It’s ridiculously easy to get stuck in metaphorical quicksand when making financial decisions. To help us out, financial adviser Andrew Dunbar shares a reliable framework to guide the process.
Ever notice yourself spending more time on trivial decisions than you do on the significant ones? You’re not alone. It’s often called ‘decision quicksand’, as these small decisions can seem to suck us in.
Many of us can attest to this in our everyday lives. For example, if you totalled up all the time you’ve spent considering what you wear to work, how would this stack against the time you’ve spent thinking about your super investments?
For most of us, the balance would be entirely out of whack with the stakes. Of course, it’s important to dress appropriately, but it comes down to a yes/no decision – is this outfit appropriate for my job?
When it comes to your super or your investments, the stakes are far higher, and the variables more numerous.
Strategies for making better financial decisions
For significant life and financial decisions, it’s important to have a reliable process or framework to guide your decision-making. That way you can give each decision the weight and time it deserves. It will also help you make more informed choices. Here are three different ways you can frame your financial decisions.
1. Rethink your pros and cons list
When it comes to the bigger decisions in our lives, many of us turn to the pros and cons list, and it’s not a bad strategy for financial decisions if done right.
Typically, pros and cons are a binary list – good on one side, bad on the other. However most decisions are far more nuanced than that.
If, for example, you are thinking of buying a property, a pro might be that you will build equity instead of paying rent. A con might be that you are responsible for maintenance and insurance costs.
Of course, they are both correct, but the financial costs and long-term outcomes aren’t likely to be the same. In this scenario, if you had six pros and thirteen cons, it would appear to be a bad decision, but the problem is that the pros and cons likely aren’t equal.
The solution is to use a weighting system to measure pros and cons by more than quantity alone. Your weighting system doesn’t need to be complex; there are some simple methods out there that you can easily apply to any pros and cons list, such as this one.
2. Analyse the quality of your decision-making, not the outcome
It’s a trap we all fall into – something out of our control went right (or wrong!), affecting the outcome. We then use this misinformation to determine whether it was a good or bad decision.
As an extreme example, if someone doesn’t save for retirement at all during their career but goes on to win a substantial lottery prize, they may say they ‘wouldn’t do anything differently’. But what we actually have here is a lack of planning and a whole lot of good luck. So they actually should have done everything differently, even though they had a great outcome.
Instead of focusing on the outcome, try thinking about the quality of the process that led to a decision.
If the process was right, but a factor you couldn’t anticipate or control impacted the outcome, it was likely still the right decision. And this is a process you shouldn’t change.
Conversely, if you could have done more due diligence to get a better result, then this is what you need to look at when making your next decision.
3. Try a pre-mortem approach
We all innately perform post-mortems on our decisions. But our post-analysis is often flawed for several reasons.
Firstly, as discussed above, you’re more likely to do the post-mortem on the outcome, not the quality of your initial decision. So it probably won’t help you on your next one.
Secondly, we can’t change the result after the fact – so post-mortems often become about the ‘what if’ instead of the ‘what next’.
On the other hand, a pre-mortem is where you take a detailed look at what could happen before you make the decision.
It’s a tool commonly used in business by project managers, but it can work for your financial decisions too. Essentially, instead of thinking about what might go wrong, you start as though it is the end, and the decision has already failed.
For example, you are about to make an investment in a company. Imagine you have made that investment, and it went wrong – you lost your money. What happened?
Was it a market downturn? Did you choose the wrong company? Did you take the wrong approach? Is it something you could have protected yourself from, either by taking a different direction or putting insurances in place?
Working back from the potential ‘failure’ can help you refine your process and ensure you are putting the right measures in place to protect yourself and your finances from the very outset.
Changing your decision-making process can take time and practice, but it is worthwhile to make sure you are making the best financial decisions and analysing them using the right criteria.
This is an edited version of an article that originally appeared on Apt Wealth Partners and is republished here with permission. This article contains general information only. This should not be relied on as independent finance or tax advice. If you are after specific professional advice, speak to your registered tax agent/financial advisor or reach out to Apt Wealth Partners.
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