5 Tips To Avoid Making Wrong Financial Decisions

pros and consEveryday, people are faced with choices. What to wear, what to eat, whether you will go to work or not – all of these are seemingly common but these are the choices that define our daily lives.

In the same way, our financial decisions have great bearing to our future. Every choice that you make, to paying the bills or taking on new debt or buying new clothes, these have a ripple effect on the life that your future self will live. What you choose will either make or break your financial future. You cannot say that it is just a small decision or a big one. Remember that the little purchase choices that you make on your credit card will all add up to be a big amount if you fail to follow through with all the payments. What you thought was a harmless transaction might be the tip of the iceberg full of past choices that could sink your personal finances.

Consumers admit to making poor financial choices

If there was ever a need to start making better financial decisions, it is today. Unfortunately, a huge percentage of American consumers admit to making poor financial choices.

In a release published on NFCC.org, they discussed the results of a poll done back in November 2013. This poll revealed that 80% of their respondents admitted that the worst decisions that they have made in their life involved their personal finances. The other choices included marriage (9%), health (8%) and job (3%).

Obviously, a lot of people realized their mistake after the recession when they were faced with mountains of debt from mortgages, credit cards and student loans. But by then, the realization came in too late. They already made the wrong financial decisions. They had to suffer the consequences and go through the tough journey towards financial recovery.

On a positive note, the NFCC poll revealed that consumers know what their mistake was. They acknowledge that they made the wrong choices and it is to blame for what they are going through. Hopefully, that will make them better managers of their money so they will do not have to feel the consequences of their financial mistakes again. All it takes is a solid experience to really shake your senses and make you change the perceptions that influenced your past decisions.

5 tips that will help you make the right personal finance decisions

As you realize your mistakes, you know that you need to improve how you make financial decisions from now on. You need to start managing your finances better and that means making the right choices.

Here are 5 tips that we hope can help you make wise choices when it comes to your personal finances.

Know your goals. Before making a decision on anything, you may want to keep in mind what your goals are. It does not always have to be financial goals, it can be the generic life goals that you have. When you have a clear picture of what you want to have in the future, all you need to ask yourself is this: will this purchase or financial transaction bring you closer to your goals? Can you imagine it as part of the future that you have for yourself?

Consult your plan. A wise manager of personal finances always have a plan. It can be a budget plan, a spending plan or a saving plan. Any decision that you will make should consult the plans that you have made. You want to keep them in line with your current expenses before you make a final choice. You might be taking in much more than what you can afford.

Educate yourself. When you have consider both your goals and your plans and you are still unsure of what is the best decision, you may want to educate yourself. If there is anything that you do not understand, refresh your knowledge about it. You can search the net for answers. Do not make financial decisions if you cannot fully understand the implications of your options.

Take your time. The fourth tip is to take your time. If there is something that you want to buy and you have doubts about it, turn away and think about it. This is the same for both small or big transactions. Any major decision deserves at least 24 hours of thinking – longer if the risk is great. For small ones, you have to ensure that you are not making rash decisions. Remember, the small ones add up to be significant in the long run.

Communicate. Lastly, you want to communicate your financial decision with someone else. If you are married or living with someone, you should discuss it with them. Even if it is your money, if you get yourself in debt, the people living with you will be affected too. Get their opinion about it. If you have no one living with you, ask the opinion of someone you know and trust. It can be your parent, a close friend and even your child. You might be surprised at how the honest opinion of a kid can help clear issues that you have in your head.

Here is a video from Vanguard that discusses the importance of having couples discuss financial decisions before actually making one.

These tips are all generic and you can add more as it applies to your unique financial situation. You want your financial decisions to help you in building your wealth. To do that, you need to consider all of these factors to avoid making a mistake.

Is it necessary to hire a professional to help with your money choices?

Some people will advise you to get professional advice from a financial planner or something similar. But is it necessary?

It actually depends on your financial situation.

A study released by the CFP Board (Certified Financial Planner Board of Standards) and the CFA (Consumer Federation of America) revealed that the more comprehensive financial planners are better off financially. These are the people who hire the help of a professional and the majority (58%) of them actually live comfortably. This group is also the most confident when it comes to dealing with financial issues and making financial decisions. 53% of the respondents are very confident when it comes to making money choices.

The same study published on ConsumerFed.org also mentioned that the basic planners are not as confident as the first. They are the ones who do not hire a professional to get their advice and they end up being less confident when it comes to making decisions about their money. In fact, only 32% of them are very confident when making choices. They also have a smaller percentage (38%) of those who live comfortably. A big difference to that of the comprehensive planners who hire a professional.

In the end, it may be safe to assume that those who hired a professional financial planner is more confident in making financial decisions. But it also has to be noted that the absence of a professional will not really make you incapable of making a smart decision. If 32% of the basic planners can feel confident about their choices without an expert advising them on what to do, then you can probably be alright. Just make sure that you will a lot enough time to think about your every move. There are many resources online that you can read to help educate yourself.