Training yourself to make good financial decisions happens one thought at a time. I consider this as “building the decision muscle”. With every decision you pose to yourself you have an opportunity to grow this muscle or let it atrophy.
So how do you grow this muscle? By feeding it healthy internal dialog and healthy decisions. One way to do that is to use Warren Buffett’s 10/10/10 rule for decision making (not to be confused with Buffett’s 25/5 Technique). The premise of this advice is to pause for a moment when making a decision and ask yourself three questions:
- How will I feel about my decision in 10 minutes?
- How will I feel about my decision in 10 months?
- How will I feel about my decision in 10 years?
The hope is to break you out of autopilot so that you spend actual time thinking about your answer to each of these questions. Rather than thinking in one-word answers, explore each of these them.
How will you feel? Where in your body will you feel it? What emotion would you associate with this feeling? Is this something you’re trying to feel, or trying to avoid? Will this bring you closer to your goals?
As I’m sitting here writing this at 9 PM on a Monday night, I just had a small bowl of ice cream (mint chocolate chip if you’re curious). If I were to ask myself these three questions earlier would I still have had dessert?
Perhaps the decision would have changed. Either way I would have spent more time building the muscle to help make a more informed decison next time. One decision isn’t going to make a major impact on my weight, but it could compound if you let it.
One thing I do know is when I stop to consider a decision in this way I put more thought into alternatives. Instead of ice cream, perhaps I would have opted for a bowl of grapes – or taken a different approach and gone with some hot tea.
For something as simple as dessert thinking 10 years out could be overkill. One thing I consider is the compounding effects of doing this same action for 10 month or 10 years. That quickly shifts multiplies the stakes of the decision.
This isn’t far off from the latte factor – the idea that if you switched from buying an expensive coffee everyday to saving it you’d save a bunch of money. While this alone won’t make you rich (unless you’re in Panama drinking Gesha coffee) if you were to make 10 similar decisions the impact could be tremendous.
Decision Support System
The same decision support system can be used for your financials. Here are a few instances where I might go through the 10/10/10 questions in my head:
- Shopping and considering a purchase.
- Browsing online and thinking about making an impulse buy.
- Choosing how much to spend on an experience (vacation, etc).
- Deciding on living space – buy a home, rent an apartment or exploring something different.
- Buying or selling an investment.
- Uncluttering the house and considering giving something away.
Take a moment to think about each of the 10/10/10 questions separately. It may sound like overkill when you’re out grocery shopping and deciding if you’ll purchase milk, but it could still come in handy – especially when it’s 1 AM and you’re browsing Craigslist thinking “I need a kayak” (and I’m very happy I didn’t end up buying one).
Analyzing Your Decision
Avoiding rash decisions comes with practice. Many people who seem in control and constantly avoid them are able to do so because they’ve been practicing and building that muscle all of their life. They go through a constant feedback loop of decision analysis – continuously improving their decision-making capabilities.
I love analyzing decisions. I love it because I don’t look back on decisions with regret thinking what could have been. Instead, I look back knowing that I make mistakes, but want to fully understand how I could improve. If you can’t forgive yourself for your mistakes you’ll be doomed to repeat them.
The question that is no doubt the hardest to answer is “how will I feel about my decision in 10 years?”. One approach to this reminds me of a George Lucus quote:
A director makes 100 decisions an hour. Students ask me how you know how to make the right decision, and I say to them, ‘If you don’t know how to make the right decision, you’re not a director.’George Lucas
In the same way a director should have a vision for their movie, it’s extremely beneficial to have a vision for your life. Think of a director making a decision about something at the beginning of a movie. Each scene, interaction or line of dialog is leading somewhere by the end. If you don’t know where you’re going, it’s going to make each of those decisions
One way to help guide these decisions is by creating a personal mission statement. Even with a personal mission asking these three questions will help, but with that mission you’ll be that much more likely to answer them in a way that leads you closer to what you want to be.
Whatever the decision-making model you go with, I would encourage you to constantly challenge yourself.
Do you pause before making a decisions – financial or otherwise – to evaluate them? What questions do you ask yourself? Does it help?