Making smart financial decisions can be a tough task if you don’t have a lot of personal finance experience. In this article, you will learn tips to for you to make smart financial decisions with confidence on a daily basis.
Every day you are forced to make decisions that impact your life. In fact, humans make an estimated 35,000 decisions daily!
Some of these decisions will impact your finances either directly or indirectly.
Direct effects are most often decisions on whether or not to purchase something.
Indirect effects can be a result of other things such as the opportunity cost of your decisions.
These types of effects can be seen when making major purchase decisions and making small daily decisions.
Since we acknowledge decision-making and finances are related, we should also realize that improving your decision-making might possibly benefit your finances as a result.
This article will talk about making better daily decisions not only for your finances, but also for your life as a whole.
The Power of Small, Consistent Actions
Since it is well known that focusing on the “Big Three” expenses is the best way to cut on spending, you may be thinking:
Why focus on small daily decisions?
The reason is simple. Firstly, the savings brought by some of these decisions can accumulate into large amounts. However, the most important reason is that small daily decisions are what form habits. They are a manifestation of your discipline, or a lack-of.
The process of self-improvement on a daily basis is equivalent to interest that compounds daily! It is more proof that compounding takes place in all aspects of life.
Financial decisions that occur daily are most often purchase decisions.
- Do I buy lunch today, or do I cook the groceries I previously bought?
- Should I check out the shoe store at the mall? Or just go and buy what I came here for?
The answers to these hypothetical questions can affect both your self-discipline and your wallet.
Most often, the daily financial decisions you make involve choosing to stick to your budget or not. If you frequently make purchases that have no place in your budget, or you overspend on things that are in your budget, you could be engaging in impulse buying.
The Power of Overcoming Impulse Buying
Impulse buying can be defined as: “the buying of retail merchandise prompted by a whim on seeing the product displayed.”
Impulse buying is a common occurrence, partly due to the free market we live in and the abundance of products you didn’t know you needed. In fact, a study by Invesp has found that 84% of American shoppers make impulse purchases!
These aren’t necessarily on small purchases either; the same study found over 50% of the same group has spent $100 or more on said impulse purchases.
The key trait of impulse buying is that it falls under unplanned decisions. At first glance, you might think it best to avoid saying “no” to all unplanned decisions, however it is not always that simple.
What if you forgot to add deodorant to your shopping list, but remember that you need it once you see it in store? Even though this was an unplanned decision, it’s still wise to say yes and purchase something you need.
Learning to filter the needs from your wants is all part of the improved decision making process you’ll use to avoid impulse buying.
5 Tips for Improving Your Daily Financial Decision Making
Improving your financial decision making might seem like a tough task, but with the right knowledge and steps, you can start making better financial decisions.
Below, I have 5 tips you can take and implement in your life to improve your daily decision making:
- Always plan ahead
- Minimize time spent on the smallest decisions
- Avoid the source of tough decisions
- Consider using cash envelopes
- Find balance with your purchases and don’t sweat your mistakes
Let’s dive into each of these tips in more detail below.
1. Always plan ahead
The best way to improve your decision-making on a daily level is to have a plan.
This plan can be in the form of a monthly budget, shopping list, or meal prep plan.
Think about it: knowing what you’re having for lunch this week reduces the likelihood of you deciding to buy lunch!
Remember that a plan alone is not enough. Everyday, you’ll now have to make the decision of “do I stick to my plan?”
2. Minimize time spent on the smallest decisions
The size of the purchase should influence the time you spend debating it. After all, it shouldn’t take you 10 minutes to decide whether or not you want a $5 latte!
For most daily purchases, you shouldn’t need more than ten seconds to make a decision. The primary question to ask yourself is:
“Does this purchase bring value to me?”
There is also a secondary benefit to making your decisions quickly and concisely. The longer you think about it, the more likely you are to give in and try to justify the impulse buy in your head.
3. Avoid the source of tough decisions
This technique will help you stick to any plans you may have made in the first step. Avoiding online shopping is one common way people avoid difficult purchase decisions.
Marketing for e-commerce is cutting edge and astonishingly effective at getting repeat customers to make purchases. If you find yourself always tempted by this, then your best bet is to completely avoid visiting the website of your favorite retailers.
The same goes for shopping malls and large department stores. Try not to visit them spontaneously; I find it helpful to only go on shopping trips that are pre-planned.
4. Consider using cash envelopes
Finally, if you are really finding it hard to take control of your daily financial decisions, you may want to look into the cash envelope budget method. I actually covered this in depth as one of the 5 simple budgeting methods to make the most of your money.
I’ve personally never used this budgeting method, but it is one of the oldest forms of budgeting and is largely popular even in today’s digital age. It is truly a great strategy for those who struggle with sticking to a budget and avoiding impulse purchases.
The cash envelope budget method involves filling envelopes with a set amount of cash every month, with each envelope representing a spending category (groceries, transportation, entertainment, etc.)
The premise of this budgeting method is that it’s impossible to overspend with cash, since you cannot spend more than you have. Also, it’s been well documented that people tend to spend more using credit cards than cash. There’s something psychological about cash (maybe the fact that it’s tangible) that leads people to be more conservative with it.
5. Find Balance with Your Purchases and Don’t Sweat Mistakes
Decision making can be tough, and if you are worrying about past mistakes, then it can be even tougher.
I love playing sports, and in particular, one of my favorite sports is golf.
If I’m playing and hit a bad shot, sometimes it’s tough to forget about that bad shot, and I’ll end up overthinking my next shot – compounding the problem.
Instead, I try to take a deep breath and focus on making my next shot as good as it can be.
I can’t change the past, but can change my future.
For making smart financial decisions, a similar concept can be applied.
First, it’s okay to spend money on things which bring you joy. You can spend money and still meet your financial goals (living a fulfilling life is also important!!).
Second, sometimes impulse purchases are necessary because of stress or peer pressures. Realizing this, you can then find balance by cutting back elsewhere and recognizing that mistakes happen to everyone.
Balance is so important in life, and knowing when to be on, and when to relax is tough but a worthwhile endeavor to try to tackle.
Start Making Smarter Financial Decisions Today
Improving daily decision-making is a powerful way to help build positive habits and break down negatives ones. This goes not only for personal finance, but also for other aspects of life such as health and fitness.
Impulse buying is a very common daily occurrence, and one example of what improved decision-making can help to counter. Impulse decisions also affects making major purchases, which can add up over time.
Remember, there are many tools out there to improve your daily decision-making. Always make a plan before shopping. Tie your decision-making time to the size of the decision; don’t spend 10 minutes deciding on a coffee! Also, try to remove yourself from tempting situations such as browsing online stores.
Thank you for reading 🙂