Making financial decisions is something that we are all faced with on a daily basis. We make hundreds of them during the course of a year. They could be as simple as purchasing a coffee or a pair of shoes to a more complex decision like buying a house or an investment. Do we stop and think before we make those decisions or are so many of them based on habits that we have formed over many years? Most of us would say that we rarely give much thought to the small financial decisions, however of course we think about the bigger ones.
If you ask those who are financially successful I would expect most to say that the small financial decisions are just as important as they large ones. Lots of small things add up over time.
One of the most famous international investment books, The Richest Man in Babylon, proposes you save 10% of everything you earn your entire working life. Let say you put the money in something pretty simple like a series of term deposits or a balanced fund (an investment that had a mix of cash, property and shares).
At the end of your working life your wealth would probably be greater than 90% of the population. Although I have not seen any research to back this up, I would be very surprised if this was not the case based on the general financial statistics that are available. Its one of the key reasons there is such support for superannuation and having it be compulsory. This is a pretty simple decision which forms a habit that has a huge impact over time.
Below are some ideas that may help you make better financial decisions:
Think – put some quality time aside before you make a decision. One of my favourite questions I like to ask in seminars is: What is the difference between how a millionaire and the average person manages their money? The millionaire spends one minute longer thinking about the buying decision.
Get clear – understand what outcome you want from your decision. Usually the best financial decisions are based on purely factual financial information. However most people make their decisions based entirely on lifestyle and emotion. There is nothing wrong with that as long as you understand that.
Write everything down – people often go around in circles and struggle to get any clarity. An exercise that I have found to be really effective is to write a list of the options you have and then list all the pros and cons of each of those options. Usually the list with the longest number of pros is likely to be your best option.
Compromise – its highly unlikely that you will find a perfect solution so you will need to go with the one that looks the best. In most cases you are going to be far better off making a decision rather than none at all. Remember you can always change that decision if it doesn’t work out as well as you hoped.
Seek some help – talk through your options with someone else. Having an impartial sounding board to run your ideas and thinking past can be really valuable. Help maybe as simple as talking to a friend or family member or if you need help with more complex financial decisions using a suitably qualified professional would be best.