When it comes to your personal finances you have to also consider the importance of decision making. All the models, tips, hacks and knowledge in the world will be of no use to you if you are not making the right decisions when it comes to crunch time. It’s not easy because money itself affects our emotions. Add to that the fact that most times the decisions we need to make are emotionally charged due to either importance or urgency and you have a recipe for a very complicated exchange. There are principles you can follow to help you make money-smart decisions. These are decisions that will not only help you out with a current issue but going forward will improve your personal finances as a whole. Who doesn’t want that?
Consult your plan
First things first, a money-smart decision is only smart versus your plan. It makes no sense to buy really good value shares on the exchange at the expense of your medical aid policy for example. Sure it could work out for you but the downside risk is too big to bear. When making money decisions it’s important to consult your plans both short term and long term to make sure the decision fits into your life without disrupting your plans.
Address causes not symptoms
This is probably the most important point I will make in this article so I really hope you understand what I am saying. In any given situation or problem we find ourselves faced with there will be causes and symptoms. In most, if not all cases symptoms are what we feel and deal with, our frustrations while causes tend to remain underlying, sometimes not apparent to the eye. As a hypothetical example, the person who cannot make ends meet doesn’t always have a problem with the lack of money but rather what they do with the money they receive. The reverse could also be true. Sounds like a contradiction but it actually makes my point. When you are dealing with a situation, look at the root cause of it. Similarly when looking at an opportunity make sure you identify the critical key and not the outer expressions. You may understand this from the perspective of looking rich (buying an expensive item) versus being rich (investing the money to grow).
One of the biggest mistakes I see people making is eliminating or not considering alternatives altogether. Say for example you intend to buy a printer. For some reason. Imagine there are 5 alternatives in all the world, two of them are very expensive outright, while the other 3 are affordable by your standards. You therefore only consider the 3 affordable options to find that the ongoing costs in ink and power consumption on all 3 are quite high but you must choose between the 3. Now imagine that one of the two more expensive alternatives actually had lower ongoing costs. So much so that over the lifespan of the printer it turned out to be less expensive than the 3 with lower upfront costs. The lesson here is simple, consider all alternatives that meet the requirements.
Short-run and long-run thinking
Those familiar with economics as a tertiary subject will quickly understand this. This is akin to the last pint I made. When evaluating decisions you need to think of both the short term and long term impacts of the decisions on your finances. Many things seem easy to take on because of their low costs but if those costs are ongoing it can make a huge difference. If you’d taken $1000 a month and (if you could have) invested it in the ZSE all-share index at the end of June 2021 your $6000 would be worth $10636.13 at the end of June 2021. Compare that to that thing you spend $1000 per month on that you don’t need. So while $1000 may not be much to spend in the short run it has a huge opportunity cost in the long run.
I had to save the hardest one for last. It’s very easy, easier than most realise to chase things which we don’t need. Yes, we can of course think about things like luxuries and foregoing them but I think there are much more dangerous wastes of money in our lives. I recall there was a gadget I really wanted for a good two years of my life. I love my gadgets and I consider them necessities. However, what I hadn’t realised was that due to changes in other factors in my life this gadget was no longer necessary yet I was actively saving up money to acquire it. It’s a good idea to make sure of the why behind some of the things we spend our money on. Just as dangerous as chasing things we don’t need anymore is chasing things for reasons that are not ours. You may get the things but it usually ends in disappointment.
These principles will help you evaluate your decisions and learn the habit of money-smart decisions.