Making Sound Financial Decisions

Sound decisions are the key to having a healthy financial life – to building wealth, paying off or staying out of debt, and to building a good credit score. Even the small, day-to-day money decisions have a big impact on your finances, so it’s important that you make the right ones.

Always ask yourself whether you can afford a purchase before you make it. Affording something isn’t necessarily about having the money for it. You have to consider: the money you have on hand, the expenses you have coming due, the money you have coming in, and your loan-term goals.

For example, you may not be able to afford something if:

• The money you have is already allocated to expenses you have coming due.
• You have money, no expenses, but you also don’t know when you’ll get money again.
• The purchase is a nonessential and you have debt to pay off.
• The purchase would keep you from achieving a long-term goal.

Of course, being able to afford something doesn’t mean you should purchase it. Is the purchase a want or a need? Make sure it’s not a want disguised as a need (e.g. an expensive designer jacket vs. a no-name, less expensive jacket that will still keep you warm through the winter). Can you give yourself a simple, non-superficial reason as to why you want to make the purchase? If not, there's a good chance it's not a wise purchase decision.

Understand the true cost of an item. For example, when you buy a pet, you’ll also have to feed, house, and provide health care for that pet. Purchasing the pet may not be expensive, but the ongoing cost of having that pet may be more than you realize. Or, for example, you may purchase a DVD player, then you’ll also be more likely to purchase or rent DVDs, another additional cost. Things often come with ongoing costs that we don't factor in.

Financial decisions should be based on logic rather than emotion. Emotions can change. You can purchase something when you’re happy or angry, and regret it when you’re no longer feeling that way. But, if you purchase something because you need it or because it will improve your life in some way, chances are you won’t regret that decision.

Set short- and long-term goals for your money. These goals will help drive many of your decisions. For example, you might decide to cut your grocery bill by $100, when you grocery shop, you’ll shop more purposefully, looking for deals and being mindful of what you put in the shopping cart.

It’s good to have both short- and long-term goals. The short-term goals are more attainable. They can keep you motivated. While long-term goals require more work, they often have a big impact on your life. In the short-term, you might decide to save up a few hundred dollars for holiday shopping. A long-term goal may be to pay off your $40,000 credit card debt.

Analyze the decisions you’ve made. Track your spending to see how well you’ve spent your money. You can learn a lot by looking at a month’s worth of spending data. You can catch your trouble areas and come up with a plan to fix them. For example, if you notice you’re spending a lot of money on gas, you can pay more attention to where and how you drive or have your car serviced to be sure you’re getting the best gas mileage.

Don’t get discouraged by mistakes or setbacks. No one’s perfect. If you make a bad choice, try to fix it. If you can’t fix it, resolve to make a better choice next time.