A Guide To Strong & Effective Financial Decision Making
Financial decision-making is a major part of any marriage.
It might not be what you thought of when you stood at the altar and said, 'I do,' but it's a key component of making it in this complex world, both in your marriage and financially.
The Importance of Financial Decision-Making
Financial decision-making is one of the most important skills to master in a marriage. Both partners need to be on the same page to make informed decisions.
When you make financial decisions, you choose how you'll use your money and what you won't use it on. You'll also set up strategies to help you reach your goals.
What Can Be Achieved Through Strong Financial Decision-Making?
Strong financial decision-making makes a stronger marriage. Whether one partner has more finance knowledge than the other, keeping both partners on the same page enables you to have a sound decision-making process.
When both partners feel seen and heard, it's easier to achieve long-term success financially and in your relationship.
How To Make Smart Financial Decisions
So, how do you make smart financial decisions? While there isn't a one-size-fits-all approach since each marriage differs, here are the key steps involved in sound financial decision-making.
Define Clear Financial Goals
Determining your financial goals is a crucial first step in making financial decisions. Without financial goals, you can't manage your cash flow, make investment decisions, or create financial planning strategies.
You and your spouse should write down your goals separately and then compare them. Look at short-, mid-, and long-term goals to ensure you look at all financial situations and determine how to reach your goals best.
Together, you can narrow down the goals you want to try to achieve first and which you'll set for down the road. Don't hold back on your personal goals, even if they don't entirely coincide with your spouse. Each partner is entitled to individual goals, too.
Assess Your Current Financial Situation
Knowing your financial goals, you can then determine what's possible by assessing your financial situation. Include all financial information in this step, including bank account balances, investment accounts, income from both partners, and debts.
Using up-to-date information ensures you make the most informed choices.
For example, you can set a goal to have $1 million in your investment accounts, but if you spend more than you make currently, it's nearly impossible to reach that goal. Setting realistic goals requires you to assess your current financial status first.
Create and Stick To a Budget
Budgeting is the key to making decisions about your finances. Creating a budget with your spouse ensures you're on the same page and know where and when you can spend money.
Budgeting can eliminate unnecessary financial arguments or unpleasant surprises if one spouse overspends or doesn't share relevant information about the finances.
Budgets are meant to be flexible, though. Go into it with the understanding that if there are mistakes (which will happen), you can review the budget, see what went wrong, and make any necessary changes based on the hard financial data.
Prioritize Financial Goals
After creating a budget and determining your financial goals, you must prioritize the most important goals. This may take some time as you and your spouse determine which goals take precedence and which can take a back seat for now.
Look at your available funds to achieve your goals and the timeline, and understand the steps necessary for managing risks. Don't forget to look at short-, mid-, and long-term goals.
For example, retirement may feel light years away, but the earlier you save, the easier it is to have enough funds when it's time to retire.
Diversify Investments and Manage Risk
Managing risk is a key factor in reaching your financial goals, and one way to do this is to diversify your investments, using your resources to invest money in many sectors and investments.
For example, don't put all your capital in the stock market. Think about what would happen if the stock market crashed. You'd lose everything.
If, instead, your investment decisions included diversifying your funds across stocks, bonds, real estate, and cash accounts, you reduce the risk of a total loss.
Even within each category, such as stocks, be sure to make better financial decisions by diversifying your capital across different sectors, such as healthcare, technology, and retailers.
Seek Professional Advice When Needed
Financial decision-making can be challenging, especially if you and your spouse don't see eye-to-eye. Getting professional advice regarding financial management and your marriage can help you make informed financial decisions and feel good about them.
Sometimes, financial concepts are too overwhelming, or neither spouse has enough financial knowledge to make informed financial decisions.
A financial counselor can help you understand the financial decision-making process while understanding how to nurture your marriage simultaneously.
Review and Adjust Regularly
Like budgeting, the financial decision-making process may have some trial and error. Regularly reviewing your financial performance and progress toward your goals will help you determine what changes you should make.
Setting up regular 'money dates' to discuss your finances, review financial statements, and discuss your resources is the key to a happy and peaceful marriage.
Tools for Effective Financial Decision-Making
Making good financial decisions requires plenty of resources and support. Here are some of my favorite tools to help in the financial decision-making process.
Budgeting software or apps: There are hundreds of options for budgeting tools, including YNAB, EveryDollar, and Goodbudget.
Subscription monitors: Try an app like Trim to eliminate unnecessary spending and cancel subscriptions you no longer use.
Investment tools: Robo-advisors and online investment tools can help you make investment decisions. Some even provide prebuilt portfolios and manage them for you based on your risk tolerance and goals.
A Financial Decision Example
Financial decision-making can be scary! Here is a quick example to help you learn how the financial decision-making process works.
You and your spouse set up a budget that works well, and now you want to use financial planning approaches to reach your financial goals.
You currently put any extra money in your emergency fund savings account but realize you and your spouse have other goals, like taking a vacation to Hawaii in five years to celebrate your anniversary, buying an investment home, and saving for retirement by age 65.
Throughout the financial decision-making process and with the necessary financial information from all your accounts, you determine how to split up your funds so you are able to reach all your goals rather than only focusing on the emergency fund.
FAQs
How Can I Improve My Skills in Financial Decision Making?
The best way to improve your financial decision-making skills is to get professional support. A financial coach can help you and your spouse see eye-to-eye and make decisions based on your financial data.
The key is learning important financial processes while also focusing on your marriage so you can make better decisions.
How Does Emotional Intelligence Impact Financial Decision Making?
Emotional intelligence goes hand-in-hand with financial decision-making because you must be strong enough to make objective decisions that aren't based on emotion and instead focus on growth in your relationship and finances.
Is Risk-Taking Beneficial in Financial Decision Making?
Risks are a natural part of any financial decision-making process. You must take some risks to allow your money to grow. Savings accounts aren't enough to reach your financial goals. Investing is crucial, and investing comes with risks.
What Is the Difference Between a Need and a Want?
A need is something you need to survive, such as housing, utilities, and food. Wants are things that could improve your quality of life but that you wouldn't die without. Anything outside of food, clothing, shelter, and medical care is considered a want.
What Can Happen With Poor Financial Decision-Making?
Poor financial decision-making can damage your finances and marriage. Finances play a significant role in any marriage; when they aren't going well, it can also wreak havoc on your relationship.
Too much debt can cause stress and financial trouble, excessive spending can cause arguments and damaged credit, and not planning for the future can leave you incapable of reaching your financial goals.
The Financial Decision-Making Process Made Easy
Financial decision-making doesn't have to be hard, especially when you have the right support.
Even if you and your spouse understand tough financial concepts and are great financial decision-makers, you may find having outside support is the final touch you didn't know you needed to reach your financial goals.
Of course, if you aren't seeing eye-to-eye, aren't reaching your goals, and argue often, enlisting the help of a financial counselor can help reduce the stress of making financial decisions in your marriage.
Contact me today for your free consultation, and let's see how I can help you achieve financial harmony in your marriage.
Want to level up your game around money in your relationship? My free quiz will help you learn your Couple’s Money Personality Type AND how you can grow from there!
Adam Kol is The Couples Financial Coach. He helps couples go from financial overwhelm or fighting to clarity, teamwork, and peace of mind.
Adam is a Certified Financial Therapist-I™, Certified Mediator, and Tax Attorney with a Duke Law degree and a Master's in Tax Law from NYU. He is a husband, dad, and musician, as well.
Adam's wisdom has been shared with The Wall Street Journal, the Baltimore Ravens, CNBC, NewsNation, and more.
