Good financial decisions are decisions you feel good about, that you don’t lose sleep over and that benefit your overall sense of wellbeing, not just financially. So how do you make a good financial decision?
By working through the tips below, you will have a checklist that you can use every time you make a financial decision.
1. Is this a need or a want?
This should be your starting point for all financial decisions. Obviously needs are more important than wants, so you need to ask yourself, if I don’t have it now, how much of an issue is it?
2. Can I afford this purchase?
Will your purchase be funded by savings or do you need to borrow money? If it is the former, sounds like you can afford it. If it is the latter, borrowing money is not a reason to not make the purchase but it gives the purchase a longer tail.
3. Does this decision have extra/hidden costs I haven’t considered?
For example, buying a house has numerous extra costs including stamp duty, legal fees, maintenance and repairs, so you need to go in knowing and do your research on how much they add to the total cost.
4. Will this purchase appreciate/depreciate?
Purchases such as new mobile phones do depreciate quickly whereas updating your skill set will only help you in the future with your career choices.
5. What is the opportunity cost or the forgone opportunity of buying the cheapest on the list?
The cheapest product might not mean it is the best and the most expensive product might be more than you need. There is an opportunity cost in both these approaches, so you need to be sure of what you want.
6. What is the ongoing costs when I have purchased this item?
Items such as mobile phones can be prepaid or have a payment plan, so if you choose the latter, you need to have a good understanding of the precise amount you will be paying.
7. What is generated by buying this asset?
Sometimes a financial decision will generate income such as rental income from an investment property, which can then help cover interest payments on a loan. Remember to think holistically and how money out can sometimes mean money in.
This information was prepared by Bryan Ashenden, a BT financial specialist.
