How to make better financial decisions?
Are you an optimist or a pessimist generally? Do you see silver linings where other see dark clouds? Research shows that our genes influence about half of our life perspective whilst the balance is affected by what we learn in early childhood and subsequent life experiences. Your disposition has an influence on your behavior towards your financial decisions as well.
Deciding how much to spend on coffee is simpler than how much to save for retirement. So, some financial decisions are easier while others are challenging. Some people with much higher financial wellbeing have developed greater self-control over their spending and are prepared to remove their current consumption for higher benefits tomorrow.
However, the total sum of all these decisions, year-on-year, determines our financial situation.
It is also true that people often neglect their personal finances because they feel those type of decisions are too ‘cold’, analytical and unemotional- according to Jane Jeongin Park, co-author of Not My Type: Why affective decisions makers are reluctant to make financial decisions.
Here are 5 practical steps to work with, while making financial decisions:
1 𝐓𝐡𝐢𝐧𝐤 𝐨𝐟 𝐠𝐨𝐚𝐥𝐬 𝐚𝐧𝐝 𝐧𝐨𝐭 𝐣𝐮𝐬𝐭 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐝𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬- Re-frame your financial activities into preferred life outcomes and life goals. See how your financial goals align with your life goals and then decide if the financial decisions you make today will affect those goals going forward.
2 𝐅𝐨𝐜𝐮𝐬 𝐨𝐧 𝐲𝐨𝐮𝐫 𝐯𝐢𝐬𝐢𝐨𝐧 & 𝐯𝐚𝐥𝐮𝐞𝐬- Motivation is what changes behaviour. Put a picture of your next travel destination or the next house that you want to buy as your computer screensaver or whatever that you know will keep you motivated towards working on your goals. Club these visions with your value system.
3 𝐀𝐜𝐤𝐧𝐨w𝐥𝐞𝐝𝐠𝐞 𝐲𝐨𝐮𝐫 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐫𝐞𝐚𝐥𝐢𝐭𝐲- Good decisions also come from understanding this. Choices about how to use your money will be easier if you know what you truly have and what is important to you. So sit tight and look at those bank statements, no need to get into high intensity excel files, but it’s good to know how much you make and how much you are spending every month and on what. Once, you are over this hurdle, look at what is important to you. Is the course that you are looking at for upskilling yourself inclined more towards your goals or is the spend on your routine dine outs. Choice it out!
4 Explore your options- Collect facts and figures! Before making a decision, make sure you’ve done your research – learn what you need to know. Consider several options, substitutes, and alternative courses of action in this step. Evaluate factors such as costs, and that’s total costs, benefits, risks, and implications.
5 Don’t be hasty with financial decisions- No financial decisions need to be made on the spot. All opportunities will be there tomorrow if you are patient. I am not saying that procrastinate over your decisions, but do sleep over them, take your time to understand them, understand their authenticity and what value can they create for you. Take an opinion, speak to someone who you trust and evaluate whether you really need to do this.
Being present and aware when making financial decisions leads to better financial outcomes.