Making decisions are not always easy, making financial decisions have their own unique challenges. Sometimes we make certain money decisions and regret it almost immediately whereas other times we do not realize the consequences of our decision until many years later. One can never make the right decisions 100% of the time, however we can put in place certain guidelines to help us in the decision making process.
- Decision
1. No Emotional Decisions
The worst time to make any decision is when you are happy or sad. No financial decisions should be made when in a heightened emotional state, whether good or bad. When in an emotional state your judgment will be clouded and you will not be able to understand the long-term consequences of your decisions. Try avoiding any decisions when in this state, they should always be made when your mind is clear.
2. Sleep On It
If it is a major financial decision you need to make, it should never be made in a rush. At least take 24 hours to think about the decision before finalizing, sometimes this may mean you miss out on an opportunity but in the long run you it will be in your benefit. The 24-hour rule will come very handy when in a high-pressured sales environment such as car dealership or investment firm.
3. Plan and Stick to It
When it comes to your finances a long-term goal and a financial plan is a must. You need to have a goal of where you want to be and when faced with a financial decision you need to asses if it fits your long-term plans. Does buying the brand new car really fall within your plan and does it help you reach your long-run goals?
4. Can’t Control It All
Contrary to popular believe, unfortunately we cannot control everything in our lives. A bad storm caused some damages to your home or the stock market had a bad few years…you cannot control these situations. All you can do is prepare for these unexpected situations (for example, emergency fund) and respond to them. Worrying about things that are out of your control will not benefit you in any way. In fact, it will only cause more stress and therefore lead to bad decisions; spend your energy and efforts on things you can control.
5. Review
As stated earlier, there is no way to make a bulletproof decisions so no matter how hard you try you will make mistakes. Take some time to review some of your recent bad financial decisions and try to find out why you settled on the choice you did. Did you rush into it? Did you overlook certain signs? Was it an emotional decision? Reviewing can help you become aware of certain habits and factors that affect your financial decisions.
The purpose here is to change your habits and become more aware of your choices. Often we make decisions, financial or otherwise, without knowing why we did it. In order to make better financial choices you need to be aware of your decision making process.
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Article by Ray
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.
Ray has written 271 articles.
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{ 7 comments… read them below or add one }
This is some great advice. I especially like the “sleep on it” and “can’t control it all” tips. I would just add that you can control your stock market risk to some extent by adjusting your asset allocation. If you don’t want to take the risk, lower your equity exposure to a level where you’re comfortable.
Here’s some tip son buying your first car that might be helpful!
http://www.londoffadvantage.com/blog/2010/02/first-time-car-buyers-what-to-know/
Don’t forget that once you make a mistake it usually can be corrected! Don’t beat yourself up over it but find out how you can undo the damage as much as possible.
A lot of people just throw up their hands and say “oh, well!”
Successful people say – I blew it and now I am going to make it better.
(Hint! Hint! some mistaken trades can be undone if caught soon)
This is a pretty good and helpful list. I like especially #2. This has worked well for me in the past. But I think some of these items like #1 “no emotional decision” may be a little difficult to implement. We are human after all and almost every decision – if not all decisions – we make is influenced by emotions.
Great list. I would add finding someone to make you accountable to yourself. If you have a plan, make sure you tell someone so they help you stick to it.
Pretty good tips. But ala #4 you can’t always control #1 and #2. We often face happy or sad situations in which decisions need to be made quickly.
Fortunately, decision making is a skill and we can all learn specific techniques that help us be better at it.
I have to say “sleep on it” is my fave. I also agree with Thicken that having an accountability partner is good as well.
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