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To get ahead in your personal finances, you need to learn how to make better personal finance decisions. The key to making better financial decisions is to be intentional with each decision you make. You need to understand your entire financial picture and understand how each decision you make influences your current finances as well as your future financial goals.

Understand Your Values

Each of us is different and value certain traits, characteristics, things, etc. over others. If you don’t know already, you need to understand what’s most important to you in your life.

Are you a fitness nut?

Is your religion first and foremost?

Is your family most important?

For example, maybe you play guitar for a band and your music career is the most important thing in your life. When you’re making your budget, you may have more money in your music budget item than others like entertainment or housing.

When going through this exercise, make sure what is important to you is actually what’s important to you and not values you’re emulating from someone else like your family, friends, coworkers, etc.

Related: Personal Finance – Know Yourself to Get Ahead Financially

Financial Goals

Now that you’ve identified what’s important to you, you need to determine what you long-term and short-term financial goals are.

Long-term financial goals are financial goals that are typically longer than a year. Some examples of long-term financial goals include paying off your home, becoming debt free, retiring, etc.

Most of your long-term financial goals will require short-term goals to ensure you’re tracking towards the ultimate goal. For example, let’s say you’d like to pay off your home loan in 10 years. In order to meet your goal, you’ll need to find out how much you’ll need to pay each month, year, etc. to meet your goals. These required payments will be the short-term goals that, if achieved, will lead to you completing your long-term goals.

Short-term financial goals are financial goals that typically take less than a year to complete. Some examples of short-term financial goals include maxing out your Roth IRA for the year, getting a raise or promotion at work, paying off $X amount of debt, saving up for a vacation, etc.

Create a Simple Monthly Household Budget

Before you can make an informed decision, you first need to understand what your current financial situation is. To truly get a handle on your financial picture, you need to create a monthly household budget. To do this, record what your monthly expenses are. Now you know what you are currently spending is.

Next, create a monthly budget. What this entails is taking your revenue and divvying out each dollar. As a general rule of thumb, adhere to the 50-30-20 rule.

There are many different ways to create a budget. Your can use a simple excel spreadsheet or use programs like You Need a Budget, Quicken, Mint, Dave Ramsey’s Every Dollar, etc. Pick the way that is easiest for you and ensure you keeping budgeting moving forward.

Related: How to Create a Simple Monthly Household Budget and What is the 50-30-20 Budgeting Rule?

Practice Mindful Spending

Whenever your faced with a spending decision, take the time to consider whether or not the decision is something you can live without, whether it makes you happy, and whether it fits with your personal values, if you can even afford (see budget), and if it is the best use of your money.

Related: How to Save Money Guilt Free with Mindful Spending

Is This Purchase Something You Can Live Without?

In other words, is this purchase a need or a want. A need is something you need to survive like food, water, shelter, heat, etc. A want is anything else.

Also, is this the bare minimum to survive within budget (i.e. renting a cheap studio apartment versus buying a large family home)? A want is anything in excess of the bare minimum.

What Makes You Happy?

A financial decision is a decision that you are making, so ultimately, does it make you happy? If you’re looking at purchasing something, it should make you happy in some way, shape or form.

Don’t let your family, friends, colleagues, etc. influence you to make a decision that’s not your own. Don’t let peer pressure, pride, shame, etc. cause you to make a decision that doesn’t align with your values and ultimately make you happy.

As an example, let’s say you want to buy an older, cheaper mini-van for shuttling your children around that you can pay for in cash. On the flip side, your family and friends are encouraging you to purchase a newer SUV because they insist it is more reliable, has more advanced features, and is more aesthetically pleasing. A lot of people would end up buying the SUV or compromising in some way shape or form to please everyone. Don’t! It’s your money to spend and, ultimately, you’re the one that has to live with the decision.

Is This Purchase the Best Use of Your Money?

Let’s say in the example above, you can afford both the SUV and the older, cheaper mini-van, but one will allow you to stay debt free, while the other will require a small loan to purchase. You value your financial freedom higher than the newer car and hope to retire early. In this case you would purchase the older, cheaper mini-van because it both meets your values and helps you achieve your goals.

Does the Financial Decision Reflect Your Values?

You already know what your values are. Just make sure the decision you’re about to make doesn’t contradict your belief and value system. If it does, you’re either going to end up not using it or giving it away, or feel guilty having purchased it.

For example, let’s say you’re a health nut. You are almost religious in your diet and exercise regime. You see an infomercial for a brand-new air fryer and it piques your interest. You take a day to think about it and quickly realize you were just hungry and tired. You decide not to buy it because if you did use it, you would feel guilty and if you don’t use it, you’ll just be wasting money.

As another example, let’s say you own a piece of property that has been in your family for generations, is part of your family’s history, and that you love dearly. A developer comes along and gives you a great offer for the property. You’re first inclination is to accept the offer and retire, but after thinking about it for a few days, you realize that your legacy and family history are more important to you than the money. You realize that if you did accept the offer, you would regret it.

Don’t Make Quick or Impulsive Decisions

If you’re faced with a financial decision, try to give yourself some time (preferably at least a day) to think about it before making the decision.

If someone tries to rush you, consider that a red flag. Sales people use this technique to force a fast, instinctive, and emotional reaction. Unfortunately, this works really well, so any time this happens to you, try to be cognizant of what is going on and avoid the impulsive decision.

Create a List of Outcomes

When faced with a financial decision, make a list of the choices available and the various outcomes. If there are too many to consider, list the most likely outcomes. This exercise will help you identify the risks, rewards, and any alternatives available to the options originally offered. Evaluate all of the options and make the decision that is best for YOU.

Look at it from Another Point of View

Try to look at the decision from the other party’s point of view. Identify what they’re hoping to accomplish. If you know what they’re ultimately after, you’ll have room for negotiation and also for alternative offers that accomplish the same goal.

Remember, the other party is looking to benefit in some way, shape, or form. Otherwise, they wouldn’t be wasting their time.

Do Research and Discuss the Decision

Before making a financial decision, do some research online, talk to mentors that you trust and respect, discuss the decision with loved ones. Don’t take everything at face value. Take the research and form your own understanding and opinion of the situation. The purpose of this exercise is not to have someone make the decision for you, but to help you make a more informed decision.

Don’t Be Afraid Say No

If you do all of this and still aren’t sure what you should do, don’t be afraid to say no or make the more conservative decision.

For example, let’s say you’ve been working a sign fabricator at a sign shop for 10 years and, out of the blue, the owner tells you he’s looking to retire and wants to sell the business and property to you. You currently make on average $40,000/year.

If you buy the business you’re salary will increase to ~$50,000/year, but all of the profit you make from the business will be needed to pay off the loan you’ll take out to buy the business and property. You can have the business and property paid off in 15 years and at that time, you’ll begin earning revenue (profit) from the business in addition to the ~$50,000/year. You feel like this is a good opportunity, but the reward doesn’t seem to line up with the additional risk you’ll be taking on as owner of the business. After consulting others and thinking it through, you’re still unsure, so you decide to decline the offer presented by the owner.

Recognizing and taking advantage of opportunities is important, but not every opportunity will be a winner. Be discerning when making financial decisions.

“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.” – Warren Buffet

How to Make Better Personal Finance Decisions – Conclusion

Making better personal finance decisions doesn’t have to be complicated. For the most part it just involved taking your time, understanding how it fits with your financial goals and values, and making a smart financial decision.

You can use the filters above (or create your own) to ensure that you are considering everything before making a decision. The more you run your financial decisions through this filter, the easier it will become as it will become habit.

Also, don’t be afraid to miss an opportunity here and there. The bad opportunities you turn down are just as important (in my opinion, more important) as the good opportunities you take advantage of.

Do you have any examples of some tough personal finance decisions you’ve had to make? If so, how did you decide?

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