Making a financial decision can be a daunting thing for many people, especially if you are looking at committing a large sum to that decision! Research from Pew Charitable Trust in the US concluded that (surprise!) the majority of people are not very good financial decision makers. The decisions they are making are keeping them on the treadmill to pay for them, or even taking them down.
It often starts with the small financial decisions we have to make – there are many people who would rather have their $500 today than $750 in a year’s time, and with a reported one third of Australian households having no savings, there is simply nothing to fall back on when a poor financial decision is made.
So, how do you make financial decisions?
Here are 5 of my tips for making better decisions with you money:
1. Start by paying yourself first
Yes, I’ve said it here before but it’s something I so passionately believe in that it’s worth saying again: make yourself the first bill you pay come payday! And put that money away sight unseen until it has grown into a sum you can further invest. Even once you have made your first investment, don’t stop paying yourself first – this means that you should always have some form of back-up.
2. Define your decision
With any financial decision, particularly before a major purchase or investment, define the decision that you are making. What is it that you wish to accomplish out of it? Will this purchase/investment accomplish that goal?
3. Don’t rely solely on first impressions
This applies particularly in business – we usually form an opinion based on our first impression of coming across something, which in business can be good and bad. If that new business idea really excited you, make sure you are not making a decision to get into it solely based on that first impression. You must be able to objectively weigh the pros and cons of the business (or investment) before making a prudent decision. If no cons have been presented to you, make sure you do your research and look for them!
4. Give yourself time
Have you ever been the subject of a “hard sell”? You know the kind, where you “must” sign up now or the deal will no longer be available? Walk away. Give yourself time to do a bit of homework, consult an expert third party or find out what you need to in order to feel completely comfortable with the decision. Legitimate investment opportunities don’t tend to require your immediate decision, and remember that under Australian law, if a sale is considered an “unsolicited consumer agreement” (such as a salesperson at your door or in a public place), a 10 business day ‘cooling off’ period, where you have the opportunity to change your mind is mandatory.
5. Identify and assess alternatives
Bad decisions are often made when you’ve made up your mind about a decision without considering the alternative options. Do your homework!