We make decisions every day. Some of these decisions are insignificant, like what to have for breakfast or what clothes to wear. Others are major decisions, such as “Do I take this job offer or move to another city?” How do you make a choice when you have more than one option? Decisions, big and small and everywhere in between, are easier to make when you know what you want and what you believe in before you make the choice.
Smart people can and do make bad decisions. We’ve all been there and have the stories to tell. Have you ever made a financial decision and thought later, “Why did I do that?” You’re not alone. The actions we take with our money have more to do with our values, goals, emotions, and behavior than with how smart we are. When you can understand this and have a plan ahead of time, you can reduce the likelihood of “bad” decisions and have an easier time making the choice that aligns with your values and goals.
Your values define the boundaries you use every day to make decisions. You do this subconsciously, but our hope in working with you as your advisors is to help you define your values and make financial decisions based on them. Also, when you have conflicting choices, you can refer to your values to help make your decision.
For example, if stability is a value that is important to you, we’ll want to help make sure you have a solid cash reserve and a predictable cash flow plan. If you have a choice between building your cash reserve or spending that money, the value of stability will help you save. You’ll work with your advisor to define the 5-6 values that are most important to you. We encourage couples to do this exercise separately and then discuss it together, compromise, and choose six values they can work on together.
Having clearly defined goals is another important step in making good decisions. Besides having values to define boundaries when making decisions, your goals will help keep you on track. Writing these goals down and creating a plan to reach them increases the likelihood that you’ll attain these goals.A clearly defined goal is SMART: specific, measurable, achievable, realistic, and timely. Saying “I want to retire someday” is none of these. A clear way to define this goal may be “I want to retire when I am 67 with an annual income of $50,000 from my investment portfolio”. This is specific, measurable, and timely. Your advisor can help you to know if this is achievable and realistic. The clearer and more concise you are with your goals, the easier it will be to make decisions that might conflict with each other.
Emotions wreak havoc when it comes to making good decisions. Think of the last market correction. Were you stressed? Did you feel fear? Were you anxious? What action did you take? What about the last time you had an unexpected windfall? Did you make a large purchase of something you weren’t planning for, or did you put the money toward a goal already in place? When you have a plan and clearly defined goals that align with your values, you have a framework to help you during times of uncertainty and when emotions may make it hard to think clearly.
Work with your financial advisor to define your values, establish your goals, and create a clear financial plan. This will help both you and your advisor, both when life is going smoothly and when unexpected or stressful events happen.
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