Tag Archives | financial decisions

Start with Your End Goal

Start with Your End Goal

Throughout life there are various points where key financial decisions need to be made that involve a substantial amount of money or which can take you off on a different path. Aside from the usual ones of buying a first home or starting a family, there are such dilemmas as:

  • Should I leave employment and set up a business?
  • Should I sell my business?
  • Should I undertake a major renovation of my home?
  • Should I buy a bigger, more expensive home?
  • Should I use some of my retirement savings for a big overseas holiday?

Such decisions affect your financial situation now and for years to come. The best way to find the right answer is to start with your end goal. This will be a goal that has a time frame of ten years or more. If you don’t have a ten year goal, develop one. Take your thoughts to a time ten years from now. See yourself on one particular day in that year and imagine all the different aspects of your life on that day. Where are you living? Who are you with? What are you doing during the day? What is your financial situation? and so on. It is only when you have a clear picture of your end goal that you will have clarity around your short term decisions. There are many paths to achieving a goal and you need to decide if you want to take the path that will get you there in the shortest time, or go via the ‘scenic route’ that takes longer but provides more enjoyment along the way. Start with your end goal, then look at the impact on your goal of each key financial decision. Will this get you there faster or with more enjoyment? If not, don’t do it.

 

Comments { 0 }

Making Confident Financial Decisions

DecisionMaking Confident Financial Decisions

There are various points in everyone’s life where it becomes necessary to make a decision that has major financial implications. Making a significant financial commitment such as taking on a mortgage to buy a house or borrowing money to set up a business, taking on a student loan, investing a large sum of money, moving to another location, changing career, starting a family; all these life events involve taking financial risk. How you feel about taking financial risk can have a huge impact on the course of your life. For some people, the fear of making a wrong choice becomes a major barrier to change. People who are fearful may secretly dream of setting up a business or changing their career, but lack the courage to follow through. So whereas the risk takers forge on ahead, sometimes succeeding and sometimes failing, the risk averse stick to what they know and feel comfortable with while perhaps feeling resentful of their lot in life.

The ability to make confident, informed financial decisions can drastically alter your life and allow you to achieve greater things. That means confronting your fears, by first understanding what they are. Common fears include fear of unexpected expenses, loss of income through illness or redundancy, not being able to keep with debt repayments, business or investment failure, and not having enough money for retirement. Strategies for dealing with these fears include making sure you have an emergency fund to cover unexpected events, keeping some of your wealth safe and secure rather than risking everything, ensuring you have spare borrowing capacity rather than borrowing the maximum available to you, taking out insurance, and paying for specialist advice to help you quantify risks and returns. Sometimes, as they say, you just have to feel the fear and do it anyway.

Comments { 0 }

Do You Need a Nudge?

nudgeDo You Need a Nudge?

Despite the best efforts of economists to portray people as rational beings who make optimal choices, it is clear we have inbuilt predispositions to being the complete opposite. In their best-selling book Nudge (Penguin, 2008), Richard Thaler and Cass Sunstein outline situations in which people are least likely to make good choices. Unfortunately, the free market and open competition allow companies to play on these human weaknesses to make more profit. Thaler and Sunstein argue that people need help to overcome their weaknesses and make good choices.

One key weakness arises where choices and their consequences (either good or bad) are separated in time. Spending less now in order to be able to spend more in the future and spending by going into debt are two examples of this. It is human nature to lack the self-control to manage these situations.

Another area of weakness relates to the degree of difficulty of making a decision or performing a task. While we can easily learn simple tasks, or even hard tasks if we practice them often enough, we may need help with difficult tasks such as choosing the right mortgage structure.

Being able to forecast preferences for options which are unfamiliar is hard for most people. The simplest example of this is choosing from a menu in restaurant. Without knowing what each dish tastes like, it can be difficult to make a choice. Financial decisions are no different. Choosing between difference insurance quotes or investment options is made harder by the fact that we can’t experience the outcome in advance.

Thaler and Sunstein argue that people need to be nudged in the right direction with such things as incentives, feedback, and guidance towards the right decision through default options or structured choices. Human weakness means the free market is not perfect.

Comments { 0 }