You might be surprised, but you’ve been making money moves since you were a kid. Every time your parents bartered with you, or you saved up your allowance, you were using your financial decision-making skills to decide the best option. That choice involved core concepts that you would find in any financial decision-making skills, like evaluation and goal-setting. It may sound simple, but think about it: a kid wants to buy a new game. They go to their parents and know exactly why they want that item. In return, they do something, like more chores, to earn it.
But your younger self didn’t have the same responsibilities on their plate that you do now. So choosing what to do with your cash comes with more complications and a more significant weight on your shoulders. So, it would help if you had the right tools in your kit to match. With that in mind, here are ways you can improve financial decision-making skills.
1. Improve Your Financial Knowledge
You wouldn’t advise someone if you didn’t understand the topic. Still, many Americans are in situations where they have to make financial choices for themselves. However, they don’t have the knowledge to back up their reasons. If you feel like your financial literacy could use an upgrade, you’re not alone. As of 2019, financial literacy has declined among American adults in comparison to previous years.
FINRA (the Financial Industry Regulatory Authority) measured this using a basic, five-question financial literacy test. In 2019, 34% of respondents could answer four out of five of those questions. That’s 8 points lower than 2009’s 42%, with the younger group of 18- to 34-year-olds being the most affected.
Lacking financial knowledge can impact things like your credit score, making it challenging to qualify for a loan or even rent an apartment. For example, let’s say you decide to apply for multiple credit cards to find the best rate and then try to apply for a mortgage after that. You may not receive favorable rates since applying for multiple credit lines in a short time frame can harm your credit.
There are easy ways to build up your financial education, though. There are finance books out there that can act as resources for specific groups, so you get a curated experience. Or, you can turn to podcasts. Any time you have a long car ride or need to walk your dog, you can just plug into some great options like “So Money” and “Beyond the Dollar.” They’re often hosted by experts who can introduce you to topics like investment or give advice on escaping debt.
Keep in mind: this step isn’t the research stage yet. At this point, you’re getting materials together that can help improve your overall financial literacy. It’s a general view of financial topics instead of a deep dive.
2. Avoid Impulsive Decision Making
Certain age groups are more susceptible to impulse buying than others. According to Statista, a market and consumer data platform, about half of the purchases made in 2018 by 18- to 24-year-olds were impulse buys.
On top of that, it’s possible that men shell out more money when they make those spur-of-the-moment purchases. A combined CNBC and Acorns study found that almost 90% of both men and women occasionally make impulse buys. However, men put out more than $100 when they did it, versus the 16% of women who matched that.
Buying impulsively can lead to unnecessary purchases or put you into debt, making it more challenging to dig your way out. So, it’s important to build the skills that can help prevent that as early as possible because it’s harder to ignore those whims the younger you are.
Regardless of your age, extend the time it takes you to make a purchasing decision to 24 to 48 hours at least. While deals and discounts may be tempting, that item likely won’t disappear.
3. Consider the Short-Term and Long-Term Implications of the Decision
Once you want something, it’s hard to ignore. However, if you avoid buying it the moment you see it, you can talk yourself through your decision.
The things you do can have a domino effect on your future, whether it’s less money to go out tomorrow or a smaller retirement fund to rely on. You have to work through your situation and decide how big an influence your choice will have on your life. You might be able to handle a short-term consequence like a slight shift in your budget, but can you handle something that impacts your retirement? For example, certain financial decisions can tempt people to reach into their retirement savings early. Will you be alright with paying the distribution fees or having a reduced fund for your golden years?
Once you evaluate the short-term and long-term risks, you’ll be able to see whether it’s worth pursuing at this time. Otherwise, you might have to wait until you’re more financially stable.
4. Do Your Research
Once again, you can’t go in blind. You might have a general idea of what your decision includes, but not the whole picture. Research your choice thoroughly and use resources available to you.
Find data that involves your decision. Working with actual numbers not only gives you reliable insight but also helps eliminate bias. For example, you may feel overconfident about purchasing a rental property when the market is high. But, what happens when the market dips, and you can’t find tenants? Researching your options can hand crunching numbers can help you avoid any future financial distress.
Also, a lack of research can make you feel lost or nervous. Either way, when you remove the guesswork from the equation, you have something solid to refer to when you decide.
You can make an informed decision when you have research to back it up. It can also lead you to alternative methods and solutions.
5. Taper Your Options
Options are great! They give a wide range of choices that can help you find the right fit for your needs. But the more you have, the more complex the choice. Maybe you have so many options because you don’t know what you want.
Focus on what you want to get out of your decisions. You can even create criteria for your top options to match. Then, narrow down your choices until you’re left with only the top contenders.
That makes it easier to choose, and you’ll have a smaller chance of regretting your decision.
6. Consult With Knowledgeable Experts
There’s a reason that they’re the experts. Still, Americans live in a culture that loves self-efficiency and independence, which reflects in their financial decisions. CNBC and Acorns created a survey in 2019 that found 75% of Americans manage their finances.
The NFEC (National Financial Educators Council) concludes that managing your finances on your own can hurt you. According to their research, Americans make money mistakes that cost them over $1,634 in 2020. That’s an increase from the 2019 write-up, which reported $1,230 in expenses.
That’s why it might be in your best interest to find financial advisor or speak to financial professionals. A financial advisor can help you navigate any concerns you may have while taking into account your situation. They’ll work with you to create solutions that match your goals, limits, and more. Or, if your big decision involves real estate, see if anyone in your life works in that field. You can gather valuable input from those around you, too.
Remember: you should still do your own research. It will help you feel secure in your decision.
It’s easy to get caught up in the stress of a decision and make mistakes as a result. But don’t let your emotions make your choices for you. Make time to consider any financial decisions you’re making carefully. It may seem like you’re putting it off, but it will save you money and time you’d need to fix any impulsive mistakes. Just use the financial knowledge building blocks you already know and work on them bit-by-bit. You’ll be surprised by how easy it is to build your financial decision-making skills.