As I get old(er), I tend to reflect on my decisions more often. It is one of the ways I learn to make better decisions and learn from my mistakes. Yes, I make mistakes! If you are making decisions, you make mistakes. No one bats a thousand! You cannot avoid making mistakes, but you should make more good decisions than bad ones. Especially the big decisions!
If you think that you are avoiding a problem by not making a decision, you are wrong! Whether you are managing a business, buying a home, thinking about college or marriage, you will make decisions that have significant consequences. You should use these steps in order to make better decisions.
- Define the problem – Ignoring the problem is classic denial. I often see this syndrome in my students. Maturity usually helps you overcome this syndrome, but not always. Defining the problem is necessary to actually solve the problem.
- Research the options – There is always more than one way to solve a problem. What are the top best solutions? There are pros and cons to all solutions, which one makes the best sense? I order to find the best one; you need to go through the top three (3) choices for example.
- Evaluation – All right, you came up with a dozen solutions. What are the top three (3) best solutions? Which are the best solutions? Select the best solution (to make a decision).
- Selection – Make a decision! You have picked the top best solutions and you pick one. Making a decision has consequences and this is why you have given it thought. Decisions range from the trivial to something that has significant consequences.
- Review – This may be the most important part of decision making! It is a great way to improve your judgment and improve you problem solving skills. Did your solution work? If so, you made a great solution. If not, changes would you make? Was there a better alternative that you should consider?
We make decisions all the time from the trivial of what to have for lunch to something more weighty such as you r career choice. Wouldn’t be great to make more right decisions than wrong ones? If you learn from your mistakes, you will make better decisions. Over time, your judgment improves! It may be maturity or just the number of decisions you make. Reflecting on your decisions is an important part of decision making.
Here are four (4) decisions I believe requires more reflection.
Paying off your mortgage – Many PF bloggers are paying off their mortgages early. They look at the interest you pay over a thirty (30) year period and decide to pay off the mortgage early. Looking at the facts, I agree there is a lot of interest. A $100,000 mortgage at 3.5% for thirty (30) years will cost $161,656. In other words, you are paying $61,656 in interest. The home value over the same period will increase considerably more than your cost. The average appreciation is approximately 5%. Based on that calculation your home would be worth $432,194 in 30 years.
There are additional factors that determine future value, but this just one example. Will you own the same home for the entire 30 year period? Another choice may be a 15 year mortgage at 2.5% and your interest would be only $20,022. Both mortgages have very low interest rates and you should be able to use the money more effectively elsewhere. If you prepay your mortgage early, you will own the asset outright, but unable to access the equity. Of course you can sell it, but you have to live somewhere.
Stock market timer – If you are new to investing, you are just seeing the market go up! Hopefully, you did some research and learned that the market has gone up and down many times in its long history. Wars, Great Depression, Black Monday and many recessions have affected the stock market returns, but over the entire history of the stock market, it averaged 8-10%, If you invested in 2008, you saw your investment go down, but it came back and more if you stayed the course. I am not a stock market timer because I just do not know enough to get in or out at the right time. Long term investing trumps the volatility.
Student loans – Everyone hates debt and I include myself in that group. If you have student loans at a low interest rate, you should treat it differently. If you graduated from college with student loans, you should view that debt as buying an asset that will grow over time. Education and training is supposed to enhance your earning capability. If you have $50,000 in debt for an engineering, computer science or accounting degree, you have an asset that increased your earnings. If you have a liberal arts degree, all is not lost! Your degree will help you earn more, but it may not be apparent as quickly.
You went to college to prepare you for a better future and you have debt. If the debt is at a low interest, you should invest in your future and repay the debt over time. If the interest is at a higher interest rate, you still need to do both! The difference is any excess cash should be used to repay the debt. Investing early is important because time is important in investing. If you do not invest in your twenties, you will have to double your contribution in your thirties just to catch up. The choice of paying off debt and not investing means you miss the benefit of investing in a 401K.
Excuses – Yes, excuses are a decision for a problem! Many people blame things for their decisions. I have read about various people blaming credit card debt on the credit card, watching TV for not doing enough or as a distraction. I am not saying there are not legitimate reasons for not accomplishing your goals, but I often hear excuses vs. legitimate reasons. First you really need to take a hard look at yourself to figure out why you failed. Then reform your plan to accomplish your goals. Successful people fail, but never make excuses.
These are just some decisions that I think require more reflection than others! We make decisions every day and sometimes it can cost you a great deal of money. Important decisions such as investing, debt and how you handle failure can impact your fortune. These decisions are usually handled routinely without thinking about your future until much later. I am just suggesting you think more strategically! Your decisions matter and they can cost you a fortune!
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