When it comes to your personal finances, there is no single ‘correct decision’ that’s right for everyone. The right financial decisions depend on a variety of factors, including your unique goals for your money and life, the resources you have to work with, and your comfort level with risk.
Finances are stressful for many people, but at Anderman Wealth Partners, we never want you to lose sleep over a financial decision. When there’s no time-tested playbook that works for every circumstance, how do you know what money moves to make?
Here are five steps to help you make rational financial decisions that fit your situation:
- Define your version of ‘success.’
When there is no one ‘right’ decision, the correct moves all depend on what you’re trying to achieve. Think about goals—not simply for your money but also your life—today, in the near term, and for your future. Prioritize them and ask yourself, “Does making this financial decision move me closer to or further from achieving my goals?” Wise financial decisions should always consider what you want most over what you want now.
2. Gather the facts.
You cannot make sound financial decisions without data. The information to evaluate will depend on the type of decision you’re making—such as whether to make a large purchase, which investments to select, or whether to pay now versus later—but in general, there are three facts you must understand. 1) How does the decision affect your cash flow? You must have a firm grasp on your income and expenses, so you have enough resources to cover your needs. 2) What are the risks? From potential returns to up-front investments, most financial decisions carry some element of risk, and it is important to evaluate probabilities while maintaining realistic expectations. 3) What are the tax implications? Pausing to ask this question will allow you to explore alternative methods for achieving the same result that might be more tax-efficient.
3. Weigh the pros and cons.
By choosing to do one thing with your money, you might be forced to forego something else. Financial decisions often have trade-offs, so it’s wise to ask yourself, “What else could I do with this money?” and “Is there an opportunity cost by not doing this?” It is also important to assess the long-term value of the route you choose and its impact on your stress, health, and emotional well-being.
4. Check for biases.
We all do our best to make rational decisions. However, biases can influence our thinking and lead toward less-desirable outcomes. The biases I see most frequently in finances are overconfidence, loss aversion, or herd mentality. It’s critical to reflect on whether any of these are in play before you make financial decisions. Just because you have been successful in the past or everyone else is doing it, does not make it the right move for you. Sticking with or avoiding something because you don’t want to admit defeat can also hold you back from making the right decision.
5. Take a breath.
Big financial decisions should not be rushed. Once you’ve completed steps one through four, talk it over with someone you trust. Sleep on it, if you need to, and remember that many financial choices will allow you to monitor and adjust if things didn’t materialize the way you envisioned. If you made the decision slowly and thoughtfully, then trust that it was the most rational choice for you at the time. Pay attention to how you feel after the decision, track performance, and allow the additional information you gather over time to be learnings you carry forward into future choices.
As a financial advisor, my job is to guide clients through these steps, provide accurate and insightful data, and offer support as you pursue your version of success. Logical decisions often make sense on paper, but rational decisions also consider the impact of your choice, and only you can decide if a decision feels right for you.