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Today’s episode – how to build a framework for decision making – for investments or wealth building strategies

Not one set way to make a decision – everyone is different – everyone has different situations – people make decisions in different ways –

  1. Emotional decision making – some people just go with their gut –
  2. Logic/formula-based decision making – following a framework on what to do
  3. both have their pros and cons – the first one enables you to take actions quicker in some cases – very useful for decisions using heuristics –
  4. If we make too many decisions in a day – eventually get decision fatigue
    1. Which is the deteriorating quality of decisions made by an individual after a long session of decision making
  5. Not all decisions are made equal – what to have for dinner is different to decisions like which investment strategy to follow – or which investments are correct
  6. So when making smaller or non-important decisions – normally go with heuristics – not getting too bogged down in logic and researching every option can lead to information overload – and decision fatigue
  7. However – if you are making more important decisions – helps to have a framework –
  8. This is how I go about it – not one right way – but if you don’t have a framework – can use this as a base to build your own to help take actions and make decisions

 

First step – goals – knowing what you want to have is the first step in on how to make the decisions to get it

  1. Setting financial goals is important – have to know what you want to make a decision on it
    1. For finances – need to have what you want to achieve –
    2. Example – what passive income you want – when you want it by – why you want it –
    3. Or – buying your first home – how much you will need to spend based on where you want to live – allows you to narrow your decisions down and make one that will serve your interests
  2. In setting the goals –
    1. Have a workbook on the website in the free members section
    2. But you need to define your goals SMART
      1. S – specific – what, why, who
      2. M – measurable – how much
  • A – achievable – needs to be realistic and attainable to be successful
  1. R – relevant – has to align to what you really want –
  2. T – Time – when you want it by and the timeline that you have
  1. Time is also important as it helps in deciding how much time to make available for the decision-making process
  2. Also allows you to help to consider other factors, like:
    1. How much time is available to spend on this decision?
    2. Is there a deadline for making a decision and what are the consequences of missing this deadline?
  • Is there an advantage in making a quick decision?
  1. How important is it to make a decision?  How important is it that the decision is right?
  2. Will spending more time improve the quality of the decision?
  1. All of these are important factors to consider for each goal – but important not to get too bogged down here as this stage can delay decision making – you might have 6 months to make a decision but why wait? Like procrastinating and doing an assignment last minute
  1. Time is also important in planning – when you want to achieve you goals by is almost as important as what you want – allows you to narrow down decisions
    1. Financial decisions differ in time horizons – likely to make decisions every day with finances
    2. Every purchase and transaction made is technically a financial decision – but longer timeframes do allows for some error in decisions

Second step – getting a list of your goals together – prioritise and decide who is responsible for making the decision

  1. If you are working as a family or couple – important to understand if it is a joint decision – or if one person is to take the lead
    1. This idea of responsibility allows for someone to take charge with the other steps –
    2. Responsibility for decision – Before proceeding any further you need to be clear who is going to take responsibility for it
    3. Also – need to decide on when the decision needs to be made for each goal here – based around priorities
    4. For some situations – sometimes a quick decision is more important than ‘the right’ decision, and that at other times, the reverse is true – actions are more important than theory or knowledge on a subject
      1. For what to have for dinner – or what clothes to wear that day – quick decisions are probably best – otherwise may go hungry or be late –
      2. For others – like setting an investment strategy – can be a very important decision –
    5. Another factor – there may be more than one goal that you have – with finite resources
      1. Setting a list with the top priority allows for one decision to be made over the other
      2. Better to make a decision on a relevant goal that you want to achieve now versus one that wont be achieved for 20+ years?

Third step – for each financial goal – get a list of possible options and relevant factors together

  1. I like lists – but they help me in making large decisions –
  2. In most cases – you will have more than one possibility – but there are almost endless possibilities at the same time
    1. Need to start to narrow these down – the first part of this is getting as many down on paper as possible
  3. Then the next part of this step is about narrowing down your potential options – important in decision making
    1. If you have a limited number of viable choices – easier to make a decision
    2. Need to know what is right to do to achieve your goals –
    3. Good news is that you don’t need to reinvent the wheel – many people have likely achieved what you wish to – so can get a list of options together
  4. Involves doing research – getting the relevant information
    1. There are plenty of resources available to gather information –
    2. However – if you cant find the information needed – it is more likely that a wrong decision might be made
      1. Also – if you spend too much time looking at irrelevant information – the decision will be difficult to make –
      2. Also – likely to become distracted by unnecessary factors and get bogged down with information overload
    3. Why refining the options allows for you to refine your research criteria
  5. Good news – once you narrow it down and have options – becomes easier to make the correct decision
    1. the amount of time spent on information-gathering has to be weighed against how much you are willing to risk making the wrong decision
    2. it may be appropriate for different people to research different aspects of the information required
    3. But if you can skip some research and do what others have successfully done – can help reduce the time and information overload potential to this step – but these strategies or investments need to be based on if it is relevant to your own situation
      1. No good using a warren buffet strategy for buying up whole companies if you don’t have the means to do so
    4. On the list of options – look at if these align with your investment values – and is realistic to your situation
      1. Everybody has their own unique set of values and go back and check if these options are plausible based on your financial situation –
      2. The decisions that you make will, ultimately, be based on your goals and what you want to achieve

Fourth step – Look at the pros and cons of each – and what the risks are

  1. It is possible to compare different solutions and options by considering the possible advantages and disadvantages of each.
    1. One key question is how much risk should be taken in making the decision? Generally, the amount of risk an individual is willing to take depends on:
      1. The seriousness of the consequences of taking the wrong decision
      2. The benefits of making the right decision
  • Not only how bad the worst outcome might be, but also how likely that outcome is to happen
  1. Your timeframe
  1. This is why diversification with investment strategies or not taking on too much volatility or absolute risks is important
  1. One good way to do this is to use your list of goals and next to each option under the goals – weigh up the pros and cons (benefits and costs/risks) associated with each solution
    1. For example, start with cons – the risks and the costs to the strategy – looking for any downsides
    2. Then – look at the pros – if the strategy goes well – will it actually put you at achieving your goals
    3. Having listed the pros and cons makes it possible to decide which option is best
    4. Can score these on a points scale – putting a positive for a pro and negative for a con –

Last step – making the decision

  1. By this stage – you should have an idea about which decision for each goal is likely to be a winner
    1. You should have your goals written down – how much you will need, when you will need it by
    2. You should have the potential solutions narrowed down – with information gathered on these – who is responsible and the pros and cons of each
  2. However by this stage – if have a clear winner you might still feel uncomfortable – if so -it may be worthwhile to revisit the process
  3. For important decisions – keep a record of your decision-making process – helps in strengthening your understanding of how it works, which can make future decisions easier to manage.
    1. Once you have made the decision – if it is a long-term strategy – can become easier to make the same decision over and over – like setting up a monthly or regular investment strategy
    2. Small stuff – like saving money – becomes a habitual behaviour
    3. Larger stuff – buying an investment property – after the first time it would also become easier
  4. The last step is that once you have made a decision – don’t waste your time thinking about ‘what ifs’ – need to take actions –
    1. If something does go wrong along the way – need to revisit the decision – adjust and adapt –
    2. But important to make a decision, take action and then move on

Summary

  1. These steps are my decision-making techniques that you may like to use – no one right way to do things
    1. Steps were to set goals, prioritise and decide who is responsible, gather a list of options and research, do a pros and cons list – then decide
  2. However – regardless of your process – there is no substitute for good judgement and clear thinking – knowing what your options are and the pros and cons of each – and making sure that your options align with achieving your goals is the most crucial factor – no point spending time on this process if your options are never going to achieve your goals

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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