Even those of us who’ve been making financial decisions for decades can stand a little help now and then. This is especially true as we near retirement, when financial discipline becomes more important than ever - even if we’ve saved all the money we think we’ll need.
Major, unplanned expenses like home repairs, hospital stays, or car breakdowns can wreak havoc on your retirement plan, which is why you’ve got to make sure that you’re keeping the expenses you can control in check. Here are 5 ways to make better financial decisions.
1. Slow down your thinking. One of the easiest ways to dramatically improve your decision-making skills is to slow down your decision-making process.
When you’re faced with a financial decision, be it as small as buying a new suit or as large as committing to a vacation, give yourself a day or two to think it over. That’s the only way to ensure that you’re not deciding based on an impulse, instead of sound logic.
2. Set your priorities. When you have your priorities in order, it’s easier to see which expenses are truly important, and which can be cut out or put on hold.
Obviously, needs like a mortgage, utilities, and groceries have to come first, along with any other bills. After those are taken care of, take some time to go through your expenses for the last month, and mark any that you can live without.
A good rule of thumb, according to financial planners, is to allocate between 50 and 70 percent of your income to needs. The percentage depends on your cost of living - it will be closer to 70 in a high cost of living city like New York, lower in other parts of the country. Then 20 to 30 percent can go toward wants, with the remaining 10-20 percent going toward savings.
3. Talk it over with a friend or financial advisor. Getting another perspective on any big decision can help you uncover your own biases or assumptions that might be preventing you from seeing everything clearly. This is doubly true of financial decisions, because money is such an emotional subject - even when we do our best to remove emotion from the equation.
Talking to a friend, family member, or financial advisor will help you see the decision more objectively, like a math problem instead of a stressful choice.
4. Consider the cost in comparison with the benefits. When trying to make a financial decision, weighing the cost versus the benefits can help you make a sound, logical choice.
Let’s say you’re deciding whether to fly across the country to attend your granddaughter’s college graduation. It’s an expensive trip, and will mean finding a dog-sitter, which is an additional expense.
However, your being there will mean a great deal to your granddaughter and allow you to spend some quality time with her and the rest of your family. In this case, it makes sense to spend the money on the trip - assuming you have the funds available - because the benefit is great both to you and the ones you love.
5. Ask questions and expect answers from your financial advisor. Working with a financial advisor is a great idea at any age, but especially when you’re retired and in need of more hands-on money management. If you’ve been with your financial advisor for years and have a good working relationship, you’re probably already forthright in asking questions about why doing certain things with your money makes more sense than others.
But whether or not you’ve known your advisor for a long time, it’s important to always request the reasoning behind his or her advice. If an advisor suggests looking into a life settlement, for example, you should make sure to ask how it works, why it would benefit you, and how it can add to your assets or help you pay for expenses.
Making solid financial decisions is a skill that can always be improved - even in retirement. For more information on making your retirement count, read our post “5 Ways to Keep Your Mind Sharp in Retirement.”