You probably make at least one financial decision every day. Buying a coffee out rather than making one at home, or filling your car up at the most convenient, rather than cheapest, petrol station, for example, would both have an impact on your finances.
Then there’s the bigger decisions: should you trade that car (the one you’ve just filled up with petrol) in for a new one? Should you go abroad on holiday this year? Should you put more into your pension?
We’ve all got different levels of disposable income, different goals and different attitudes to spending. So while it’s hard to define what makes a good financial decision, a sensible starting point is taking steps to avoid decisions you’ll regret later.
Nobody wants to be thinking or worrying about money every day. But to ensure that’s the case, you need to be conscious of your financial situation and, ideally, have some goals in mind.
You may have a specific timeframe – ‘I want to have enough for a deposit on a house in 2 years’ time', for example – or you might just want to gradually build up savings to increase your financial security.
Establishing goals can help you get into the habit of spending – or borrowing – within your means and making your future plans become a reality. They can help you avoid spur of the moment decisions that make you uncomfortable later, as you’re able to ask yourself whether something is helping you get to where you want to get to.
1. Be realistic
Making better financial decisions shouldn’t have to come at the expense of all fun and the occasional extravagance. Set yourself achievable goals and give yourself some leeway.
If you’ve decided to save monthly, for example, then set your goal within a range, such as £100-£300.
If you target a specific figure, like £200, but can only afford £100 one month, you might be tempted to skip that month’s savings altogether. Remember, saving something each month is better than saving nothing.
Explore more: How to save money
2. Bring your goals to life
Setting tangible targets and keeping your financial goals front of mind can be a big motivator.
‘Savings account’ is not the most inspiring name. What’s it actually for? Why are you saving in the first place? If it’s for a holiday to Japan, try labelling your savings account ‘JAPAN HOLIDAY’.
If you’re saving for your child’s education, try ‘DAVID’S UNI FUND’ (assuming your child’s called David).
If your goal is to clear your debts, set yourself milestones where you can celebrate the progress you’ve made.
3. Decide on when, where and how
Deciding exactly when, where and how you’ll make certain decisions can reduce the temptation to veer from the plan.
For example, if you’ve decided to put money into a savings account each month, will you do it:
- the same day you get paid, or the first day of each month?
- on your phone, laptop, or in branch?
- at home, at work, or on the train to work?
It can be the same when repaying debt. Decide exactly how you want to repay each month and set yourself rules around when, where and how you’ll do it.
Decide before you start and let it become a habit.
4. Automate your decisions
Taking the decision to set up a standing order prevents you having to make a fresh decision each month. Set it up so your savings or debt repayments are automatically deducted from your income.
This can help you work out how much you have ‘free’ to spend each month, safe in the knowledge you’ve already contributed to your goal. Not only may this help you meet your goal faster, it may remove any guilt you feel for spending on things you enjoy.
5. Picture the alternatives
A common source of regret can be realising after an event that you could’ve done something differently. If you’re serious about attaining your goals, think about specific ways things could go wrong and how you’ll avoid them.
For example, if you’re saving for a holiday tell yourself in advance: ‘If I’m tempted to buy a new jacket I don’t really need, I’ll remind myself that I’ll save the money for my holiday and stop browsing.’
6. Set up alerts
Being aware of your spending is the first step to controlling it and spend alerts are a great way to keep track.
Some apps will allow you to set a limit for your spending in different areas and then send you a notification if you’re approaching or have gone over your limit.
Don’t forget, everyone spends a little more than they mean to sometimes, and that’s OK. But taking steps to avoid a regular sense of regret is a good way to start making better decisions.