Jeran Van Alfen, CFP®
How to Make Better Financial Decisions
We are all faced with financial decisions on a daily basis. Some decisions are small like: How much to spend on lunch? While others can be major like: Should you buy the house in today’s market? If you feel like making the right financial decision is challenging, then you are not alone. Studies show that 7 in 10 Americans postpone making major financial decisions .
There are many reasons why most of us find decision making difficult when it comes to our money. Sometimes it is a lack of confidence in our ability to make a choice. Sometimes we are caught up in “paralysis by analysis”, meaning that we overthink the problem until we don’t know what to do. While other times we feel an urgency to make an uncomfortable decision because we fear missing out on what we think everyone else is doing.
Smart decisions are made when you feel educated, confident and empowered that your choice is the right one. These emotions are the reason financial planning is so important. A good plan will provide the education needed to make a confident choice. In this post, I will share some processes that will help you make better financial decisions consistently.
Early in my career, I was once told to try to visualize every decision before the opportunity presents itself. Often, we don’t know what experiences life will bring, but we do have some control over how we act when we are faced with choices. Since the early days of my career, I have tried to figure out what was meant by this advice. In my experience, I feel that it has been important to create a vision of what I want my life and finances to look like. This way when choices are presented, I can evaluate my decision on whether it will help me get closer to or further away from my vision.
This process has helped many times in my career when really tough choices had to be made. I suggest taking the time to create your vision. You can write it down in a journal, use a vision board, brainstorm with your partner, or anything else that will help you really define what you want. Also, it is ok if your vision changes. It should definitely evolve and grow and your choices should as well.
A tool to make better decisions
Recently, I was listening to a podcast about making better decisions . The podcast outlined a process for keeping a decision journal to improve your performance in making decisions. I thought it was a great idea and have implemented it as I make my own financial decisions. During the podcast, there was a reference to a conversation between the Nobel Prize winning economist, Daniel Kahneman and Michael Mauboussin, chief investment strategist for Legg Mason . According to the story, Kahneman was asked what is the single thing an investor could do to improve his or her performance and the immediate reply was to buy a notebook and start keeping track of every decision. The reason this helps is that it helps us to learn from our decisions and prevent hindsight bias. We tend to look back on our decision-making and skew our intended results to what we feel is favorable to us. The decision journal will give you honest feedback of what your intentions were at the time of making your decision so that you can measure your performance.
Here is the process for keeping a good decision journal:
Describe your decision as specific as possible.
Write down your desired outcome of the decision.
Write down why you believe the outcome will happen based on the thought that went into your decision. (This means that you need to do the work and research to know why you are making the decision.)
Write down if the desired outcome doesn’t happen, what the consequences will be.
Lastly, write down how you feel at the time of making the decision. Again, be specific about the emotional and even physical state that you feel.
Build a decision-making team
When it comes to your money, you should ultimately be in charge and make the decisions, but it helps to have a team that you can talk your decisions through with. I recommend building a financial team with a Certified Financial Planner™ professional. The CFP® credential means that your financial planner should follow a process that will guide you to more educated financial decisions. Make sure to share your decisions with people you trust and it helps to get feedback from people who have been faced with similar choices.
Hopefully these ideas will help when you are faced with challenging decisions and if you need to talk through a decision, please let us know! We are always happy to be a resource in your decision-making process.
I once read that 2/3 of adults have set financial goals, but only 1/4 have a written financial plan. At Centered Financial, we deliver a written action plan to help you make progress toward your goals. You can check out our financial planning process here.
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.