In many ways, the health of your bank account is based on whether you’re a good decision-maker. After all, whether we’re rich, poor or somewhere in between often depends on the choices we make. Sure, some people are born with far more advantages than others, but still, whether you rise or fall in life often comes down to the quality of your decisions.
Good financial decision-making isn’t an art or a science, but there are some smart guidelines you can follow to help you achieve your goals.
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Weigh the pros and cons first. This is good advice for anyone making a significant life decision, whether there’s money involved or not.
Scott Vance, founder of Trisuli Financial Advising in Raleigh, North Carolina, says that when he was young, his dad would sit him down and have him split a piece of paper into two columns.
“The left would be positives, the right would be negatives. Then [he would] have me list as many as I could think of. He made me do this for financial decisions such as car-buying, enlisting in the Army and college choices,” Vance says. “It is something I still do today. Recognizing the negatives of a choice and the potential positives has always forced me to weigh the good and bad and make a decision fully knowing the negatives that may happen.”
Ask yourself why you’re making this purchase. Really question yourself. That’s something everyone should do, according to Brian Massie, a communications consultant who lives in Waynesboro, Virginia, and who spent nine years at a startup, seven as the chief financial officer.
[See: 12 Ways to Be a More Mindful Spender.]
“I like to think I have a decent perspective on the topic of making good financial decisions,” he says.
Massie believes that too many people make purchases without thinking things through. For starters, he says, you should ask yourself: “Is it a want or a need? People confuse these two all the time.”
He also points out that too many consumers buy things to keep up with the Joneses, and if you think you’re impervious to that (After all, who knows their neighbors these days?), ask yourself if you’ve ever upgraded your phone or played the lottery simply because you’ve been bombarded with mentions of the latest gadget or Powerball in the media?
Or maybe you’ve bought something expensive or traveled somewhere exotic because you noticed your friends doing something similar on social media?
Massie suggests that everyone listen to the old song, “Don’t Let The Joneses Get You Down” by The Temptations.
“The song … should be the anthem for making good financial decisions,” he says.
Live like it’s five years ago. If you’ve ever noticed that you never seem to get ahead financially, even though your income has gone up over the years, Ryan McGuinness, founder of the wealth management firm, CTR Financial, in Lincolnshire, Illinois, has a suggestion.
Before buying anything big, ask yourself: Could you have afforded the purchase five years ago? If you couldn’t, McGuinness suggests holding off, or buying something less expensive.
“Assuming your income has grown over those five years, you can’t help but have money left over for savings,” he says.
And if you aren’t convinced, McGuinness explains his thinking this way: “Your ability to control lifestyle inflation is the biggest deciding factor as to whether you’re going to be rich or poor. I’ve met people making close to half a million dollars a year and have very little in the way of savings. Why? They spend everything they make — and when they make more, they spend more.”
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Banish emotions from the decision-making equation. Plenty of people don’t do this, says Rob Jupille, president of RTJ Financial Management in Santa Monica, California.
“One of the biggest reasons people make bad financial decisions is that they let their emotions get the better of them,” he says.
And fear, he adds, drives a lot of financial decisions, especially when it comes to selling stocks. Buying stocks, too, Jupille says, is emotional, but that often happens when people are experiencing “the euphoria of a high point in the market. To counteract this, we have the client ask themselves if anything has changed, other than the market, to cause them to want to veer off their plan.”
Usually, taking a deep breath, Jupille says, is enough to prevent many of his clients from making a poor decision.
Don’t put off decisions. But you have to exhale at some point. Fear, Jupille says, often paralyzes people to the point of inaction.
And not making a decision is making a decision, notes Crystal Stranger, a tax accountant in Los Angeles who runs 1stTax.com, an online tax preparation service.
So sure, it’s smart to weigh the pros and cons and really think about what you’re about to do, but eventually, you do have to make up your mind.
“Honestly, what often is more important than making good decisions is making any decision at all. Many people let indecision make the decision for them,” Stranger says.
She has a point. If you waffle about how you should save for retirement or your kids’ college, or debate with yourself about whether to buy life insurance or draw up a will, and you research and think about it but ultimately take no action, eventually you may realize that there’s virtually no time left.
So try to get in the habit of making a decision, if you’re prone to letting life make decisions for you, Stranger suggests.
“Making decisions makes you strong,” she says. The more you make decisions, the easier it’ll become to make good ones.
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How to Make Good Financial Decisions originally appeared on usnews.com
