How to Make Decisions

If you are going to make decisions, you must include all the relevant information.

It’s impossible to make a good decision on purpose if you are missing key information.  You may have luck and end up with a good result, but it’s not repeatable.  People are wary of politicians, sales people, and anyone who is trying to change other’s behavior.  This is smart to be wary – caveat emptor – buyer beware, don’t be deceived.

Buy what if you are the one deceiving yourself?

Today’s example in decision-making comes from my own household budgeting process.  While many people have a rough idea of where their money goes each month, I’ve prided myself for years on making a zero-based budget.  Every dollar is accounted for, planned for, before the month starts.

I would list my monthly household income at the top of the page, write out all my expenses and desires for the month, and go until I ran out of money “on paper”.  I paid off my credit cards every month in full, and my net worth looked like this in my budget app:

Net Worth - Before the Reckoning

I was so proud of myself.  The red bars are the debt, my credit cards, and the teal bars are my cash on hand.  I felt fantastic.

But I was lying to myself.

The information I was hiding from myself was my student loans.  I was paying the minimum payment on them every month, but I hadn’t factored them into my monthly decision making process on my budget.  I just paid them as if they were the light bill.

Here is “the reckoning” when I finally added the student loan balances to my budgeting app:

Net Worth - After the Reckoning

My real net worth was way below zero.  What looked so good before, my cash on hand, was puny in comparison.  When budgeting each month, we were making decisions to buy a house, go on vacation, splurge on shopping – never thinking about the real problem.

We’ve been making real progress on paying down the student loans since that time – it’s been a long journey.  Of course, there’s more to the story than just including the student loans in the net worth calculation.  Knowing the real picture of our finances, however, changed our decision making process.

It will for you, too.

The takeaway:

  1. Make sure the relevant information is included when making decisions, even routine ones
  2. If you feel information is hiding or underemphasized, make it visual, and in proportion to the other information
  3. Realize that it isn’t always other people that will try to deceive you – sometimes it is you deceiving yourself

If you ever had an “a-ha” moment like I did, please feel free to share it with others in the comments.

If you want to learn more about the budgeting tool I use and recommend, You Need A Budget, click here for a free trial.  We both get an extra free month of the service if you subscribe, but it’s cool if you don’t.

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