Financial Health 101: How to Form a Financial Decision-Making Process

Financial management can be a challenge at any age, regardless of how much money you have. You may have heard that arguments about money are extremely common in partnerships and marriages. Even if you’re not sharing a household and budget with another person, you still need to make informed choices about personal finance if you want to be in good financial health.

At Leaders Credit Union, it’s our mission to provide our members with tools to build and improve financial literacy to turn their dreams into realities. One of the cornerstones of personal financial wellness is forming a financial decision-making process that you can use to make sure that you’ll have the financial outcomes that you want. Here’s what you need to know.

How Can You Assess Your Current Financial Situation?

The first step to financial wellness is wrapping your head around your financial situation and decision-making process. You need to know how much money you have and how much you owe before you can create a sound financial decision-making process that serves both you and your financial goals.

Here’s a list of the financial information you’ll need to gather to get a clear picture of your finances:

• The most recent pay stubs for you and anyone else in your household 
• Your most recent bank statements (checking and savings accounts)
• Your most recent loan statements (mortgage, car loan, student loan, lines of credit)
• Your most recent investment account statements
• Your most recent credit card statements
• Your most recent utility bills
• Your most recent grocery receipts
• Your insurance policies/statements (homeowners, auto, life, pet insurance)
• Up-to-date information regarding any other sources of income (side gigs, etc)
• Up-to-date information regarding any other debt (payment plans, etc.)

Once you’ve gathered all necessary financial statements and other documents, you’ll need to total your net monthly income and debt obligations. Income should include your take-home salary, income from your hourly wages and/or income from any other sources. Debt obligations should include regular monthly payments for your rent or mortgage, utilities, debt payments (loans, credit cards and lines of credit) and insurance premiums. You’ll need these monthly totals for the next step.

How Does Budgeting Help In Your Decision-Making Progress?

A household budget is an essential tool in making financial decisions. Here’s our quick guide to how to set a budget.

1. Gather all relevant financial documents as noted in the previous section.
2. Total your net monthly income and your monthly debt expenses.
3. Choose a budgeting method that works for you. Here are two popular options.
   • The zero budgeting method accounts for every dollar you earn and spend every month to arrive at a zero total.
   • The envelope budgeting method allocates money in each spending category to help you avoid overspending.
4. Enter your total net income.
5. Itemize your expenses. Make sure to include money that you want to save. We always encourage our members to pay themselves first.
6. If you have more expenses than you have income, then you’ll need to take a step back and figure out ways to reduce your expenses or increase your income. For example, you might consolidate your debt or pick up a side job.

The reason we recommend budgeting as an important part of your financial strategy is that you can make an informed decision about any aspect of your finances only if you have a handle on your overall finances and have sufficient cash flow to meet your obligations.

Keep in mind that your budget doesn’t have to be carved in stone. Your monthly expenses or income may fluctuate and big changes, such as losing a job or getting a promotion, can impact your budget. We suggest revisiting your budget regularly to make sure that it’s working for you.

Why Is Setting Financial Goals Crucial for Your Future?

You know that creating a budget can help you with setting financial goals, but before we reveal the key steps to making good financial decisions, let’s talk about why it’s essential to set financial goals.

Financial goals allow you to keep your eyes on the future. Many people have a combination of short-term, medium-term, and long-term financial goals. Examples of short-term goals might be saving money for a family vacation or for a down-payment on a new car. A good medium-term goal would be creating an emergency fund if you don’t already have one. Long-term goals may take years to achieve and could include saving to buy a house or investing money for a comfortable retirement.

Any financial goals you set should be SMART goals. That means they should be:

• Specific
• Measurable
• Attainable
• Relevant
• Time-Bound

It’s not enough to set a goal to reduce your debt. To make the goal SMART, you’ll need to choose a specific debt repayment strategy and decide how much money you’ll pay each month to get out of debt by a specific date.

Looking at your budget can help you set goals, which you can then fit into your budget. After you’ve entered your income and expenses, you can look at what’s left and determine your goals accordingly. You’ll keep these goals in mind as you make any financial decisions going forward.

What Are the Key Steps to Making Smart Financial Decisions?

Here are the steps to help you develop a financial decision-making process that will allow you to make sound choices even when your stress level is high.

Understand Your Financial Reality

The first step is to make sure you’ve got a clear picture of your financial reality, meaning you’ll need to understand where your finances are to make the best financial decisions for yourself.

Look at the Big Picture

Next, look at the big picture of the financial decision you’re making. Here are a few potential questions to ask yourself:

• What do I hope to achieve by making this decision?
• What are my choices?
• How will each choice impact my overall financial picture?

You may have two, three, or more options, so it’s important to articulate them before you make a decision. Use your imagination to come up with as many choices as possible. Some decisions may be simple, such as yes or no questions, while others will be more complex.

Evaluate Your Risk

Most financial decisions come with some potential risk. For example, say you want to buy a new car and the choices you have are as follows:

1. Buying the car with cash from your savings.
2. Putting a down payment on the car and financing the rest.
   • Financing with your credit union or bank.
   • Financing with a dealership.
3. Trading in your old car and using the money as a down payment, then paying with cash.

There could be several other options, but each has some potential risk. Buying the car with cash would mean you wouldn’t have a car payment, but you might deplete your savings and need to rebuild your emergency fund. 

You’ll need to factor in the risks and rewards of each option, so we suggest listing the options and the pros and cons of each.

Find the Facts

After you’ve clarified your options, it’s time to solidify your choices with research. If you were planning to buy a home, this step might involve researching lenders and home prices.

The more information you have, the easier it will be to make sound financial choices. That said, don’t get bogged down in research. There’s such a thing as “information paralysis,” and you might find that you have a difficult time choosing the best option when you’re overwhelmed with information. 

Get Help If You Need It

At this stage, you may need a bit of guidance if you’re still wondering which choice is best for your financial health. Reach out to your local bank or credit union for help. Leaders Credit Union has a substantial library of financial resources on our website and we’re always happy to talk to our members one-on-one to guide them through difficult decisions.

Another option is to meet with a member of Leaders Credit Union's Investment Services team to discuss your options. Working with a financial professional can help with both short-term and long-term financial goals and decisions. 

Make Your Choice

The last step is to make an informed choice based on the information you’ve gathered. Try to avoid binary thinking (good/bad) when you’re considering your options. It’s not necessarily wrong to borrow from your 401(k), for example, but there are consequences for doing so. 

We find that thinking in terms of benefits and consequences is a better option for the financial decision-making process because it separates financial choices from your emotions.

Make Smart Financial Decisions with Leaders Credit Union

Financial decision-making doesn’t need to be stressful. Using the steps we’ve outlined here, you can create a financial decision-making process that allows you to be fully informed and evaluate your options before choosing a course of action.

Do you need assistance with investment choices? Leaders Credit Union has a dedicated Investment Services team that’s here to help!