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.
Too often, we make choices on impulse or emotion. Many times we 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, whether you’re picking a restaurant for dinner or buying a house.
Got a financial decision in front you? Here are five steps to point you toward the right answer.
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’s the issue?
To identify the issue, take a big-picture look at what you want.
For instance, if you’re considering getting a new credit card, ask yourself why you want one. What good will it do for you? Are there any risks?
The idea is to look at why you want or need something and whether it’s going to contribute to your financial life in a positive way.
What do you hope to achieve?
Think about the outcome you want. Maybe it satisfies an immediate, short-term need or furthers a long-term financial goal.
For instance, with a credit card, the ideal outcome is getting a card that is convenient to use and offers the best rates and terms.
No. 2: Consider alternatives and consequences
Next, compare several potential choices and their resulting consequences.
Don’t rush to make a decision — it won’t end well. 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 alternative choices and their potential outcomes.
An alternative choice should provide a glimpse into 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 and find the one that best meets your needs.
Write down a few scenarios in which your decisions can go wrong. If you’re able to tie a dollar amount to each decision, do so.
Be honest about the potential consequences and whether or not you’re 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, it’s time to 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 drive your decision — so leave your emotions at the door.
Know what factors to consider when consulting a source of information. Reliable resources are current, accurate, and objective. Focusing on trustworthy resources helps 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 purchases, 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 and weigh the pros and cons. Choose the one that best meets your needs.
No. 4: Take action
Once you’ve made your decision, take action.
Were you considering a credit card? Get the credit card you were eyeing. Were you looking for a new car? Go to the dealer and buy the car you picked.
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’d do differently if you had to make a decision again?
Whether good or bad, our decisions provide lessons to apply to choices we make in the future. And even if a decision doesn’t turn out quite how we expected, there are usually ways to fix it.
Decisions are a part of life. When money is on the line, rely on a systematic approach to point you in the right direction.