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Financial decision-making: Its importance & how to develop your process

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Luis Alvarez/Getty Images

Setting financial goals to work toward can bring you a satisfying, optimistic sense of purpose. If you've gone through the exercise of creating a budget, categorizing expenses and laying out your short- and long-term goals, then you've done well to map out what you want to achieve—but not necessarily the nitty-gritty of the how.

Reaching your goals is a long path where, even with a plan in hand, you still consistently need to make choices about how to use your money in the moment. It can help if you have a financial decision-making process to turn to again and again to move you forward on your way to your financial achievements.

Why your approach to financial decision-making is important

Having a financial decision-making process simply means having a set of steps you work through when you have to choose how you'll earn, spend and save your money.

Modern culture often tempts you with things you can buy or do that may not be truly aligned with your values or established goals. Especially if you have bigger, farther-away financial goals like purchasing a home, paying down debt or saving for retirement, it's important to have a method for decision-making so that you aren't tempted to give up.

A strong process helps you defeat the distractions and obstacles that try to get in your way.

Steps to follow in the financial decision-making process

The key to smart financial decision-making is to break it into steps and work through them. This can put the choices in perspective by measuring them up against the goals you know you want to achieve.

These five steps are key ones that can guide you. To show how they work in practice, we'll use an example: Let's say your growing family faces the choice of staying in your current small but very affordable home or moving to a pricier home with more space to grow.

1. Discover the facts

Sometimes you think a choice is obvious until you do some research. Find out all the relevant information you can on the topic. It can be time well spent to slow down and establish what's true before making a rash decision. It doesn't have to take very long—just so you feel that you have a clear understanding of your options.

Using the example of moving to a bigger home, you'd want to consider more than the extra square footage. Factor in details such as how much your mortgage, taxes, insurance and utility bills will increase, if your kids will have to transfer to a new school, or if your commute time will change.

2. Analyze and weigh the alternatives

Once you have the facts, you can think about what different scenarios, outcomes and options are possible. In most cases, every choice will bring competing benefits and drawbacks rooted in finances, your feelings, your values and other factors. This step involves considering all those pros and cons and deciding how they'll tilt you toward one choice over others.

For instance, a larger house might seem too exciting to resist. But be honest with yourself about whether it would genuinely solve problems. Expand your range of options. Maybe there are less expensive modifications you could make to your current home. Evaluate how that stacks up against moving and taking on a larger mortgage.

3. Choose a direction & strategy

Listing and analyzing your reasons for or against something can go on forever, but eventually, you have to pick a path. This step moves you forward to figuring out which choice best prioritizes the essentials you need and comforts you want but also makes sense in light of your overall goals. Bring together the facts and data you've gathered and your evaluation of the options, and select the one that feels right for advancing you toward your big-picture achievements.

In the case of the house, you may realize after researching the housing market that choosing to stay where you are and doing cost-effective updates is the way to go. You even may consider putting the unspent "bigger house" money toward your retirement or kids' college education instead. Even if it doesn't feel like anything is actively changing with your decision, it's still important to acknowledge that you've made an intentional choice on behalf of your future well-being.

4. Monitor the results you get

Forging ahead doesn't mean the financial decision-making work is over. Follow up on how your decision pans out. You may realize later there were factors you hadn't considered or your situation may change so that another choice is now the more advantageous one for reaching your goals. It can give you context and experience to draw from as you approach future financial crossroads.

Returning to the house decision, for it to make the most sense, you'd need to make sure you are, in fact, saving the difference between the cost of upgrades and a new house. If you're spending that extra money anyway, you're not making the headway you were intending for those long-term financial goals, so you may want to reevaluate.

5. Keep at it & make one decision at a time

Decisions about how to best use your money to balance meeting your daily needs and short-term goals while also working toward your long-term goals always will be forks in the road on the map of your overall financial strategy. Continue to consider where you could economize today to save for your future. Stick with the process to address each decision as it comes, and you'll make steady progress.

Difficult to see a clear path toward your financial dreams?

One of the most important financial tools to support financial decision-making long-term is a financial plan.

Don't leave out these financial plan must-haves

Benefits of handling your financial decisions methodically

As you develop and use a series of financial decision-making steps that work for you, you'll realize the various ways having a process can give you more choices. You'll likely also learn some things about yourself that let you feel more confident about your money management skills.

Overcome analysis paralysis

In some situations, you can feel like it's impossible to choose your next step, what's "right" or "better." This often can lead to making no decision at all. By systematically gathering facts, comparing alternatives and committing to something while knowing you can reevaluate it can break the pressure of trying to pick the one "winning" scenario. Once it's all laid out for you, the options for how to move forward will become clearer. With experience, you'll find any rational decision feels better than staying stuck.

Realize your emotional triggers

Many people have emotional responses to potential risks as well as the fear of missing out, and these can cloud otherwise logical financial decisions. By clarifying your process and consistently using it to take more time with your choices, you'll wait out the emotional responses and make way for rational financial decisions.

Know where you stand with your numbers

When you're in the moment of making financial choices, you may be unsure how it will move the needle on your goals. Part of the fact-gathering step of your process will have you consulting your budget and records. By assessing and reassessing, you'll get more familiar with the state of your finances and how it evolves over time. With practice, you'll know exactly how to evaluate the opportunities in front of you and decide if you're ready for them or if you need more stable financial footing first.

Prioritize what's important & assert control

Working through the decision-making process can reveal to you which of your competing interests is truly more important to you. You can use it repeatedly on both big and small financial decisions, and each time, you'll be challenging yourself to use your money most effectively. Regardless of which choices you go with, the process ensures you're taking control of your financial destiny.

Getting help with your financial decision-making

Even with a map and a method, money matters can be tough to navigate entirely on your own. Consulting with an experienced professional can lead you to a reliable partner for your journey. Good financial advisors leave the decision-making in your hands while providing you with knowledgeable insight into your potential options. They aim to help you understand your financial position relative to your goals and offer guidance that can help you pursue your chosen path.

Consider meeting with a Thrivent financial advisor to help you refine your approach to financial decision-making.