Everyone will be faced with a major financial decisions at some point in his/her life. It could be buying a house, buying a car, accepting a job offer, hiring a lawyer, accountant, or other professional, etc.
Major financial decisions can be difficult to make, and more importantly, can have a long lasting impact on your financial health. Before making a major financial decision, be sure to take your time and make sure you are making the best decision for you and your family. Here are some tips that may help you make eliminate the noise and make the best decision for your situation.
Making a major financial decision
1. Listen to your gut. If it doesn’t feel right at the first glance, then it may be a good idea to pass. Was the car salesman overbearing or did he change the topic when you asked a question about the car’s accident history? Did the financial planner you met with seem concerned about you and your financial interests, or did he give you the hard sell on a high priced mutual fund? A gut check is valuable because it can serve as your first line of defense and help you quickly eliminate some options from consideration.
2. Do your research. Using your first impression can help you quickly eliminate some options, but not all options. The examples I gave above helped me avoid buying a clunker and avoid using a broker who was more interested in racking up fees than making me money. Listening to my instincts helped save me money, but it didn’t put a car in my driveway or help me set up a financial plan. For that I had to continue my research.
3. List pros and cons. Once you have your options narrowed down, it’s time to take a closer look and examine the pros and cons. This is a great option for buying a physical item, such as a house or car. But it can apply to other situations as well, including evaluating a job offer, saving, investing, paying off debt, etc.
4. Communicate. Communication is especially important if you are married or make joint financial decisions. An example of this is my parents, who once bought a couch neither one of them liked, but they bought because they thought the other person liked it. I think I need to amend the article.
5. Sleep on it. Give it a day… or a week… or a month. It’s very rare that you need to make a major financial decision at a moment’s notice. You should typically give a proportionate amount of time to the size of the decision. For example, I usually wait a day or two before buying something over $100. But I take more time to do research for a larger purchase or financial decision. For example, my wife and I are looking at buying a new car, and I imagine it will take us a good month or so of research. A house can, and probably should, take longer.
6. Go with what you know. All things being equal, go with the situation you are familiar with. Buying a car is a good example. For instance, last week I asked, would you buy a Toyota?, in response to the recent recall issues they have experienced. I have owned 3 Toyotas in my life, and my family members have also owned several. After doing the research, I think Toyotas are still great vehicles and offer good value. So if all things are pretty much equal, I would buy a Toyota because I am familiar with their vehicles. The same thing goes with buying electronics and other big ticket items.
7. There is no perfect answer. Voltaire said, “The perfect is the enemy of the good.” You can spend a life time going over the various situations and possibilities, but that won’t necessarily get you closer to the perfect answer. In fact, the closer you get to perfection, the more difficult it is to obtain – sort of like the law of diminishing returns. The short of it is this: there often isn’t a perfect answer. Sometimes you just have to make a decision and roll with it.
8. Trust yourself to make the right decision. You’ve gotten yourself this far. Now it’s time to trust yourself to take action and make the right decision.
Do you have any tips for making major financial decisions?