Throughout your life, you’re likely to have to make many financial decisions.
Most of them will be relatively straightforward, but others could have a big bearing on your future wealth, to the extent that mistakes could prove very costly.
Because of that, being able to make smart financial decisions is extremely important. So, read about six ways to make sure you’re able to make the best possible financial decisions whenever you have to.
1. Always be aware of your financial situation
The best decisions are taken from a position of strength. Having all the information you need to hand, rather than relying on guesswork, can play a vital part in ensuring you make the right calls when you have to.
A good place to start is to make sure you keep track of your finances. A simple income and expenditure spreadsheet will give you an immediate, high-level overview of your finances.
It’s also important to keep track of how much money you have in savings and other investments, and how much you’re setting aside each month for your retirement.
Knowing where your money is, and where it’s currently going, will give you a clear idea of how certain decisions will impact your situation. It makes it less likely that you’ll make bad ones.
2. Budgeting can be boring but is essential
Once you have your spreadsheet in place, you can use it to help you budget.
It is important for you to have a firm grasp of financial management, and budgeting is a key part of this.
It’s crucial that you’re able to set money aside to fund your lifestyle after you stop working and start to enjoy retirement, so allocating your income now can go a long way to guaranteeing a secure future.
Budgeting helps keep you in control of your finances and means you’re able to prioritise your spending commitments.
3. Understand the difference between what you want and what you need
Making smart decisions often comes down to priorities.
Your top priorities should be the things you need in order for you and your loved ones to live comfortably.
Secondary to that are your wants – items you’d like to have but don’t necessarily need them to live.
That may sound obvious, but the source of many poor decisions has been neglecting the former at the expense of the latter.
As with any major activity, if you have solid foundations in place before you move on, you’re giving yourself the best possible chance of success.
4. Have a clear idea of what your financial priorities are
Separating your needs and wants leads to having a clear idea of your financial priorities.
For example, keeping your debt level as low as possible – with the possible exception of secured borrowing such as your mortgage – should be one of your top priorities.
There’s very little point in putting money into a savings account if the interest rate you’re getting on those savings is less than the rate you’re paying on any credit card debt you may have.
The only possible exceptions to that are pension savings through your employer’s scheme if you have one, and your emergency fund.
Your other priorities will obviously be subject to your own personal circumstances – for example, if you own your own business or need to provide financial support to other family members.
5. Know your financial goals
Having a clear understanding of your ultimate financial goals can help you keep on track and make sure the financial decisions you’re taking are the right ones to help you achieve those goals.
Your aspirations can help motivate you and give you a clear sense of purpose. For example, you may want to retire early and travel around the world. Alternatively, you may plan a quiet retirement focused on spending time with your family and friends.
Whatever your aims are, having them set out means you can make sure the ultimate financial choices you make go towards fulfilling them.
6. Never be afraid to ask for advice
One of the smartest decisions you can make is to ask for help if you are faced with a financial issue you don’t know the solution to.
By being aware of your own limitations and asking for help when you need it, you can devolve the decision-making to someone better placed to make it. You’ll also reduce the possibility of making an expensive and potentially irreversible mistake.
At a high level, this means that you should be prepared to seek advice and guidance from experts, such as accountants and experienced financial planners.
But closer to home, it’s always best to make joint financial decisions with your spouse or partner, rather than thinking you have to manage everything yourself.
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The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC legislation, which is subject to change.