It’s no secret that improving finances requires smart decisions. When the situation demands, but the budget is tight, you go for short-term car rental instead of getting an auto loan. Such decisions are small in scope and thus easy to make.
But the problem most people have with financial management is that it throws you countless decision points each day. And our minds are seldom prepared for that challenge. Consequently, the majority of our financial decisions actually come down to set patterns of thinking. And at some point, you have to change that if you want to gain control of your financial freedom.
Bad scenarios are common
We like to think that bad financial moves are obvious, or can be easily mitigated. Equally, good moves are self-evident. Everybody knows not to break the bank for something they don’t need, and that you have to set some money aside for emergencies. Right?
Wrong, as it turns out. In 2019, only 40% of Americans could cover a $1,000 emergency through their savings. In an OCBC Bank survey, results show that permanent residents (PRs) and two-thirds of working Singaporeans don’t have enough savings to maintain their current lifestyle for more than six months if they were to lose their jobs.
A majority of the world’s population is living from paycheck to paycheck and relying on debt to bail them out of a bad financial position. Like thrashing about in quicksand, that only leads to further problems.
This is not the sort of situation that happens to individuals overnight. It’s the end result of day after day of going on autopilot in a financial sense.
Deliberately improving thinking
There’s a common saying that you are the average of the five people you spend the most time with. There may not be an exact threshold of time spent, nor does the number have to be five. The point is that we tend to think and behave like the people who surround us most of the time.
When you assume that you know what to do with money, where does that assumption come from? For most people, it’s unlikely that they assembled a solid base of financial knowledge through practice and study. Rather, they assembled their practices piecemeal from observing and assimilating what friends or family are also doing.
We need to be more deliberate and systematic about improving our financial decisions. And critical thinking is the skill you need for that. It’s invaluable for professionals in the world of finance, and individuals can benefit as well. You can pick up useful tips like the 50/20/30 budget rule along the way, but critical thinking is what provides the foundation for them to work.
Steps to application
The first step in applying critical thinking to your finances is questioning your assumptions. All of our behaviors are conditioned by habit. These habits manifest in every aspect of our lives, and often lead us to allocate our finances without thinking.
Habits are a form of heuristic thinking. We use them to greatly streamline our decision-making and simplify our lives. Without them, we’d have to actively process every decision point encountered throughout each day, resulting in a massive cognitive burden.
Critical thinking doesn’t call every habit into question all the time. But you have to periodically revisit and review what you’re doing. Does saving always mean putting money into a savings account, or is it time to explore other forms of investment? Are you financially stable enough that you can now allow yourself to buy higher-quality food, or non-essential items?
The next step is a systematic gathering of information, which leads to the formulation of a plan of action. This is where you engage in self-directed learning to address gaps in knowledge.
What are the respective pros and cons of bonds, shares of stock, real estate, and other forms of investment? How much are you willing to invest in those methods? If you outsource this to a third party, such as a fund manager, you may be tapping their greater professional skills, but you are also removing yourself from the decision.
This ties into the third step, which is seeking additional perspectives. Self-learning can open you up to alternative systems of thinking. But it’s also essential that you get feedback from others.
You can consult with financial experts. But remember that they are ultimately there only to advise you. The same goes for trusted friends, family members, and colleagues. Many of them might have valuable knowledge to share, but the task of reconciling this advice with your unique financial circumstances must be yours.
Applying critical thinking to your finances won’t be easy. But once you take ownership of this challenge, you will begin to free yourself from negative influences and groupthink and make decisions that make the best sense for you.