How To Make Better Financial Decisions (5 Simple Steps)

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How to make better financial decisions in 5 simple steps | Be The Budget

If you struggle to make good, sound financial decisions, you are not alone. In fact, I can think of any number of poor choices I have made with money over the years. The good news is, if you want to make better financial decisions, all you have to do is follow these five steps:

  1. Take Responsibility
  2. Set Inspiring Financial Goals
  3. Live On A Strict Budget
  4. Say Goodbye To Debt
  5. Focus On Building Your Net Worth

These steps are the exact path I took to go from a life of financial struggle, to a debt-free life of financial purpose, responsibility, and freedom. And, I am confident they will do the same for you.

So, if you want to improve your financial life by learning how to make better financial decisions, I encourage you to keep reading. For the rest of this post, I am going to cover each of these steps in-depth.

Let’s get started.

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Step 1: Take Responsibility

Before you can turn your financial life around, and start making better financial decisions, you first need to take responsibility for your financial situation. I mean, you can blame your difficult financial situation on just about anything you want, but that won’t change it.

You are the only person that can turn your financial life around. And, it’s time to come to terms with that.

I’m sorry if that sounds harsh, but it’s the truth.

So, before you get started, I want you to do a few things. First of all, I want you to really look back and reflect on the decisions you have made with your money. This is the time to assess your impulsive spending habits, your failure to save and invest, and any debt you have taken on. Also, if you have made any poor investments in the past, I want you to acknowledge them, and own up to them. Oh, and you should write all of these down; no matter how ugly or painful they might be.

Next, I want you to assess what you should have done differently. You know how they say hindsight is 20/20? Well, use that to your advantage. If you really take time to figure out what you should have done differently, then you will know better in the future.

For example, when my wife and I decided enough was enough with our financial struggle, we were buried in $34,000 of debt. When we assessed what we could have done differently, it was clear that credit cards and loans had only ever served to bring us financial harm. So, we decided to shred our credit cards, and never take on a penny of debt again.

Why?

Because if we had just done that from the start, we would have never ended up in that much debt, and thus never caused our financial struggles. Let’s just say we weren’t about to repeat our mistakes.

Don’t run from your financial past. Instead, face it head-on, like a beast, and take financial responsibility for your current situation.

5 Steps to make better financial decisions | Be The Budget

Step 2: Set Inspiring Financial Goals

After you address your financial missteps and how to never repeat them, it’s time to focus on the positive. If you want to win with money, you need to set financial goals that inspire you on a daily basis.

I’m talking about goals that are so exciting they get you out of bed in the morning.

For my wife and I, our first goal was to get completely out of debt. At that time, we were paying nearly $1,000 per month in debt payments, so that was a pretty big deal for us.

Additionally, we set a goal to buy a house in cash. Now, this is typically when people look at us like we’re crazy, and feel the obligation to educate us on the difference between a mortgage payment and rent. But, remember how we committed to never go into a penny of debt again? Well, that includes a mortgage. And 30 years from now, we didn’t want to be looking back — just like we did before — wishing we had just taken 5 extra years to save and put 100% down.

Now, I’m not saying you have to have the same goal. The point is, setting the goal to pay cash for a house was ultra inspiring for us, and your goals should be the same.

I will add one last thing, your goals should be more than inspiring. They should have a time-frame, they should be achievable, they should be challenging, and you need to write them down.

Step 3: Live On A Strict Budget

If you live on a strict budget, it is easy to make better financial decisions. You know why? Well, when every penny you spend has to run through a budget that you set forth each month, it holds you accountable.
Think about it, when you set up a strict budget at the beginning of the month, you are creating a clear plan for your money. So, if you start to stray from the plan, the budget is there to rein you in and set you back on-track.

Now, when it comes to budgeting, I only recommend zero-based budgeting. As opposed to a budget where you just allocate your money into imprecise percentages, a zero-based budget requires you to plan out every penny of income you make. In essence, you start with your total income, and then subtract every planned expense from that number until the amount remaining is $0.

This takes more time, but if you want to make better financial decisions, you need to know exactly where every dollar you make is going.

Step 4: Say Goodbye To Debt

One common theme I have noticed about debt, is that it rarely (if ever) leads to happiness. In fact, for most people, debt is the source of all their financial struggle. So, say goodbye to it; and I mean FOREVER.

I can tell you from personal experience that life without debt is significantly easier.

Consider this, if you had never taken out a loan or spent money on a credit card, and instead paid for everything in cash, would your financial life be easier right now? Also, if you lived a life where you had to pay for everything outright, would it have kept you from making any of the bad financial decisions you made in the past?

If you decide to get out of debt, and never go back into it again, it will keep you from making all sorts of bad financial decisions in the future.

If getting out of debt is something you want to do, be sure to check out our Free Debt Snowball Calculator. Just enter all your various debts, and it will calculate how many months it will take you to get out of debt using the Debt Snowball Method.

Step 5: Focus On Building Your Net Worth

The equation for net worth is about as simple as it gets. You just subtract the amount of money you owe from your total assets. (i.e. Assets – Liabilities = Net Worth)

If you have never calculated your net worth, now is the time, because focusing on building your net worth is the final step to making better financial decisions. Here’s how.

An asset is anything of monetary value that you own. For example, any money you have in the bank, as well as any money you have invested, is considered an asset. Additionally, if you own your car, or have equity in your house, those are both considered assets.

So, the first step in calculating your net worth, is to add up the value of all these assets.

Next, you need to subtract your liabilities, which is just any money you owe to somebody else. So, if you owe money on your house, student loans, credit cards, car loans, or anything else, subtract how much you owe from your total assets.

Now, it is very possible for you to end up with a negative number when you calculate your net worth. In fact, it’s pretty normal. But just because something is normal, doesn’t change the fact that it’s bad. So, now I want you to turn our attention to increasing your net worth.

If you want to increase your net worth, the first thing you need to do is reduce the amount of money you owe. In other words, pay off debt. The second thing you need to do is increase the amount of assets you own. Namely, save and invest your money.

That’s why you need to start focusing on your net worth if you want to make better financial decisions. If you say no to choices that will reduce your net worth, and maximize the decisions that increase it, it is much easier to make better financial decisions.

Final Thoughts

If you want to make better financial decisions, you just need to stick to a plan. And I sincerely believe the tips I laid out in this article will point you in the right direction.

All I know is that these five steps have worked wonders in my financial decision-making process. I just hope they will do the same for you.

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How to make better financial decisions: 5 simple steps | Be The Budget

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About The Author

About The Author

Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.

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