Early on in my career, I came across a simple process that could help anyone make an informed financial decision. I use it both personally and in practice quite a bit.
It’s called the “Three Criteria,” and it involves answering “yes” or “no” to the following three questions.
- Can I afford it?
- Will I feel good about doing it?
- Does this decision make sense?
Now, the goal of the exercise is to see if you can say “yes” to all three questions. If you can, it means the decision you are about to potentially make is an informed one.
However, it does not mean that you should go ahead and do it. It simply means you’ve met the criteria for making an informed decision should you then choose to do so.
The reason I like this system so much is because it addresses both the objective and subjective nature of personal finance. For example, affordability is a matter of knowing your actual numbers.
Do you have enough money to make the purchase? How would financing impact your cash flow? How will this purchase affect other financial goals? The beauty here is that asking this question calls into question your understanding of your own financial situation.
While I don’t think most people have a clue as to what they can really afford, the good news is that this serves as a call to action to go figure that out.
Whether or not a certain decision makes sense is a combination of subjectivity and objectivity.
Having to replace something critical to your everyday life, like a car or a phone usually isn’t up for debate. However, what it gets replaced with generally is.
As much as we hate to admit it, our everlasting love for consumption has created an impulsive behaviour that we seem to have justified through the lens of affordability and gratification.
We need to overcome this impulse if we’re to successfully and consistently meet our financial goals.
In typical financial planning fashion, it always comes back to what do you want for myself? Is this purchase bringing you closer to that want?