Let’s be real: managing finances can sometimes feel like you’re playing a game of Monopoly where the rules keep changing. But just like any good game night, having a strategy can make all the difference. Whether you’re thinking about saving, investing, or even considering a prenup (cue the “Gold Digger” chorus by Kanye West), understanding financial decision-making processes is key.
The basics of financial decision-making
Before we get into the nitty-gritty, let’s define financial decision-making. Essentially, it involves making choices about how to manage your money, which can range from daily spending decisions to long-term investments. Regardless, your first step has to be knowing what you want. Are you saving for a house, planning for retirement, or just trying to make it to the end of the month without overdrafting your account?
Once you know where you want to be, figure out where you currently are financially. Take stock of your current financial state, including income, expenses, debts, and any assets you have. If this is new for you, then schedule yourself a money date now. This is dedicated time that you set aside monthly to delve into your personal finances. Read more about how to do this here.
Once you’ve gathered this information, your decision-making process (regardless of the circumstance) will become a whole lot easier. Let’s take a look at three financial decisions that most Americans will face: budgeting, growing your wealth, debt management, and joint vs. separate finances with your spouse.
Financial decision #1: Budgeting
Budgeting is like the foundation of a house – it holds everything else up. Without a solid budget, your financial plans can crumble fast, leaving you in a sticky situation. Did you know that 78% of Americans live paycheck to paycheck? A solid budget can help you break out of this cycle, so getting this step right is key. But don’t worry, budgeting doesn’t have to be boring! Promise.
The first step of budgeting, similar to the above, is to know your financial priorities. Maybe you want to save for a vacation, pay off student loans, or build up your emergency fund. Like any successful journey, it’s a good idea to begin where you’re starting.
When it comes to budgeting, it’s all about what you’re doing with the money you have. Are you spending it mindlessly, or is each dollar you’ve worked for being put to good use for you? To answer this, you need to track your spending. There are lots of apps to help do this, but I like the old-school approach of downloading my accounts into Excel and reviewing each item myself. It makes it more real to see exactly how I’ve been handling my money that month.
Once you’ve met your own spending reality, it’s time to decide how you want to intentionally allocate your income moving forward. To make this simple, try the 50/30/20 approach. This is a popular personal finance budgeting tool that allocates 50% of your income to essential expenditures like housing, bills, and food, 30% to personal expenses like entertainment, self-care, and dining, and 20% to savings and investments. Use this as a guide and alter it in line with your current situation and future goals.
Financial decision #2: Saving and investing
Once you’ve got a budget in place, it’s time to think about the future. If you’ve stopped by The Witch of Wall Street, you’ll know that saving and investing are key to growing your wealth and achieving long-term financial goals. What are some of the key decisions you need to make? Let’s take a look…
First things first—emergency fund! This is your financial safety net that can prevent future disasters. Aim to save 3-6 months’ worth of essential expenses, i.e., enough to cover 3-6 months of rent, utilities, food, and basics.
Once you’ve got your current self taken care of, it’s time to look at the future. That’s where retirement savings come in. A great way to get started is by taking advantage of employer-sponsored retirement plans like 401(k)s or opening up a tax-advantaged investment account like an IRA (Individual Retirement Account).
Your next step is to start investing your money so it can work for you and build your wealth. While many people assume investing requires picking individual stocks, a better alternative could be looking at low-cost index funds or ETFs. Investing is like planting a tree. It may take time to grow, but with patience and consistency, it provides substantial financial fruit in the future.
Financial Decision #3: Debt Management
Debt can feel like climbing a mountain. It’s challenging, but with each step, you get closer to the summit and a clearer view of your financial future. To make it feel more manageable, the first step I suggest is going back to basics. Understand your debt in depth. Instead of keeping it at arm’s length, get up close and clear on the interest rates, terms, and balances of all your debts.
Now you know what you’re dealing with, it’s time to craft your repayment plan. Focus on paying off high-interest debt first (like credit cards) using methods like the avalanche or snowball approach. More on those methods here.
Depending on your debt situation, you may consider consolidating your loans or refinancing to lower interest rates, making it more manageable to pay down. As you embark on your debt management journey, the key piece of the puzzle is to avoid taking on additional debt and only borrowing what you can afford to pay back.
Financial decision #4: Joint or separate finances
Deciding how to handle finances as a future married couple is a significant conversation to have before tying the knot. The best approach will depend on your individual circumstances, communication styles, and financial goals. It’s essential to have open and honest conversations about money before marriage (hint, hint: a prenup) to establish a system that works for both partners and fosters a healthy financial relationship.
There are a few different approaches to marital finances you can consider:
- Joint accounts: This involves combining all income and expenses into shared accounts, which can often foster a sense of partnership and transparency.
- Separate accounts: Each partner maintains their own individual accounts, which is good for financial independence and autonomy.
- Hybrid approach: This approach combines elements of both joint and separate accounts. Couples might have a joint account for shared expenses like rent and utilities while also maintaining individual accounts for personal spending.
How a prenup can help: Getting a prenup can help you and your future spouse align on several different life goals, including the management of finances during the marriage. You can specifically include in your prenup whether you want to utilize joint or separate bank accounts while married. This can help set expectations and boundaries for the marriage to avoid conflict down the road.
Takeaway
Navigating the world of personal finance doesn’t have to be intimidating. With a clear understanding of financial decision-making processes and what areas to focus on, you can confidently manage your money, achieve your goals, and enjoy a more secure financial future. So go ahead, channel your inner boss, and take control of your finances like the savvy finance pro you are.
Frequently Asked Questions (FAQs) about financial decision-making processes
Let’s discuss some more questions about the process of financial decision-making.
Q: How do I start budgeting?
A: Begin by tracking your expenses for a month. Use this information to create a realistic budget.
Q: What’s the best way to save for retirement?
A: Take advantage of employer-sponsored plans like 401(k)s and consider opening an IRA.
Q: How can I manage my debt effectively?
A: Focus on paying off high-interest debt first and consider debt consolidation or refinancing.
Q: How often should I review my financial plan?
A: At least once a year or whenever there’s a major change in your life circumstances.
Laura Tynan is the founder of The Witch of Wall Street, a personal finance and investing community, where women are shown how to manage, multiply and manifest money, using simple strategies. Laura holds a BSc Hons in Finance, is a Chartered Accountant, and is certified in EFT Tapping, Breathwork, and RRT. She has been recognized by the Financial Times as a Top 20 Future Female Leader and by Yahoo! Finance as a Global Champion of Women in Business. She is a multi-award-winning speaker who has spoken at, and been featured in, Forbes. Laura hosts The Witch of Wall Street podcast and is the author of the personal finance and investing book for women, by the same name, which is available now on Amazon.
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