1. Advisorkhoj
  2. Principal Mutual Fund
  3. articles
  4. Making Better Financial Decisions

Making Better Financial Decisions

Oct 26, 2015 by Priyanka Chakrabarty | 25 Downloaded
Picture courtesy - PICJUMBO

All of us try to make our lives a little better and easier. However, there is a thin line which distinguishes bad decisions from good ones. The impact of such decisions is not felt in the short term but the long term impacts are inevitable. Your financial life is no different. It is often a culmination of the decisions you make: some good and some bad. Just because you make bad ones, does not mean you should not aspire to make better ones. How do you make sound financial decisions? The answer to this is fairly simple but rarely explored: knowledge. Unless you are aware of the various avenues and options available you cannot make any decisions. Hence, find reliable sources of financial knowledge and start educating yourself on the various avenues. You can start with these pointers to learn and make better financial decisions.

Make Savings and Investing Automatic

Manually transferring money to various savings accounts and depositing monthly cheques for your investments or Systematic Investment Plans is a commonly used option. This usually results in procrastination and you miss out on your savings and investments. You may be unable to do the same due to other financial burdens. Instead of relying on this manual and somewhat ineffective system you can get this entire system of savings and investments automated. While opening your savings accounts, Mutual Fund SIP or Recurring investments tick the “Auto debit” option in the scheme form which will ensure that every month the stipulated amount is debited on a stipulated date.

Another major advantage of this system is you keep getting updates and reminders of the dates within which the debit will occur. It ensures that you maintain a specific balance in your account. However, if you are unable to maintain the balance within the given dates, there is no need to worry. You can write a cheque on a later date and make up for the investment which bounced. Hence, make this process a little easier by making it automatic.

The Marshmallow Test

In an experiment called the “The Marshmallow Test” was conducted by Stanford University where the researchers stated that “one marshmallow now or two later” and they deliberately left the room for fifteen minutes. Once they were back they noticed most of the participants had consumed one marshmallow within three minutes of them leaving the room. Some waited for as long as fifteen minutes only to be rewarded with another marshmallow. This test is one of the major tests for self control and the rewards associated with that. The key to being successful in this test was self control and understanding long term goals.

Every time you make an investment you are going through a Marshmallow Test. Are you usually looking for quick short term gains? If you are a fickle minded investor who invests and withdraws in the short term then you are continuously failing the Marshmallow Test. You never wait long enough to see your investments reap any returns. You settle for one marshmallow when you can have two. You rarely see yourself being one of the investment success stories because you do not look at the long term goals.

The key to making good financial decisions lies in strategizing and biding time. Your investments will have to go through rough waters and smooth times to get great benefits. This can only happen when you leave it for a while. Hence, wait a little and relish the double sweetness of the marshmallows.

Identify Your Money Personality

Your money personality is formed by the way you handle money and your thoughts about money. We are all different people because we think and do things differently. The same applies for our financial decisions. Each of us has unique approaches to savings and investments and that allows us to have a vivid money personality. You could be a financial innocent who fails to understand the monetary transactions and investments. You fail to understand the various avenues in which your money can be invested and stick to the limited and traditional options. You are somewhat intimidated by money. You could also be a financial hoarder as you maybe habitually hoarding money under the pretext of saving. You maybe deprive yourself of certain necessities as you are afraid of spending. You could be a financial spender where you spend without any regards to future income or savings. You spend without consideration and find it hard to curb your spending and save money.

There are various money personalities and you belong to one such money personality. Every personality has its own pros and cons and identifying these could be instrumental to the financial decisions you take. If you are a financial innocent then it is perhaps time to ask for that raise. If you are financial spender you need to slow down and track your spending to start saving.

Avoid Shame and Blame

Experts are of the opinion that a lot of time we make bad financial decisions because we are emotionally attached to the money we save or invest. Hence, we waste a lot of time shaming ourselves for the bad decisions and blaming others for the same. As the decision makers of our finances we have to remember one thing that we are going to make bad decisions. They are a part and parcel of learning to make decisions. Shaming ourselves for such decisions reduces our self worth and makes us question our ability to make decisions at all. Instead of blaming yourself by saying, “I took a terrible decision. Maybe I cannot decide what to do with my money” think of it as, “That was a bad decision. Let us try and do something else with the money next time”.

Decisions making is a process which works on a series of trials and errors. The process of making financial decisions works the same way. It helps to treat the money as “Investment Money or Savings Money” rather than “MY investment money” and “My savings money”. The personalized association makes create a barrier to making objective decisions and increases the chances of self shaming and blaming others. Hence, make some bad decisions or watch others make some and slowly you will be able to take sound financial decisions.

The Lure of Instant Gratification

Let us imagine a scene. It is a Sunday and you walk in to a mall. You see a big sign which screams “SALE” or “BUY 1 GET 1 FREE” and you walk towards the store like iron towards a magnet. You do not stop to think even for a second if the materials on sale are of any use to you. Even the things you buy to get the things that are free will be ever used by you. All you care about is you are buying things below the Maximum Retail Price (MRP) and that makes you ecstatic and it gives the illusion of savings and smart buying. Soon after the purchase is done, you get an adreline rush, which is satisfaction of instant gratification.

Soon after you realize you do not need a single item that you have purchased and it has been a financial waste. Financially, you took a bad decision and the lesson learnt will be the end of the month fund shortage. To cover this up a lot of us have to resort to means of credit taking and to fulfill the credit taken, your following month’s salary is affected and this slowly builds a debt trap. Now you must be wondering, this is just one purchase. Just imagine, if you keep on making such purchases you are trapping yourself by making a series of wrong decisions. Hence, the solution to this is rather simple: self control. It is hard to exercise but nothing is impossible with practice. Next time you see a sale try not to go overboard. If a single patty burger is good enough do not go for the double patty extra cheese burger. A series of financial decisions gone right can create a small sum which might keep growing over the years. Hence, start doing small things right and avoid instant gratification.

Conclusion

There is no magic formula for making the right financial decisions. There is not a single human being on this earth who can claim all the decisions they have made have gone right. That is simply not possible or human. A famous saying goes as you have to spend money to make money. The saying you have to lose money to get money is equally appropriate. The richest have also lost millions before they earned back the amount and more. That is how the process of decisions making works: you get some right and some wrong. It is just a matter of what you choose to do with the wrong decisions, beat yourself up and repeat the same mistakes or try and make better decisions from a lesson well learnt? The decisions are yours! Happy choosing!

Locate Principal Mutual Fund Advisors in your city

Priyanka Chakrabarty

A literature enthusiast who loves to write. An ardent social worker who dreams of bringing about change and hopes to do so through her writing. A firm believer of the saying pen is mightier than the sword, Priyanka is an English Honours graduate. She also pursed Diploma in Wealth Management Practice from IIFP and is a certified social media expert.

comments powered by Disqus

© 2016 Advisorkhoj - A Gamechanger Business Services (I) Pvt. Ltd. Brand - All Rights Reserved

Feedback