How To Make Better Financial Decisions In Your Life, And Not Go Astray

We all want to be smart with our money, but that’s often easier said than done.

Whether it’s spending too much on random splurges, not saving enough for the future, or falling for get-rich-quick scams promising overnight millions, it’s easy to make silly money mistakes that set us back. When making financial decisions, such as how to spend, save or invest, our money mindset, habits and short-sighted impulses can lead us astray.

Most people approach money decisions quite casually without much forethought or big-picture context, and that often results in avoidable financial problems.

When they see something they want, they do a quick gut-check if they can afford it and either splurge or hold off. For instance, impulsively buying the latest mobile phone without budgeting for upcoming bills, resulting in overstretched finances. Or financing a lavish holiday on credit because they desperately want to escape work stress, but then ending up with a mountain of high-interest credit card debt.

These are prime examples of the short-sighted choices that get made when we rush for dopamine and neglect long-term planning and consequences, resulting in missed opportunities and ultimately less happiness.

Making consistent efforts to educate yourself, build better money habits and take control of your decisions can help you to make better financial decisions. Here are some ways to start:

Slow down the decision-making process

Have you ever excitedly splurged on an expensive purchase, only to experience buyer’s remorse soon after?

That’s the risk of making hasty, emotionally charged money moves. Have a mandatory “cooling off” or “sleep on it” policy so you wait at least 24-48 hours before making the decision.

For life-changing decisions like buying a house, or quitting your job, take a longer time to reflect. During this time, let the excitement, fear or other passing emotions subside. Then you can evaluate things rationally. More often than not, by giving it some time, you will see why that “can’t miss” is actually a “can miss” decision.

But do make a decision! It’s important to find a balance. While taking time to think things through is wise, don’t delay for too long. Putting off important financial decisions like investing for your retirement can limit your returns. The earlier you start investing the greater the compounding benefits over time. Procrastinating can end up costing you.

Remove emotion from the equation

Money choices should be as clinical, data-driven and impartial as possible. The decision should be made objectively, rather than subjectively based on feelings and assumptions.

Especially for big-ticket purchases, investments or other major decisions, don’t just go with your gut feeling or make assumptions – look at the hard facts and numbers.

It’s easy to get carried away by greed for potential rewards or to avoid something out of fear. But you need to catch yourself when emotions are clouding your judgment.
Make a list of the potential upsides and downsides, the risks involved, and the realistic outcomes, good or bad.

Approach money matters with a calm, level-headed mindset, relying on logic, reason, and objective scrutiny of the facts, rather than allowing emotions to drive your choices, which could lead to poor or impulsive decisions.

Seek another perspective

We all have personal biases and blind spots that can cloud our judgment, so soliciting feedback from those who have your best interests in mind is invaluable.

For instance, perhaps your friend with a background in real estate notices red flags when viewing the property which you had overlooked. Or your financial advisor cousin points out the risks in the investment that is supposedly a sure win.

Ultimately, we still have to make the decision, but an impartial outsider viewing the situation objectively may raise issues or concerns that weren’t initially considered, potentially protecting us from costly mistakes.

Question your assumptions

Step back, examine and challenge the validity of the underlying assumptions when you make a choice that affects your finances. It’s all too easy to fall into the trap of making bad decisions based on assumptions and expectations. It’s like taking a step back and giving ourselves a reality check.

For example, in investing, we often underestimate the impact of economic factors or overestimate the potential returns on our investments, simply because our minds tend to project ideal outcomes as opposed to realistic ones.

You may well have read or heard that “past performance is no guarantee of future results”, yet we can’t help but assume that the hot stocks /funds and industries that have been doing well will continue to outperform. This kind of overconfidence bias can lead us down a slippery slope, where we fail to do the due diligence – research, question, analyse and compare, increasing the chances of making costly mistakes.

Practice building self-control

Impulsive spending can be a real challenge for some. It’s like an addiction that can sabotage the best intentions.

Go on periodic ‘money fasts’ to build disciplined habits and assert self-control over money temptations.

During money fast periods, you cut out all non-essential spending. This helps break the cycle of instant gratification and reinforces the power of delayed gratification. By setting up deterrents you limit purchases to a set amount and therefore can’t overspend on impulse.

Educate yourself

Learn the fundamentals of managing your finances like budgeting, cash flow, compound interest, debt management and asset allocation to make informed decisions.

Take the initiative to build your money skills and good habits through self-study, online courses, or consulting financial advisors.

The more knowledge you accumulate , the better guard rails you’ll develop to protect yourself from mindless mistakes.

When you make a mistake…

Nobody’s perfect, especially when it comes to financial decisions. Even when you follow all the steps to make the best decision, mistakes can still happen.

You might buy property in the wrong location, invest in an education only to change direction later, or put a significant amount of your savings into a risky investment that seemed promising.

It’s important to remember that failure is a part of learning and not the end of the game – it’s a valuable learning opportunity. Embrace your mistakes, absorb the lessons they offer, and continue working towards the future you want.

This content is part of the Temasek – Financial Times Challenge, a financial literacy education series in Singapore for youths.