So why do smart people sometimes make bad decisions? I think it’s because we’re human and this simple fact complicates any sound decision making process. I am where I am because of the bridges I’ve crossed.
Temptation is everywhere. Each day we’re faced with a multitude of choices that lead to intended and unintended consequences that impact our future. Some decisions have large bearing on our lives such as big purchases, investments and important family matters, while other choices have lesser impact on our lives immediately, but the cumulative effects add up. For example, daily dilemmas like “should I eat the candy or the fruit?” or “do I go to the gym or watch TV today?”
Ripples turn into waves which ultimately become our legacy. Today’s choices will influence your future financial security.
Outside influences also impact our choices. For instance, if you’re on a diet and happen to be walking through an airport and are hungry; what choices do you have? By far there are more fast food vendors than healthy food hawkers. At first you may be thinking about a salad but hey, you deserve that Philly cheese steak sandwich and super duper latte mocha super size grandee drink.
Along the same lines of being subject to the human condition, a comparison to outside information influences our valuations and importance given to items. A control group of real estate appraisers were given a higher listing price on a home than other appraisers. The study proved that a higher listing price led to a higher appraisal, although 80 percent of the appraisers contended that the listing price had not swayed their judgment.
Another example is a group of students from Columbia Business School who were asked to write down the last four numbers of their phone number and then to write down how many doctors they thought were in Manhattan. Not surprisingly, there was a strong correlation between those with lower phone numbers estimating a smaller number of doctors in the area versus those with a higher phone number guestimating more doctors in Manhattan. The power of the mind is amazing.
Temptation, subconscious and unconscious subliminal factors influence decision making and could be sabotaging your financial well-being. By identifying your goals and knowing where you stand today, you’ll likely find that you do have financial strengths you’re not even aware of. Once you’ve recognized strengths and weaknesses you’ll be better aware and better equipped to deal with outside influences that could undermine your success.
Here are 10 basic questions to help you get started with organization and self-awareness. If you don’t know where you are how will you know where you’re going?
n Do you have written and specific long-term financial goals?
n Do you have current financial statements, (that you understand!)?
n Can you easily locate all your personal and family financial documents?
n Are your assets, especially your investments, in line with your financial goals?
n Do you have any credit cards in your own name?
n Are you investing and accumulating resources to provide financial security when you retire?
n Do you understand how inflation impacts the purchasing power of your money?
n Do you understand how taxes can cut into your investment returns?
n Do you keep track of your investments?
n Do you have a valid will, is it up to date?
Calculating your net worth will give you an accurate picture of where you stand at this moment. Determine what you own and then subtract what you owe; that’s your net worth. Cash flow on the other hand is a fluid planning tool that’s calculated by adding all monthly income (wages, alimony, investment and rental income, social security benefits, pensions and other income) and then subtracting monthly expenses (all taxes, loans, housing costs, insurance costs, utilities, good, entertainment, donations and at our house pet care and dog food!
The net number, which we hope is positive, is your monthly cash flow (income minus expenses).
Now you know what your net worth is and where your money goes (cash flow). The next step is to get your money working for you. Excess cash flow, or the amount that is not earmarked for basic necessities, is called discretionary income that may be used to obtain your goals such as home ownership, college funding and retirement planning.
Budgeting and cash flow analysis, along with debt reduction increase the probability of success along the road to financial well-being. Remember that each of your decisions today has a ripple effect and influences your tomorrow. With that in mind, I’m having cottage cheese and fruit for lunch along with a small piece of chocolate for desert; it’s all about balance, right?! Invest accordingly.
This article provided by Darcie Guerin, Financial Advisor & Branch Manager of Raymond James & Associates, Inc. 606 Bald Eagle Dr. Suite 401, Marco Island. Gulfshore Life Magazine named Darcie as one of the Best Personal Wealth Managers in The Southwest Florida Area for 2009 and 2010. She may be reached at (239)389-1041, email Darcie.Guerin@RaymondJames.com or visit website RaymondJames.com/Darcie.