that sometimes, it’s more important to just make a decision of some kind than to not make one.
For example, if you continually waffle about saving for your kids’ college educations, your retirement or about having a will drawn up but actually do nothing you may find that you have practically no time left to do anything. She further points out that the more decisions you make the easier it becomes to make good ones as you will become a stronger decision-maker.
Use both sides of your brain
Finally, here’s a short video explaining how you can make better financial decisions by using both sides of your brain.