How to Make Good Financial Decisions

iStock_000012574800XSmallTo get ahead in life, you need to make more good decisions than bad. Good decisions can result in your ability to get a better job, make more money, save more money, invest for gain and other steps that help you end up in financial plus land.

How does one go about making more good decisions than bad ones? You are standing here, at the edge of the present, looking hard into the mist of the future – seeing just dim outlines of what might be. The branches in the road are many and lead to different paths. No one knows the future. Decision making must be done based on the present and your vision of the future.

I believe that if you use a process to make your decisions, you will be more apt to make more good ones than bad.  You will get better and better at the process and hence make better and better decisions.  Here are factors I consider important in good decision making.

Factors That Help You Make A Good Decision

Starting with the end in mind.

This is one of Steven Covey’s Seven habits of successful people. What is your vision of your financial future? Have a goal, develop a plan and use it to make your choices – the ones that lead to moving your plan forward.

Researching your options.

Research to learn the alternatives available and the probable consequences of those choices. Be thorough in doing your homework. Find and use checklists, articles, books and other knowledge sources about the circumstances and results of your choices.

Understanding the conditions of the decision.

Don’t do something you don’t understand. Be aware that the outrageous and unthinkable can actually happen. Read the fine print. Understand that choices are usually mutually exclusive – you can’t do or have everything, no matter how rich you are or how much time you have. Consider the best and worst case scenarios and how you would deal with each one if you make this decision. Outlandish things do happen!

Using common sense.

If something sounds too good to be true, it probably is. Does this decision make common sense? If not, think again.

Not going it alone.

A person can get so immersed in their own viewpoint that they totally ignore something very important. Bouncing the choices and your thoughts off a trusted party can show you the error of your ways. Sometimes it is hard to accept another viewpoint, but it is important to listen and consider the validity of someone who is questioning your judgment! Better a question now than an ‘I told you so’ later.

Sleeping on your choice.

Few things in life really require an instant decision. Take time to mull it over. Let your subconscious weigh in before making your choice final.

As an extreme example, a book I just finished reading – Family Fortunes by Will and Bill Bonner – suggests that folks who want to hold onto their fortunes for 100 years should only make a major financial decision once every 5 years!

More thinking, less feeling.

Don’t decide when you are in an emotional state. Wait. Don’t decide based on popular opinion, use your own logic.

Letting your body rule instead of your mind.

Don’t make decisions when you are sleep deprived, hungry, in pain or some other less than optimal physical state – it can cloud your judgment.

Making good on your choice.

Making a decision is only part of the battle. You need to follow through and take action based on your choice. If you decide that you should diversify your finances, you will need to figure out how (perhaps by choosing an asset allocation model), and then do transactions to make it happen. Then you will need to monitor your allocation choices and percentages as an ongoing task.

How Would This Work?

Lets say you are deciding whether to buy a new home now while mortgages are low and the housing market depressed.  How would you use the above factors to aide you in making your decision?

Start with the end in mind.

How does the new house fit into your vision of your future? Does having a new home move you towards that vision by enhancing your life quality, lowering your mortgage, increasing your equity or providing more security and stability? Do you plan to live in the area long enough to make the purchase worthwhile?

Research your options.

Find out all you can about mortgages, mortgage brokers, your credit score, your job or business stability and potential income increases or decreases, the neighborhood you want, the house itself, all costs related, the negotiating opportunities for reducing costs, the actual total costs involved in buying, selling (or renting), moving, getting new furnishings and etc.

Understand the conditions of the decision.

Weigh the choice of staying where you are, choosing other homes or home types. Know about hidden costs or conditions – such as pending tax levies or unpaid encumbrances for which you will become responsible, the costs of any professionals you need to use, such as lawyers or title searchers.  Is there a homeowners association?  What does it cost and cover?  How much and what type of insurance coverage will you need?  Who has the authority to force you to make changes to your home or governs the types of changes you can make?

Read and understand any documents and understand the conditions of the sale and post sale (warranties and etc). Don’t enter into contracts (verbal or written) that you don’t understand. Doing a short sale? Get educated. Buying a foreclosure? Research!!!

Use common sense.

Is the house pristine and the sale price rock bottom? What else is wrong – there must be something! Outlandish and unexpected things can happen. Is the house on a flood plain? Subject to hurricanes or tornadoes or earthquakes?  Understand the frequency with which these have happened in the past.

Don’t go it alone.

At every step, from the moment you start thinking of buying that new home, bounce your thoughts off of your spouse, your parents, your accountant or advisor. Consider their information, whether you use it or not. Let their input temper your eagerness for that new home purchase.

Sleep on your decision.

Sleep on the decision to even buy a home. Sleep on the decision of which neighborhood you want, what price range you want, the number of rooms and how they are divided and etc. Sleep on the decision to offer a certain price or make a counter offer (and be willing to walk away).

Don’t buy with your emotions.

As you look for that home, go through a checklist and only consider homes that pass all items on your list. Do a financial analysis to determine if buying a home will move you towards your financial goals or away from them. Think about the ‘extras’ that may tempt you post sale – keeping up with the Jones type extras. Remember to include the future equity potential – a good house in a bad neighborhood is unlikely to retain value into the future. Don’t make a decision to buy a house when you are grief stricken, depressed, stressed, overworked or angry – you won’t take the time or make the effort needed to get it right.

Don’t let your body rule your mind.

You will get physically tired of looking. You may want to just get it over with. Don’t settle because of that.

Make good on your choice.

Make the best deal you can. Keep the housing expenses under control going forward, but keep your property maintained to preserve it’s value. Stay abreast of neighborhood changes and plans so you can take an active role in preserving the value of the hood.

Making good decisions year over year is not easy, but it can be done and practice in the decision making process can help. I think a consideration of the above factors can improve the decision making process and help you make good financial decisions.

 What factors do you consider important in making good financial decision?


Comments

How to Make Good Financial Decisions — 19 Comments

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  2. Good post Marie! I could not agree more about having the end in sight when making financial decisions. Just like you would not go on a major road trip without looking at a map, this is what the vision does for you. I find that it helps make the decision making process much easier to approach.

  3. Great tips Marie! One of the things that I normally do when I have to make a financial decision is to sleep on it, because oftentimes what looks good for now, may look different tomorrow and having that different perspective gives me an important advantage when making my decisions.

  4. Some really good advice here. My biggest problem – and I’m sure some will agree – is staying on track with the plan you’ve laid out for yourself. I’m really great at planning and coming up with good financial decisions. However, sticking to my plan gets a little tedious.

    • You have hit the nail on the head as to why we aren’t all millionaires or billionaires! Persistence is more important than almost any other dimension of success. Try to make the plan part of your daily habit somehow… reading over it once a day…working on one small part of it…. talking about it with someone who will encourage you and etc…maybe that will help.

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