Personal Financial Decision Making

Guest post by Dr. Chandler Chang of Therapy Lab

4 Steps to Make a Personal Financial Decision

If you are struggling to make a decision, you aren't alone. As humans, we make an average of 35,000 decisions each day. And when it comes to making money decisions? We deal with a lot of them.

We encounter small financial decisions throughout each day—whether to buy that cup of coffee or make it at home, when to buy flights for a holiday visit to your hometown, and how to make the most of a grocery store run. 

Occasionally, we face a more consequential financial decision that could affect us for years to come. What might a tricky financial decision look like? We receive a job offer and salary bump for a position that seems dull. Or we encounter an opportunity to invest in a risky but intriguing venture. It could be deciding to purchase a home or keep renting. Or still, trying to figure out a plan for survival after a job loss or financial misstep.

The easy financial decisions feel clear, easy, and satisfying. You are able to make a choice with minimal effort. But difficult financial choices can lead to stress, avoidance, sadness, or even grief. 

The good news is there's a strategy to handle both the emotions and the decision itself. 

Here's how it goes, and "it" is a brief problem-solving technique popular among CBT (Cognitive Behavioral Therapy) therapists.

Step 1: Identify Your Central Money Dilemma 

When it comes to financial indecision, or the struggle to make a money-related choice, the first step is to identify what the dilemma is. What's the real financial dilemma? What to do with your money? Whether to take a new job or stay at your current one? Deciding on which bank account to open? Write it down at the top of a page.

Yes, get out a sheet of paper or whiteboard. Write “Problem:__________.” And fill in the blank with a precise statement about the decision gnawing at you. 

• Do I take the job or stay where I am? 

• Do we sell the house now while the market is active, or do we stay put?

• Can we afford to start our family now or wait another year? 

This step is both simple and powerful. You'll likely notice that the simple act of writing down the problem can bring some immediate relief. Say it out loud. Text a friend. Get it out! 

Like a past mentor explained to me (back when hairspray was popular), writing down the decision is like putting the hairspray back in the can. An unspoken decision is like a stressful gas in the air. Name it, write it down, say it--and suddenly the decision is contained so you can work with it. 

Step 2: Brainstorm Possible Financial Solutions

Once you've identified your financial dilemma, the next step is to consider potential financial solutions or outcomes.

In my opinion, this is the fun part: brainstorming. 

Let all your desires, expectations, and plans go. Get wild, humorous, absurd, imaginative, and free. Be smart, savvy, unpredictable, and sharp.

On the sheet where you've written your tough decision, make a list of as many different outcomes to this decision as possible. I recommend including some wild ones to open your mind about the range of options you can choose from.

When we face a stressful decision, we can have tunnel vision, and we feel trapped as though we have no good options. It can feel like the only options are "yes" or "no." This type of thinking is emotion-driven thinking, and doing a financial brainstorm allows you to open your mind to all options and create an inventory. 

Once you have a list of responses, systematically go through each potential financial choice and list the "positives" and "negatives" associated with each choice. You might have done a version of this exercise before when making a decision; writing down all possibilities with a "pro" and "con" list.

Step 3: Make a Money Decision

Here comes the big (and, ideally, liberating) moment. Choose an option. Choosing an option is about committing to a financial choice. From there, you can start to create a plan. 

There are two ways to create a plan: one uses the SMART goal outline, and the other is an adaptation of Emily Ladaus' FUN goals. SMART goals stand for Specific, Measurable, Achievable, Relevant, and Time-Bound. A FUN goal is Flexible, Uplifting, and Numbers-based (Emily's original N stands for numbers-less, but for financial planning purposes, it's best to have a number involved). 

To amplify the likelihood of adhering to the plan, get others involved. Ask your partner to get on board, a friend to hold you accountable, or your therapist to check in on you at a specific time interval.

Step 4: Address Potential Barriers to Your Money Choice or Plan

Once you have made your financial decision and created a plan, think about the potential barriers you'll face. Name them; plan for them. Think through the downsides of your decision and begin to prepare for them to buffer the impact. 

Too often, when we make a financial decision, we don't think about potential hiccups along the way. Then, when a barrier pops up, we are caught off guard and struggle to get back on track. Instead, plan for barriers along the way, and create a pre-emptive plan for dealing with them. 

For example, if a potential barrier to reducing your monthly food spending budget is that you may be tempted by dinners out with friends, let them know of your plan. Ask if there are other ways you can meet up that don’t involve dining out. And when they text to invite you to that last-minute brunch? Say you’d love to meet them for a post-brunch coffee or walk instead. 

Financial Decision-Making Examples

If you want some examples of how to implement these four steps, here are a couple of financial decision-making examples. 

Debt Payoff

Layla has three credit cards with outstanding balances. She knows she needs to pay them down, but feels overwhelmed about which one to start with. She got an offer in the mail to refinance them into a 12-month 0% interest rate credit card and doesn’t know if she should.

1. Identify the central dilemma Best way to pay off debt

2. Brainstorm the solution 

   1. Keep paying off the cards little by little (what she’s currently doing)

      1. Pro: Already something she’s doing

      2. Con: Isn’t maximizing either debt paydown method

   2. Pay off the higher interest rate card first (Debt avalanche)

      1. Pro: Makes the most sense financially

      2. Con: Feels a little weird

   3. Pay off the smallest balance first (debt snowball)

      1. Pro: Makes the most sense psychologically

      2. Con: Doesn’t make financial sense

   4. Refinance 

      1. Pro: Gives Layla a break from accumulating interest, might be able to pay off sooner

      2. Con: If she can’t pay back the refinanced card in 12 months, the interest rate is higher than her current three credit cards

3. Make a decision Decide that she will refinance, so she can stop accumulating compound interest on her cards.

4. Address barriers For this to be the best choice, she can’t add any additional consumer debt to her outstanding credit. She set up a 2x month alarm on her phone that says “Remember why you’ve refinanced. Pause on extra shopping for now!”

Job Offers

Goeff has two job offers in an industry he’s been trying to pivot into. One pays $125k but he’d have to move cross-country, and the other pays $105k but he wouldn’t have to move. 

1. Identify the central dilemma. Take a higher-paying job and move, or take a lower-paying job and not have to move.

2. Brainstorm the solution

   1. Take the higher paying job and move (the cost to move would be about $12k)

      1. Pro: More money, the adventure of a move

      2. Con: Move somewhere new, away from his family and friends; unsure if he’ll like the new location

   2. Take the lower-paying job

      1. Pro: Stay in his current location, take a job in the industry he wants

      2. Con: Potentially earn less, miss out on the adventure of moving

   3. See if the higher-paying job will pay his relocation expenses

      1. Pro: Potentially get relocation expenses covered, adventure of the move

      2. Con: Might not like the new location, they say “no” to paying for the move

   4. See if the lower-paying job can increase the salary offer

      1. Pro: Stay in his current location, take a job in the industry he wants

      2. Con: They say “no” to paying him a higher salary, miss out on the adventure of moving

3. Make a decision. Geoff decides to ask the lower-paying job if they can increase his salary. They say no, but do agree to a $5k sign-on bonus. While it’s lower than he’d hoped, he accepts the offer because he’s excited about moving into a new industry and not having to move across the country to do it.

4. Address barriers. Geoff admits he has a tendency to get ansty professionally.  Geoff and his partner agree that he’ll stay at the new job for one year before making any decisions about looking for a higher-paying job. 

Feeling Good About Your Financial Decision

Life is full of risk. Staring a tough decision in the face and accepting risk with eyes wide open is one of life's big adventures. Savor the heightened emotion of risk and move forward with the knowledge that you made this financial decision with intention and planning. And remember: very few financial decisions are irreversible; if down the road, you decide something wasn't a fit for you, permit yourself to change your mind.

About Dr. Chang

Chandler S. Chang, Ph.D. is a licensed clinical psychologist practicing in Los Angeles since 2008. In addition to her clinical services, she is the founder and CEO of Therapy Lab. Therapy Lab offers targeted, brief interventions with a mission to provide accessible, culturally sensitive care to people across the U.S. where we have an unprecedented need for mental healthcare. Therapy Lab offers teletherapy in California, Michigan, Massachusetts, Rhode Island, Connecticut, Washington, Arizona, and Maryland. 

Dr. Chang earned her A.B. from Princeton University and her Ph.D. at The University of Georgia, and she completed clinical training at UCLA Resnick Neuropsychiatric Hospital. In her free time, she loves spending time with her family as a mother of two boys. She enjoys cooking, hiking, and road-tripping. Dr. Chang is licensed as a psychologist in California (PSY#22092) and Michigan (6301018928).