No one likes making bad money decisions, and the regret they can bring. Whether it’s splurging on something you don’t really need or making an investment that doesn’t pay off, we’ve all been there. That sinking feeling in your stomach when you realize you could have done better is a sign of learning something about yourself—and it’s a reminder to make smarter financial decisions in the future.
But how, exactly? Making better money decisions can seem daunting, especially when you’re feeling overwhelmed with finances.
In many ways, your decision-making skills determine your financial health and wellness. Our choices, whether to save money or spend it will decide our future. Depending on your choices and a whole lot of luck, you will be rich, poor, or somewhere in between. Sure, some people are born with far more advantages than others, but still, whether you rise or fall in life often comes down to the quality of your decisions.
Sound financial decision-making isn’t an art or a science. But here are some steps to making better financial decisions:
1. Determine your values and priorities
Understanding your values is key to having a healthy relationship with money. Values are internal and external factors that determine how you feel about money. Our values are shaped by the childhood nurturing we receive, other past experiences, our social groups, goals, and ambitions.
Values help shape the financial decisions you make. Thus, you want to have positive money values. To determine your money values, as yourself these questions:
- Do your money values align with your priorities? For example, taking trips to places, I have never been to before more than an endless supply of new clothes or other material things. Because I value experience more than material things, this informs my decisions. I would instead save money than indulge in impulse buying or spending more than I need on things I do not need.
- Are your money values moving you closer to financial freedom?
- Do your money values make you happy?
If your money values do not align with your priorities, move you close to financial freedom or make you happy, it’s time to change them and adopt new ones.
2. Create a financial plan
A financial plan is a roadmap to help you control your money better. A good financial plan should provide a wholesome picture of your current financial situation, your financial goals, and the strategies to help you achieve the set goals. Steps to create a financial plan include:
- Assess your current financial situation: The starting point to making a plan is to give it a basis. How much money are you making in total? What are your monthly expenses? Do you have debts you are paying? Your current financial situation will guide goal setting, budgeting, and any other financial decisions you make in the future. For example, if you have bad debts, one of your goals should be to get rid of them.
- Set SMART goals: Where do you want to be in the next 5 or 10 years? What do you wish to accomplish? Do you want to buy a house? List all the things you want to accomplish. For every goal, provide a timeline and the specific amount of money needed to achieve it. An example of a SMART goal is; “to save $100,000, to put a downpayment on the house in 2 years.”
3. Get comfortable with budgeting
As one theory by Professor Richard Thaler reveals, you’ll reap emotional and financial rewards from categorizing or budgeting your spending and making a plan for it.
That’s because categories help you increase your mental accounting of money. You’ll be less likely to spend money you planned to save if you categorize what you’re saving the money for.
If you plan where every dollar earned goes, you will be less likely to indulge in wasteful spending.
If you are new to budgeting, there are various types you can use. These include:
- The 50/30/20 budget: This type is one of the most common budgeting methods. It allocates 50% of your income towards living expenses or necessities, 30% to wants or lifestyle expenses such as entertainment, and 20% to savings and paying off debt.
- The envelope system: This system relies on physical envelopes. You start by determining how much you spend on expenses such as groceries and transport. Once you establish the amount, label the envelope and physically put in the cash. Once you use up the money in that envelope, you suspend spending on that category until the next budgeting period.
- The zero-based budget: This type works similarly to the envelop system, the main difference being that you don’t use and are not restricted to using cash. The concept behind the zero-based budget is that every dollar you earn has a purpose. This approach is meticulous with where all your funds go.
Choose a budgeting system that works for you and is easy to follow. You can use a budgeting app to help you with the process. Evaluate your budgets regularly to ensure they reflect any changes in your financial situation. Above all, always keep your goals in mind. Budgeting will ensure that you always make the best financial decisions.
4. Track your spending
Tracking your expenses increases money mindfulness, reduces stress, helps you process your spending, and increases savings.
How is this possible? The answer is all in reflecting on your spending habits. Taking the time to look back at your recent transactions provides context to your purchases.
You can use an expense tracking app to make this process easier. Review your transaction at least once weekly to determine whether you are spending within your budget. Tracking your spending will highlight areas of wasteful spending that you can eliminate to increase your savings. It will also help you be mindful of your spending.
5. Have an emergency fund
The COVID-19 pandemic taught us that there is no guarantee in life. Your life can change in an instant. Emergency funds provide a cushion to fall back on when life throws you a curve ball. However, it’s not just about preparing for the worst. It is also a resource you can top into to enrich your life if you ever decide to shake things up, such as starting a business or following a passion.
The traditional guideline is to save three to six months’ worth of your living expenses. However, in today’s uncertain economic environment, I recommend you save at least six months worth of expenses.
6. Don’t rush big financial decisions
No major financial decisions or significant purchases need to be made on the spot. Suppose you feel pressured into making a hasty financial decision, especially an investment decision. In that case, it is a warning sign that the deal might not be as good as it seems.
Sleeping on big decisions gives you time to consider alternatives, evaluate whether you need to do this, and probably get other opinions or information. Remember, it is better to wait and learn a cheap lesson than hastily rush into something and learn an expensive lesson.
7. Get educated
Financial literacy will help you make better financial decisions. For example, many options are available if you need to save money, from high-yield savings to money market accounts. However, if you don’t know these, you will end up holding your savings in a vehicle that does not maximize the returns from every dollar saved.
But, it can be hard to know who to trust with such important information. After all, social media influencers might have you believe they have the secret sauce to wealth building when in reality they are just trying to make a quick buck off of your naivety!
That’s why it’s important to find an accredited money coach instead who is experienced and knowledgeable in all aspects of financial management. They will be able to help you assess your current financial situation, create a budget plan tailored to fit your individual needs, provide guidance on how to make smart investments, and set long-term goals.
A money coach will be an advocate for you and provide the unbiased knowledge you need to make educated decisions about your money. They won’t steer you wrong, as they are trained professionals with a vested interest in your success. And while they may offer advice on certain investments or products, they will never push you into doing something that doesn’t feel right to you.
With experienced and accredited money coaches on your side, you can rest assured that your financial literacy will be increased and you’ll avoid the traps of social media influencers who may wish to take advantage of you.
Numerous free resources online can help you learn more about personal finance management. Suppose you are looking for strategies to get out of debt quickly. In that case, there will be books, blogs, and even Youtube videos that can provide the information you need.
8. Be kind to yourself
Concerning finances, there is no right or wrong decision. Whatever decision you make will have outcomes that you learn from. So, if you make a decision that results in losses, accept you made a mistake learn from it, and quickly move on.
The bottom line on making better financial decisions
Getting clarity on your money, understanding your values and priorities and acknowledging your current financial situation are the first steps toward making sound financial decisions. When you understand these two, choices about how to use your money become easier. For example, if you align your spending with your values, budgeting and sticking to one becomes more effortless. So get clarity today and give your journey toward financial freedom the much-needed boost!