How To Make Good “Bad” Financial Decisions

When making financial decisions, we are often encouraged to ask ourselves whether the decision “makes sense.” There are two problems with this approach. First, it’s the wrong question. There is no decision that makes sense for everyone. Rather, each of us has unique needs and wants, individual opportunities and constraints. As a result, a decision that “makes sense” for one person may not “make sense” for another. Thus, a better question to ask is whether this decision “makes sense for me ?”

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The second problem with this question is that we may not be giving enough thought to what it means for something to “make sense.” Does it “make sense” to buy a car that costs $75,000 when you could purchase one for $40,000? Does it “make sense” to buy a new pair of winter boots when your current pair still get the job done? Or, how about pricy baseball season tickets you could use to spend more time with family and friends? The answer depends on how you do the math.

If “making sense” always and only means spending as little money as possible, the answer is probably “no.” But if “making sense” is defined not only by dollars and cents but also by what we want out of our lives as whole people who exist beyond our bank ledgers, then maybe there are scenarios where you should go for it. In fact, I know there are. I call these moments “smart splurges,” financial decisions that might be “bad” for someone else but are right for you, decisions that you can make with intentionality and confidence if you do a little work to understand yourself and your finances.

Know Your Priorities

One of the reasons to work hard and earn money is to enjoy life, right? This includes the occasional splurge. But how much splurging is too much? And how do you know if you’re making a smart splurge, as opposed to an ill-advised one? The trick is to know what matters to you, and to make your choices based on those priorities. What does that look like in practice?

1. Identify your values. Money can be a tool for living our values, but only if we know what those values are. Before we ever talk with our clients about money, we guide them through a series of exercises to help them pinpoint the values that are most important to them. We work with them to determine what it is they want for themselves, their loves ones, their community, and anyone or anything else that matters to them. Once our clients can clearly articulate these priorities, they can use their values as an instruction manual to build a plan for making financial decisions that support them.

2. Establish a meaningful, “sticky” goal. Financial management is all about trade-offs, choosing to prioritize one thing over another. It’s important that you identify a key goal or goals you can use as a barometer for evaluating the opportunities that will come your way. For example, my wife and I really want a beach house. When making financial decisions such as whether to take a weekend away, we ask ourselves if we’d rather spend that money on a quick trip out of town, and thus postpone purchasing a beach house that much longer, or skip the trip and put that money towards our dream of owning our own slice of heaven on the sand? Whether it’s a beach house or something else, having that sort of big, meaningful goal is helpful in providing you a tangible sense for the impact of your choices and helping you to make decisions that truly align with your goals and values.

Know Your Numbers

In the absence of meaningful data, you will be left with only your emotions to guide you to an answer around your most important “spend or save” decisions. That’s why it’s important to be able to identify how a few of your key financial numbers will change based on a particular decision. This sort of cash flow forecasting can be complex or require sophisticated software, but behind it all are a few key concepts that can help you to feel more comfortable making data-driven financial decisions:

1. Plan for what is predictable. People are often surprised by things that aren’t actually that surprising. Whether it’s your car wearing out, the HVAC system breaking in your house, or expenses related to aging, you can actually predict your life’s expenses better than you may think. Your financial plan should identify these high probability events so you don’t overlook them as an important factor in your major financial decisions.

2. Be an investor, not a gambler. In the same way there are good “bad” decisions, there are also bad “bad” decisions. Many investors are driven by the rush of making money, but the path to wealth is often much less sexy. Put together a plan that fits you, and then use that data to select investments that support that plan. Resist the common temptation to put the investment selection decision first. It should actually go last. Investing without a purpose or method can be akin to gambling.

3. Find someone you trust to help you. Just as an elite athlete relies on a trainer to help them attain superior results, you may need a professional to help provide the data it takes to make the financial decisions to support the life you want. A good financial planner is skilled at helping you understand your financial position so that you feel empowered to make the best choices to meet your goals. They also do more listening than talking, respect your goals and values even if they are different than theirs, and will work with you wherever you are in your life – whether facing retirement or just now joining the workforce.

If good financial management is one part knowing your values and one part knowing your financial data, the final parts are intentionality and balance. The lives we want to live do not magically appear. Rather, we have to actively pursue them. And, I’d suggest, we have to make sure to have some fun along the way. That’s where the intentionality and balance come in. Some days you go for the smart splurge. Other days you practice a little more restraint. But every day you should be empowered to know how to make the choice that best helps you to get the life you want to live.

Any opinions are those of Jay Wheeler and not necessarily of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.Ð'd2961 Centerville Rd. Ste 150 Greenville, DE. 19808 Ð302) 543-5585

By Jay Wheeler, Top Advisor