Make Better Financial Decisions

June 27, 2018
Posted in Blog
June 27, 2018 Mduduzi Luthuli

People try to choose the best feasible option, but they sometimes don’t. Only through experience and continuous learning are you able to make better, optimised decisions. This is an important principle of behavioural economics. In other words, people try to make the optimal choice—they are optimizers—but they sometimes make mistakes. This principle also explains why financial literacy is so beneficial to everyone. Financial literacy has the tangible benefit of increasing the optimality of the person’s own decisions. Put differently, learning about money turns you into a decision-maker who is more likely to choose the best feasible option. By learning about money, you become a more skilled optimizer. By not learning about money, your decision-making process becomes stagnant or erodes over time as the foundation of your decision-making process is no longer pertinent. In learning about money, you inherently learn to embrace risk and make better money decisions. Let’s unpack this concept.

Become Friends with Risk

If you were asked to complete a Personal Finance Test, which measures financial knowledge and understanding, would you pass it? If you were asked to answer questions touching upon areas such as earning, saving, investing, risk and return, managing debt, insuring and comprehending risk…. how well would you do?

If the answer is not well at all, how then can you possibly hope to fulfill your financial aspirations? To acquire wealth, one needs to comprehend risk — and understand uncertain financial outcomes — otherwise you’re constantly crippled by your mistakes.

Risk, unfortunately for most, is something you’ll likely learn in the school of hard knocks. But it would be far better to learn about the concepts associated with risk — such as hazards, exposure, probabilities and consequences — in elementary or high school. Having higher risk knowledge is correlated with being less likely to be financially fragile.

Know Your Numbers

Even if you don’t need to know a lot about finance to do your day-to-day job, the more conversant you are on the subject, the better off you’ll be. If you can speak the language of money, you will be more successful. After all, if you’re trying to sell a product or strategy, you need to be able to demonstrate that it is both practical and high margin. Even of the person you’re trying to sell to is YOURSELF. As the decision-maker in your life you need a simple model that will confirm that what you’re doing is a good financial idea.

Still lacking motivation? Make improving your financial skills a survival issue. Every time you are paid, your organization makes less profit. So, you need to think about what you can do to help the company remain profitable or be more so. An absence of financial savvy is “career-limiting.” If you’re unable to contribute to a discussion on your company’s performance, you’re unlikely to advance. You are not going to be involved in running projects unless you understand the financials. Think of yourself as a miniature profit and loss statement: How do you add value?

Get a Mentor

Mentors play vital roles in our lives by guiding us through the unknown. A financial mentor has the power to impact every facet of your life by helping you understand and build your wealth to the level of achievement you desire. So how do you find someone you can trust to lead you down the path to financial freedom? Do they need to be a professional money manager? What traits should they have? Here’s what to look out for when looking for a mentor.

  • They’ve had solid financial footing for some time
  • They are willing to share their knowledge
  • Their financial situation is what you want for yourself
  • They’re a good listener
  • The two of you click

Sometimes it pays to seek out the assistance of a professional. Do your research to find someone who currently works with the type of financial tools you’re interested in and has the qualities listed above.