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How to stop making bad money decisions

So, the 80/20 rule suggests that 80% of outcomes come from 20% of causes. And in the context of personal finance, this implies that a small percentage of poor financial choices can lead to the majority of negative financial consequences.

With that being said, improving key decisions could possibly prevent financial troubles. But although that sounds good in theory…no one is perfect.

Even so, that doesn’t mean that we shouldn’t at least try to minimize bad decision making. So here’s a look at a few things that are guaranteed to help you do better. I don’t use the word “guarantee” often, but I will today because I’m so confident in this list.

1). Review your past money mistakes

The reality is that some people never learn from their past mistakes, and as a result, they do the same things over and over again.

To give you a perfect example, some people get themselves into debt—more specifically credit card debt. To get out of debt, they might get a consolidation loan, pull equity from their house, or use a windfall to pay off their balances. But even though they overcame that hurdle, they didn’t learn from their mistake. A few years later, they’re deep in credit card debt again.

I honestly believe that many people don’t intend to repeat the past, but it often happens because they never took time to think about what went wrong in the first place. Reflecting on our past mistakes is like looking at a map of wrong turns, where you’re able to isolate roads that led to nowhere and directions that took you off course. This way, you avoid the same pitfalls in the future.

As you analyze your mistakes, ask yourself three questions: What happened exactly? Why did it happen? And what could I have done differently?

2). Practice role reversal

Even if you’re not great at giving yourself good advice, you might be great when it comes to giving someone else advice.

If someone comes to you with a problem or dilemma, as an outsider you’re able to view the situation impartially and objectively. With that being said, if you struggle to make good financial choices, imagine yourself advising someone on the decision you’re about to make.

Now, if you like this person, you obviously want to see them do well. You don’t want them to deal with negative repercussions. If you have solid ideas to help them, you’re going to speak up. Therefore, as you think about your own actions, flip it around and pretend it’s a friend or relative making the same decision. What advice would you give them?

3). Consider worst-case scenarios

Now, I realize that most of the things that we worry about will never happen, and when it comes to everyday life advice, the general consensus is don’t sit around worrying about imaginary problems. This is something I also subscribe to.

However, when it comes to personal finance, all bets are off.

In this situation, you need to consider the worst-case scenario because a bad financial decision isn’t always easy to overcome. Some of these are not only costly, they have lasting consequences. Therefore, make sure you consider all outcomes for big and small things (financing a home or car, cosigning a loan, quitting your 9 to 5 to be self-employed, etc).

I highly recommend this because it forces you to pause, think, and reflect on the consequences of an action or decision. And honestly, the worst-case scenario might not be that bad – but at least you gave yourself an opportunity to decide if you’re prepared to deal with any possible fallout.

4). Complete a decision worksheet

This is a simple tool that helps you analyze different factors before making a financial decision, or any big decision for that matter.

It typically includes listing your options, weighing the pros and cons, the risks, and considering how a decision might impact your goals and priorities. I love this because it promotes a better understanding of potential outcomes, which ultimately leads to wiser financial choices.

You can make your own decision worksheet or download this free reusable template.

5). Learn how to control your emotions

Imagine your emotions are like drivers of a car, and your financial decisions are the destinations.

Learning to control emotions is like being a good driver, preventing you from getting lost or making wrong turns in your money journey. But the question is: How exactly do you do this?

Well, for one, instead of retail therapy, you can find other ways to get your dopamine hit when you’re feeling sad or frustrated.

Personally, I find that dancing and listening to upbeat music or watching stand-up comedy has the same effect. You can also throw yourself into a project, even if it’s only organizing your closet or cabinets. The brain can only focus on one thing at a time, so keeping busy can take your mind off shopping.

6). Immerse yourself in financial education

The bottom line is that you don’t know what you don’t know. Some people carry high credit card balances from month to month because they don’t realize how the amount they owe affects their credit score (sometimes it can lower it). And some people cosign loans because they don’t realize that the debt will also appear on their credit report or that their credit score can suffer if the other person doesn’t pay.

You can’t move forward until you understand what’s holding you back. So don’t let a day go by without taking in some type of financial education.