Make Winning Financial Decisions in 5 Simple Steps
Some decisions can be made lightly, but when it comes to your finances, money is on the line.
Oftentimes, we make choices on impulse or emotion and make decisions without thinking them through. This can lead to rash actions and unintended consequences. Following a system can help you make smart financial choices, from picking a restaurant for dinner to buying a house.
If you have a financial decision to make, here are five steps to point you in the right direction.
No. 1: Take a big-picture look at the issue and what you hope to achieve
To make a financial decision, first identify the issue and preferred outcome.
What is the issue?
To identify the issue, take a big-picture look at what you want. For instance, if you are considering a new credit card, ask yourself why. What specific purpose will it serve? Are there any risks?
The idea is to look at why you want or need something and whether it will positively contribute to your financial life.
What do you hope to achieve?
Think about the ideal outcome. Does it satisfy an immediate, short-term need or further a long-term financial goal? For instance, with a credit card, the ideal outcome for your financial situation might be a card that is convenient to use and offers the best rates and terms.
No. 2: Consider alternatives and consequences
Next, compare potential choices and their resulting consequences.
Consider alternatives
Don’t rush to make a decision. This is good advice for anyone, even if it’s not a monetary decision. Decisions require time and research. This means practicing patience as you explore choices and their potential outcomes.
An alternative choice should provide a different approach to the issue and a different outcome. Rarely is there only one option, and this process allows you to compare those available to you to find the one that best meets your needs.
Consider consequences
Write down a few scenarios in which your decisions can go wrong. If you can tie a dollar amount to each decision, do so.
Be honest about the potential consequences and whether or not you are prepared to handle the worst-case scenario. Recognizing the risks of each choice can help you avoid unanticipated consequences.
No. 3: Make a choice
Once you’re ready, make a choice. Narrow down your options by relying on trusted resources to build your knowledge.
Use reliable resources
Successful decision-making requires information and resources. Facts should take priority over emotions in your decision.
Know what factors to consider when consulting a source of information. Reliable resources are current, accurate, and objective. Focusing on trustworthy resources helps to remove biases and inaccurate information that might cloud your decisions.
Learn your rights
When making big financial decisions, it’s important to know what rights you have as a consumer. This might apply to home or car purchases, or any number of other major financial transactions.
Knowing your rights empowers you to push back against predatory practices and negotiate the best terms. To educate yourself, seek out official government resources.
Make a choice
Now it’s time to make a choice. Look at your list of alternatives, weigh the pros and cons, and choose the one that best meets your needs.
No. 4: Take action
Once you’ve made your decision, take action.
You did your homework, so be confident that the decision you made is right and that you’ll be happy with the results.
No. 5: Review results
You made your decision, but that’s not the end of things. Now it’s time to evaluate the results. How did the decision turn out? Is there anything you need to change? Is there anything you would do differently if you had to make a decision again?
Good or bad, our decisions provide lessons to apply to choices we make in the future. Even if a decision doesn’t turn out quite how we expected, there are usually ways to fix it.
Bottom line
Decisions are a part of life. When money is on the line, rely on a systematic approach to point you in the right direction.
