How to Make Smart Financial Decisions

Young asian couple managing finances, reviewing their bank accounts using laptop computer and calculator at modern home. Woman and man doing paperwork together, paying taxes online on notebook pc.

American culture obsesses over money and, yet, somehow we aren’t very competent at managing it. According to recent research, over half of adults are stressed about their money. Seventy-eight percent live paycheck to paycheck. Two in three families lack an emergency fund. Maybe we all need to learn more about how to make smart financial decisions.

Who is supposed to explain how money works — parents, teachers, or the clear-eyed “advisors” who star in financial services commercials? Only 21 states require high school students to take a personal finance course to graduate, according to the Council for Economic Education. As a result, plenty of us are learning from our own mistakes. For many, the pandemic and the resulting inflation now unfolding have made matters worse.

Even with the topsy-turvy economy, knowing how to make sound financial decisions doesn’t have to be complicated. You don’t need to learn how to sell NFTs or secure mortgage derivatives. The most useful skill is learning how to live within your means. 

Make a simple financial plan

If you want to get where you’re going, you’ll need a map, which is as true with money as it is with a cross-country adventure. Pick out some clear goals you can easily name: Do you want to pay off your mortgage before you’re 50? Send your kids to college? Stop working before retirement age? Once you decide what your future will be, the sooner you can figure out what it will cost, and how much you need to save to get here.

Your goals don’t need to be far in the future or heavily detailed. You can even start with a goal you can accomplish sooner, like “save car down payment.” Once you have a focal point, you can outline the steps to fund the goal.

 

Live within your means (and maybe a little less)

We’re all guilty of FOMO. And there’s always a “lifestyle creep.” That’s when you start earning a little more money and decide you should get a bigger apartment or newer car because your paycheck can cover them.

But simply put: FOMO and lifestyle creep can sneakily make you spend all of the money you have and then some, leaving you with nothing left over to save. Plenty of people struggle through an underfunded retirement because they spent all the money they made in their high-earning years. 

Here’s the fix: Include saving as part of a simple monthly budget, a hard-and-fast line item you pay as surely as you pay your electric bill. (Ever heard the expression “Pay yourself first?” Yeah, this is how it works.) And from there, it’s just a step or three to make a super-simple budget: list out all your monthly expenses that are Musts (food, gas, shelter, utilities), subtract your new savings “bill” and then you’ll have the number that equals your disposable income. 

Pro tip: do not include cable, streaming services, gym memberships and the like in your “musts” category. Those are “wants” and get to choose which wants you can afford to pay for. Kiss the other wants goodbye — and remember you are making that trade-off for long-term financial stability, which is truly priceless and never lets you down. 

 

Start investing early

Investing money doesn’t need to be complicated and research-intensive and no, you don’t need to know what crypto or Dogecoin is. Instead, look for an index fund (meaning a fund made up of several companies, created by a person who knows finance better than you) from any of the big robo-investors (meaning you can do it all online). A little goes a long way if you’re really young (time is on your side, always, when it comes to the stock market), but beginning an investment program at any age is a good move.

 

Don’t wait to pay down debt

If you can, pay off debt sooner rather than later. Debt is basically the opposite of investing: “Compound interest works against you, instead of working for you,” says Jessica Aguillera, a consultant at White Mountain Partners, a financial services firm offering debt consolidation and debt settlement programs. So waiting to pay off credit cards, college loans and car leases — or choosing to pay them off slowly — only increases the interest payments, eating into money you could be saving for a mortgage down payment or a trip to Hawaii. Also, carrying a lot of debt can impact your credit score, and a high credit score means that when you want to get a mortgage or other big loan, you’ll need to pay a higher interest rate, if you are able to qualify at all.

Debt is the number-one blocker for financial stability. So make it your primary focus — yes, even before “pay yourself first.” Buckle down and drop all those “wants” out of your budget to speed your way through whatever high-interest debt you’re carrying. Your future self will thank you.

 

Save for an emergency

Some financial advisors recommend putting away at least six months worth of salary to cover for a layoff or other sudden crunch. While you may be able to get by with 2-3 months of salary, it’s smart to have a fund you can dip into, in case of a surprise bill, like a car repair or an unexpected trip to the doctor.

 

Reconsider your plans every couple of years

As you get older, your life plans and goals will undoubtedly change. But savings is always a good idea. Check in with yourself and your plans and see if maybe you can save a little more. Or life will throw you surprises, as it always does. But remember: when it comes to making smart financial decisions, your best move is spend less, save more. Maybe the savings you earmarked for a new boat needs to be diverted toward your child’s college tuition. You need to make sure your budget and savings plan account for the shifts that come with life’s surprise plot twists.

Remember, you don’t need to be a money expert to have a good financial plan, you just need to use your funds wisely. That’s what the heart of smart financial decision-making is all about.