One Habit that will help you make Sound (Financial) Decisions

David Ramsey in his popular book “The Total Money Makeover” makes an excellent point. Personal Finance is 80% behavior and 20% head knowledge.

I couldn’t agree more.

I have experienced this multiple times in my personal life. I have made some bad investment choices in life and many good ones too.

As I pondered about it, I came to the conclusion that although there are a lot of good qualities that are important, a key behavioral quality ranks highest, in making good financial decisions (from my own personal decisions).

And that is: “Asking the Right Questions” before you invest or spend your hard earned money.

Think about this. You earn money the hard way, spending months or years. With poor financial decisions, you are blowing away not only money, but all your efforts, energy and time that you spent on earning it. Remember you are emotionally invested in it already.

Answer honestly.

When it comes to savings and investments: How many times do you act hastily on financial tip-off from friends, relatives and media? How many times did you thoughtlessly plunge in to stocks and mutual funds that plummeted in value soon after or sold investments that skyrocketed soon after? How many times did you buy insurance policies clueless about the coverage or details, and whether you really need it? How many times have you been sold investment products that you have the faintest idea of, that have given you poor or no returns or blew your principal away?

When it comes to spending: How many times did you spend on products that you didn’t quite need or want? How many times did you have to throw out the products because you didn’t have space to store them or because another product that you had already addressed the need more effectively? How many times did you feel remorseful about buying wrong things, or overpaying for those and/or not being able to return or exchange them? How many times did you buy software when a comparable one was available for a free download? How many times have you made impulse spending decisions that you couldn’t even resell at a lower price?

Did you ever wonder Why? I think it is because you are not asking the right questions. You are either not asking anything or asking wrong questions or dumb questions.

How does “Asking the right questions” lead to good decision making?

(a) You do the research : In order to ask the right questions, you need the knowledge. Right? Hence you start doing the research before you invest or spend money. If you want to invest in stocks, for example you get to know the industry, the economic and business context, the business model of the company you want to invest in. What is their revenue? How profitable is the company? What is the P/E Ratio? What is the market capitalization? How does it stack up against competitors? Is it a growth or value stock or neither? How long has the company been around? Etc.,

Similarly before you spend, you begin to do the research. You begin to ask if you really need this or want this, if you can afford this, by how much are you postponing your goals achieving your financial or other goals, or if you have something already that can serve the purpose, what comparable products exist in the market, price comparison, reviews, quality comparison, Is some one giving away for free or cheap in Craig's List, or free cycle? You cover the whole nine yards.

You get invaluable information out of the research that will help you make a better decision.

(b) You take time to make decisions: You need and take time to do the research. That psychologically detaches you to an extent from the decision you are likely to make. With the additional time, you tend to get more rational than emotional or impulsive. You are not a kid in the candy shop any more. The time taken itself improves the quality of the decision. Even if you lose a specific opportunity because of the time taken for research, you are still better off, because you will be prepared the next time.

(c) You become an organized planner: You begin to realize that to make use of investment opportunities and to make the right spending decisions, you need time and research (as above). To do the research, you get the right tools. To not get overwhelmed you begin to prioritize and organize. You start planning ahead of time, set goals and milestones to measure yourself. In short, you organize your life smarter,

(d) You turn off bad advice, and attract good company: Because you are not naive anymore your bad friends and influences begin to retreat, knowing that you won’t listen or act on what they want you to bite off. They realize that you are not gullible anymore. You have developed some good habits and continue to build them. You have gone through a profound personality change with this habit.

On the hand, you attract people who share your philosophy. You are in the company of people who are sensible, and financially well-behaved. Your ability and chances of cultivating good habits are much higher.

You build synergy that leads to very wise investment decisions. All by Asking the Right Questions.

What is your experience? If you have to list One Key Quality or habit for better decisions what will that be? If you were to choose 1 good Habit what will it be? What’s your experience?