Photo by Mimi Thian on Unsplash
When it comes to being good with money or doing the right thing with finances, the temptation is to think we just need to know more information, or more facts, or that the ultimate goal is to get to the objectively “right” answer.
But knowledge or information alone is rarely what stops us from enjoying the success we want, or achieving our goals. And there are often many ways to get to a goal, not just a single “correct” path.
So how do you make a good financial decision if knowledge alone isn’t enough? And how do you decide on the right path for you if there is no one, single, always-the-best-thing-to-do answer?
Here are some strategies we’ve seen work well for the wealth management clients we coach and guide toward the financial success they want.
Don’t Get Stuck In Analysis Paralysis
If just having all the information was enough for us to make great decisions at every time, everyone would have all they need. That’s thanks to the internet.
The fact that we have free access to the amount of information and human knowledge that is on the internet is incredible — and historically unprecedented. Never before has it been so easy for anyone with an internet connection to learn almost anything.
And yes: when you’re just getting started, you do need information; you need the facts and the data to help you make progress.
But there are downsides and problems to freely accessible information — like the fact that not everything on the internet is true. You must develop a filter to find the signal in the noise, which can be difficult when you’re just starting to learn.
(This, by the way, is part of the value of having experts on your side. They have finely-tuned filters that can help you sort through what’s true and what’s false.)
Another pitfall? Even if you can sort through what’s true and false, that still leaves a massive amount of good data on the able. And the more information you must interpret within the context of your life, the more likely you are to get stuck in analysis paralysis.
Too much information leaves us paralyzed with uncertainty, and unable to simply choose one path and act (which, even if we don’t choose the optimal action, is usually better than standing around doing nothing at all).
To Improve Your Ability To Make Good Money Decisions, You Need These 2 Things
The very first steps to getting a strategy in place for decision making are these — and without them, you will not be able to make good choices with your money:
- Clarity on your values and priorities, and
- Acknowledgement of your financial reality
Good decisions come from understanding where these two things meet. Choices about how to use your money will be easier if you know what’s truly important to you.
What are your core values? What really matters? Why are you trying to earn more money or invest wisely?
More money on its own is not a true goal. It’s what the money allows you to do in your life that matters.
If you align your spending with what’s most important, building budgets suddenly becomes much easier; if you know what you want to save for, you can suddenly find more intrinsic motivation to contribute more to savings and investments.
You cannot ignore what the numbers tell you; that’s your financial reality. If your cash flow shows you spend more than you make, that’s a problem — regardless of what your values are.
But you also don’t need to feel obligated to always do what a spreadsheet says is “best” from a numbers perspective.
In fact, doing so can leave you feeling unfulfilled and unsatisfied because you’re not considering what you actually want to do with your life.
“Right” And “Wrong” Aren’t Useful Labels, So Use These Instead
When you struggle to make good financial decisions, making things “right” or “wrong” won’t help.
When you apply those labels, you clutter up the situation with things that aren’t objectively true.
Who is to say that spending a year traveling is “wrong” and putting everything you have in your 401(k) is “right”?
This could be perfectly acceptable for your situation if, say, you’ve spent the last 10 years maxing out your retirement plan, you saved up the amount you need to cover your travel expenses, and you have a plan for continuing to work and earn an income when you return.
On the other hand, if you are behind on saving for retirement and don’t have any cash savings built up to pay for your travels, it might not be so smart to quit your job to wander through Europe — but I’d argue that even here, it doesn’t help to make yourself wrong for your wants and your choices.
Instead of right and wrong, think more in terms of “does this work for me?” or “does this not work for me?” Determining what works and what doesn’t comes down to, again, your financial reality and your goals.
Going back to our examples, it probably works just fine for you to take a year of to travel when you’ve been diligently saving for both this goal and your future for the last decade.
But it does not work to continue to neglect your retirement savings because one day, you may not want (or be able) to work to earn a paycheck and need to rely on your nest egg instead.
Consider Both Today And Tomorrow
That brings us to another important strategy when improving the quality of your financial decisions: make sure you strike a balance between what benefits you today and what you’ll need in the future.
Too often, people think in extremes — they’re either hyper-focused on today (#YOLO) or they’re overly concerned about the future (and potentially missing out on life as it happens right now).
It’s not easy to balance the needs and wants of Present You with the needs and wants of Future You. This is why I love Mark Manson’s suggestion to make two separate pros and cons lists when you need to make big choices.
One of your lists should contain the pros and cons of a potential decision for the short-term. The other list should include the pros and cons of that same choice, but in the long-term.
Manson also suggests thinking about the potential regrets for doing something (or not doing it), as well as the opportunity cost or tradeoffs you make when you choose one option over the other.
Take Your Decisions For Test Drives First
Most people don’t buy cars without test driving them first. But they make all kinds of big, huge, life and financial decisions without ever having tested and verified their idea of what they wanted was actually what they wanted.
So how do you test drive a dream or a goal before you reach it? Here are some ideas and examples to help you start brainstorming for yourself:
If you think you want to go on extended travels in the future (say, a month-long backpacking excursion through the countryside of Spain), let’s plan for you to take a week-long trek somewhere in the US.
When you return home, you can ask yourself: how did that go? Are you more excited than ever for your big dream… or did you enjoy the test drive less than you thought?
If you want to make a big, permanent move to a completely new location when you retire, start visiting the places you think you want to be right now.
Go for a weekend; spend a week there; visit in all four seasons; explore different neighborhoods each time you go and try to live as much like a local (instead of just hitting up touristy spots and activities) as you can.
Are you still in love with the area after multiple visits at different times of year? Or did you find the charm started to wear off when you stayed longer and had less exciting things on your itinerary?
If you want to make a big career transition, think about how you could work part-time in the new industry now to confirm it’s the right fit for you (or, depending on the situation, even volunteer as a way to get experience and a first-hand understanding of what the work is like).
These are just a few simple ideas — but you could apply this test-drive approach to anything that sounds great now but you don’t have much experience with.
Don’t make it your future plan without first confirming it truly aligns with how you want to spend your time and money. Find ways to test the waters, and then evaluate what worked and what didn’t, and if your experience gives you any more clarity on what you most want to do in the long-term.
Good planning isn’t about deciding on a set of action steps once and then doggedly following them no matter what.
The best planning is all about making optimal decisions based on what we know today — and then being willing to iterate on the plan as we learn, do, and grow more.
If You’re Faced With A Hard Decision, There’s Good News: You Probably Can’t Go Wrong
Ultimately, if you’re facing a hard decision, it might be hard precisely because you’re choosing between equally good options.
The two options you need to pick from might look very, very different — but again, there is no right and wrong. There is no one right answer.
The future is unknowable and from our vantage point in the present moment, we have no idea how each of our decisions, big and small, will play out 30 years from now.
Ideas we thought were fantastic today could turn out badly for us later. Decisions we might felt were “wrong” could actually be some of the best moves we ever made.
Still, knowing this doesn’t always make it easier to actually make that hard decision. So when you have to make difficult choices and knowing you can’t predict the future, try this instead:
Consider what choice most aligns with the person you want to be.
What kind of values do you want to cultivate — and what choice supports your efforts? What option is in sync with your stated priorities?
That, to me anyway, is the bottom line on making the “right” financial decisions. The truth is, every choice depends on your situation and the context of your life.
What makes perfect sense for you may seem like perfect nonsense to the next person… and that’s okay, as long as you made choices that aligned with who you are and the kind of person you want to be.