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Everyone loves lists. You probably have To-Do lists, grocery shopping lists, and lists of shows you want to watch on Netflix. What about a list of essential money steps to help you make better money decisions?
While there are no magic pills or secret formulas for building and sustaining a healthy financial life, there are some important steps you can take to improve your financial decision making.
- Understand that even with good planning, you can experience bad outcomes. No one is exempt from random bad luck. Build in a margin of error to account for this risk.
- Have a willingness to adapt your views on markets, the economy and their interaction based on long-term history. Swallow hard and understand that there may be a gap between your beliefs and actual financial science.
- Appreciate that there’s a difference between financial market analytics and psychology. Your financial decisions are informed by data, but actually made emotionally.
- Develop the skill to become comfortable being uncomfortable. You can’t know precisely what the future holds, so your decisions will always be imperfect.
- Have the capacity to ignore how others are investing. Their long-term goals aren’t the same as yours. Because of that, they are playing a different game, with different rules.
- Avoid big mistakes. You surely will make mistakes, but try to steer clear of real lifestyle altering trouble.
- Accept the reality that your money decisions will always involve trade-offs. Since both money and time are finite, when you choose to invest time or money in one place, you generally are foregoing something else.
One crucial characteristic that runs throughout the list above is humility. Humility helps you make better financial decisions. When you are humble, you’re willing to learn from miscues and focus on controlling the aspects of your financial life that depend on your behavior.
What you actually do, as well as what you choose not to do, form the foundation for your financial life. Your investing behavior is the single most important component of long-term financial success.
While this list focuses primarily on financial steps, it’s important that you don’t ignore the social, health, and relationship aspects of your overall life. The best financial decisions in the world won’t matter much if you sacrifice these crucial non-financial components of life.
Good financial decisions improve your prospects for being able to sustain your lifestyle in retirement. Subpar financial decisions can make you poorer over time after considering inflation. The reality is, all of us as homo sapiens are poorly suited to making good financial decisions without guidance. This list is a good place to begin building a decision-making framework.