Have you ever made any bad financial decisions? I know I have. If you’ve been an adult for any length of time, you probably have too.
Welcome to the club.
Lest you think I’m somehow above making bad financial decisions just because I teach people about personal finance, I can assure you that you’re wrong. I’ve made stupid financial decisions in the past that have literally cost me tens of thousands of dollars.
In fact, some of the financial mistakes I’ve made over the years have actually helped me become more qualified to teach people about their finances.
You can call it the school of hard knocks I guess.
I’ve chalked up those losses to experience and moved on with my life. However, I’ve learned some valuable lessons along the way that are helping me eliminate bad financial decisions in the future. I think they can help you too.
You Can Stop Making Bad Financial Decisions
I get emails from readers all the time lamenting the bad financial decisions they’ve made. Some were huge one time mistakes. Usually though, it was a slow trickle of bad decisions that added up over the years and grew into a huge problem.
From what I’ve seen, these decisions a pattern of behavior that repeats year after year, until the situation is no longer manageable.
I believe that most people can correct these behavior patterns if they are motivated. It’s just a matter of gaining a little knowledge of what to do, combined with enough resolve to do it.
So I wanted share a few things I’ve learned along the way from some of the bad financial decisions I’ve made. Some of these tips are easy to implement. Some take much more time and effort. But I believe if you put these strategies into practice in your own life, you will save yourself a ton of money and stress by making better financial decisions going forward.
7 Strategies to Eliminate Bad Financial Decisions for Good
Take Your Time
When you’re making a large financial decision, don’t rush into anything. It’s easy to get caught up in the process of buying a house, car, or other pricey item and agree to a deal that you may come back to haunt you.
Do plenty of research. Take the time to sleep on any financial decision before you commit to anything substantial. Also, the bigger the financial commitment, the more time you should take and the more research you should do. This gives you a sort of financial “time out” to counter the emotional excitement that sometimes comes with making a big financial decision.
I remember not long after my dad passed away, my mom was considering several large financial decisions concerning her house and inheritances. Some of the things she was considering seemed logical in the moment. But after I urged her to take some time to consider everything, the options that she was considering didn’t seem quite as prudent. Time and patience helped her clarify her thinking and make the best decisions possible.
Check your motivation for making a financial decision. Have you gotten caught up in the emotion of getting a new car? Are you desperate and feel like you’re backed into a financial corner? Are you grocery shopping while you’re hungry? Better be careful. Don’t make any financial decision while you’re in the wrong state of mind.
Your emotional state is very important in the decision making process. Take a step back and evaluate the situation from a more clinical standpoint so you can eliminate making emotional decisions. Making an important financial decision primarily out of emotion will come back to bite you every time.
Seek Wise Counsel
The bible is full of passages about seeking wise counsel. You should always seek someone wiser than you for advice any time you’re making an important financial decision. Preferably it should be with someone who has had to make a similar decision in their own life and was successful with it.
You should also be careful about seeking advice from someone who stands to gain from your decision. Even if they are honest, it’s very difficult for anyone not to show some bias when they stand to benefit from the outcome.
Most importantly, never take money advice from someone who’s broke. That means cousin Eddie living in his motor home as well as your other cousin who looks successful but is drowning in debt.
“Without counsel plans fail, but with many advisors they succeed.”
Learn From Past Financial Decisions
You’ve probably made a few bad financial decisions in the past. We all have at one time or another. Look back at some of those decisions and pick them apart. What did you do wrong? What did you do right? Could you have done anything better?
It’s extremely important to learn from your mistakes so you never make the same mistake twice.
The great thing about making a bad financial decision is that you can learn from it. Just like anything else in life, if you screw it up once you can do it much better the second time around. I’m speaking from a ton of experience, let me tell you.
Learn everything you can about money and how it works. One of the biggest problems I see is that people don’t know what they don’t know. When you’re just winging it financially, hoping everything falls into place, you’re headed for disaster.
Getting financial knowledge comes in handy on a daily basis. From large purchases to investments to everyday spending, the more knowledge you can apply to your situation the better. More knowledge results in better decisions. Here are a few of my favorite books for getting a basic understanding of money:
Personal Finance For Dummies by Eric Tyson
Financial Peace by Dave Ramsey
Rich Dad, Poor Dad by Robert Kiyosaki
The Cashflow Quadrant by Rober Kiyosaki
Ask The Right Questions
When it comes to any financial decisions, be sure to ask the right questions. If you’re making a large financial commitment you should ask yourself:
- What’s the worst that can happen?
- What will happen if this works out well?
- Am I prepared for the worst case scenario if it does happen?
The answers to these questions may not always be clear. But the more questions you ask, the more clarity you will get about your decision.
Too many of us like to think about the upside of a big financial decision, but don’t give enough consideration to the risks. It’s much more likely that things will go wrong instead of everything working out perfectly. So it’s up to you to know the risks and be prepared to deal with them if necessary.
Sweat the Small Stuff
It’s usually the small stuff that gets most of us in trouble. Making a bad decision on a mortgage or a car purchase can cost you thousands. However, it’s those everyday habits that will cost you bigtime.
I get emails from readers every day about credit card debt and overspending that have totally decimated their financial situations. They don’t always seem to know how they got into such bad financial straits.
The problem is usually that they didn’t sweat the small stuff. These people never did a detailed budget. They used credit cards for everyday purchases and carried a balance. They never kept close track of how much they were spending and later realized that they were spending more than they made.
Sweating the small stuff means paying attention to your daily spending habits, doing a budget, eliminating credit, and using cash to fund your life. When you sweat the small stuff you will never spend more than you make and you will always know where your money is going.
Building a Huge Pile of Wealth
We all make bad financial decisions occasionally, me included. But when you recognize your mistakes, correct them, and learn from them, your financial decision making gets much better over time.
You just have to take the time, use every resource you have, and make the best decisions you can. What may be the right decision at a given time may not work out in the long run. But when you keep your eyes on the ball every day, you’ll continue making better and better decisions.
Those better decisions will add up over time, building a huge pile of wealth for you and your family. I guarantee it!
Question: Ever made a bad financial decision? Leave a comment and tell me the worst financial decision you ever made. I’ll start with the first comment
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