Making a major financial decision can be intimidating if you don’t have a lot of personal finance experience. In this article, you will learn about how you can make financial decisions with confidence.
Throughout your adult life you will have to make major financial decisions that can potentially be life altering. Some people don’t think their decisions through, while others are guilty of overthinking them.
Major financial decisions are often tied to our largest expenses. Choosing to rent vs. buy a home is a common one. Choosing the specific home is a subsequent major decision as well! Other examples of major financial decisions include (from largest to smallest):
- Post-secondary education (for yourself or your children)
- Choosing a vehicle
- Purchasing furniture & large appliances
- Purchasing computers, smartphones, & other technology
For the purposes of this article, we’ll say any purchase over $1,000 is a major financial decision. These aren’t decisions you make on a daily, weekly, or even monthly basis.
It may seem surprising, but the method for making major financial decisions is the same, whether it’s making the purchase of a home or a smartphone. It is also similar but more detailed than the process used for making better daily financial decisions.
Below, I have 5 tips you can implement to make better major financial decisions:
- Avoid Impulse Decisions at all Costs
- Don’t Listen to “Blanket” Advice
- Ask Yourself These Personal Questions
- Run The Numbers
- Don’t Get Cold Feet
Avoid Impulse Decisions at all Costs
Impulse buying is something nearly all of us do; this study says 84% of Americans have made an impulse purchase before.
While you may think of “impulse” shopping as buying a latte or a pair of jeans, it also occurs for major purchases. The same study said 20% of shoppers make an impulse purchase greater than $1,000!
You should “sleep on it” before making any such purchase if possible. The amount of time and effort to put depends on the scale of the decision being made. You should spend far more time researching a vehicle than researching a smartphone for example.
Also realize that buying the product as soon as you enter the store is NOT necessarily an impulse purchase. Ideally you’d be researching before going to the store, not after.
If I research the new iPhone and decide I want it, then I may spend no more than 10 minutes in the store. If I were to see the Samsung next to it and decide I like the Samsung better, then that would be an impulse purchase.
Sometimes unexpected things happen, whether it is a new deal for a different product, or a change in personal circumstances. Whatever the case may be, always sleep on your decision!
Don’t Listen to “Blanket” Financial Advice
Blanket advice is a term that describes a generic piece of advice that doesn’t consider your personal circumstances. It may be good advice for some or many, but bad for others. Given how personal finance is highly personal, you’ll need to filter through these pieces of blanket advice.
“Buying a home is always better than renting” is the most common piece of blanket advice in the personal finance world.
Since this is arguably the biggest financial decision of your life, it would be wise to not follow blanket advice here!
Ask Yourself These Personal Questions
There are some qualitative questions you should ponder before making your decision. Some of them may not be easy to answer; remember to be as honest with yourself as possible!
Do I need this or want this?
The question appears simple on the surface but it is actually subjective and complex. Needs and wants can overlap. You may need a car, but you want a Mercedes. You may need a college degree to be an accountant, but you want to go to an expensive, private, out-of-state college.
Timing also plays a factor here.
Getting a new phone can be a need if you have an iPhone 6, but a want if you have an iPhone 10.
Give it a few years and that want for a new phone will turn into a need.
Try to be as truthful with yourself as possible, and remember to prioritize needs over wants.
If this is a want, does it provide value to my life?
Just because something is a want doesn’t mean it gets ruled out!
The next step is to see if making this decision will bring value to your life, and seeing if that value is worth the cost.
This step separates the “I really want…” from the “I kind of want…”
If a major purchase or financial choice will improve your quality of life then it’s worth it, so long as you can afford it.
Can I afford this at its current cost?
This one is more objective than subjective. Running the numbers (discussed below) is the way to figure this out. You shouldn’t make a financial decision that will break your budget, even if it is a good deal or opportunity on its own.
Am I willing to consider any cheaper alternatives?
There is a cheaper alternative to virtually anything. The question is, what is the lowest-cost alternative that is still practical, and that you’re still willing to consider? These are questions only you can answer.
You might be in the market for a pre-owned vehicle in the $20,000 to $30,000 range. Would you consider a $10,000 used car? How about a $1,000 box on wheels? Odds are that you’ll get to a point where your standards will limit how low-cost you’re willing to go.
This is why you need to figure out what low-cost alternatives you’re going to consider, if any.
Housing is another area where there are many lower-cost alternatives.
House hacking is a great way to greatly reduce your housing costs IF you’re willing to consider it. I did house hacking for 4 years and had some great results!
Run The Numbers for Your Major Financial Decision
If you follow any one tip from this article, make it be this one! Doing the math for your own personal situation is a must for making major financial decisions.
If it’s a large purchase, you’ll need to evaluate what it’ll cost you. Remember that includes recurring costs (ie. maintenance costs) and not just the purchase price on the sticker.
If you are comparing different scenarios (most commonly renting vs. buying) then you’ll have to evaluate the costs of both to see which one is better in the long run. Again, don’t forget to include all costs and not just the purchase price!
It can be complex to perform these calculations though, especially if math isn’t your strong suit. Luckily there are plenty of awesome calculators online meaning you just need to gather the data and input.
Here are my favorite online calculators for different situations:
Don’t Get Cold Feet
At first glance, this may seem like it contradicts the first tip. However, this tip targets the other extreme! This is for the people who get cold feet from waiting too long.
“Through indecision opportunity is often lost” – Publilius Syrus
Not making a decision is effectively making a decision to do nothing. While you should definitely sleep on the decision of buying a used car, sleeping too many nights will result in the car likely being sold to someone else.
This is why doing the legwork beforehand is crucial; it gives you the opportunity to make a well-informed decision quickly when the time arises.
Make Smart Decisions During Major Financial Moments
Improving the way you make decisions can in fact improve your finances. You employ many of the same strategies whether you are making daily financial decisions or making once-in-a-lifetime decisions.
It is important not to let impulses dictate your decisions here; but you also have to be careful to not get cold feet either.
Following the remainder of these tips will allow you to look at both the qualitative and quantitative sides to the decision, and be ready to make a well informed decision when the time comes!
Readers: what is the next major financial decision you foresee having to make?