How to Make Good Financial Decisions

Three strategies that will improve your bottom line.

Photo by Martin Poole/Getty Images

1. Set Your Priorites

Money set aside for one thing can’t be used for another. Maybe your top goal is to save for your child’s college education. Or to take a big family vacation every year. To keep your primary goal in mind, “have a visual reminder such as a photo of it saved on your phone, and take a peek at it weekly or anytime you’re tempted to make an impulse buy,” says Farnoosh Torabi, the host of Financially Fit, a Web series on

2. Set a Budget and Follow It. (Really.)

Sure, this is a tedious task. But there’s no better way to figure out what you can really afford. In All Your Worth: The Ultimate Lifetime Money Plan ($15,, authors Elizabeth Warren and Amelia Warren Tyagi suggest dedicating 50 percent of your take-home pay to must-haves (like housing and food), 30 percent to wants, and 20 percent to savings. For some people, especially for those in areas where the cost of living is high, this breakdown might not be realistic. Joe Duran, the author of The Money Code ($15,, advocates allocating 70 percent to needs, 20 percent to wants, and 10 percent to savings instead. Once you’ve chosen the budget that works for you, use an online financial tool or app (like Quicken or Mint) to ensure that you stay within your limits. Revisit your plan every three months or anytime you experience a financial change (say, a job loss or a windfall), then adjust the amount of money you allocate accordingly.

3. Quiz Yourself as You Go

Before you buy something, Duran recommends asking yourself these questions:

  • Who might be affected by the opportunity cost of this purchase? For example, if you buy a new sofa, it may mean that you can no longer afford your son’s karate lessons.
  • Am I prone to buying in an effort to increase my own happiness or to impress or please others? Translation: Think twice about buying your spouse a new Wii if you’re hoping that it will help him forget about last night’s argument.
  • What are the true costs of this item? If you’re getting a dog, be sure to factor in not only the adoption fee but also grooming, food, and vet expenses going forward. When buying a house, take into account the price of utilities and necessary repairs, and even whether its location will increase your commuting costs.
  • What are the possible benefits of making this purchase? Consider vacations: They can be expensive, but getting away improves your well-being and provides some much needed rest. And who can put a price on that?