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Money Decision Problem 2: Solving the Wrong Problem

You can have the greatest system in the world for analyzing and solving your personal or business money problems, but you would be wasting your time if you were solving the wrong problem. This usually happens if you do not think through a problem before you start to solve it. To understand how to approach a particular problem you should understand at least these things about the problem:

  1. What are the limits to problem at hand?
  2. How do you define a good or a bad outcome to the decision?
  3. How should you measure the outcomes?
  4. What do you bring mentally and psychologically to the decision table?
  5. What are other ways to look at the problem?

A Mutual Fund Example
One example of solving the wrong problem is to pursue a high rate of return from a mutual fund investments without first deciding what kind of comparison or benchmark you should use to determine if the return is high enough. For example, index mutual funds that are designed to mirror the results of the Standard and Poor’s 500 index consistently outperform rough 80% of all mutual funds. The original problem may have been how to choose mutual funds with high returns. A better problem to solve would be how choose mutual funds which consistently perform better than the S&P 500.

Final Thoughts
Remember that most problems involving money usually involve something else besides money or mathematics. If you focus on the parts of the problem that are objective and that can be measured or solved with common with equations and spreadsheets, you may miss the most important part of the problem.

Next Lesson: Not Looking at All Sides of a Problem

Money Decision Problem 1: Not Taking the Time to Think About the Problem

Money Decision Problem 1: Not Taking the Time to Think About the Problem and the Decisions that Must Be Made

Before you make a financial decision, you have to know something about your needs, the effect your decision may have, and how you go about making a decision. Some common money decisions that often happens too quickly is what credit card you should have, whether to buy or sell a stock, or whether to go into debt to replace your boring old (and paid off) car for a shiny new one. Taking the time to make a proper decision can save you a lot of frustration and regret, especially if you do it consistently.

A Credit Card Example
Let’s look at the credit card situation more closely. There could be dozens of reasons why you suddenly decide that you need a new credit card. You might not have one at all, but one day you decide to rent a car and find out that you need a credit card. You might have a card already, but you find a way to transfer balances and reduce your interest rate for the first six months. Even if you think you need to take action right now, it always makes sense to think it through to see if it is the right decision for you. The following are just some of the questions you should ask yourself before you sign on the dotted line:

  1. What do you want to accomplish when making the decision? – At the very least, figure out if it is a short term or long term goal.
  2. Who will be making the decision? – Typically anyone who will be responsible for paying the bill and whoever will be allowed to make charges on the card.
  3. How should the decision be made? – Figure out things like whether you need to decide after comparing other options, or if any one person will have veto power.
  4. Does the decision significantly affect other decisions?
  5. Does the decision have to be made at all? – Think about what would happen if you took no action.
  6. Does the decision have to be made by some kind of deadline?
  7. What’s the worst that will happen if you don’t make a decision?
  8. How much time do you need to make a decision?
  9. What kind of options do you have?
  10. Do you have any experience making this kind of decision, and if so what did you learn?

Once the background questions are settled and you have a good understanding of your overall situation, you have to start dealing with the decision making process. You should finish gathering any information that you need to make a decision. For credit cards, this would be things like late fees or other penalties, how much interest you will be charged, and what kind of no-interest grace period you have. These kinds of details should be spelled out in the agreement. If you don’t understand it, don’t sign it. If you don’t see it in the agreement, then it’s not part of the deal.

The next big steps are making the decision and carrying it out. If you decide to do something, then follow through. If you decide to do nothing, then take no action, no matter how tempting it may be. If you decide to change your mind, go through the same decision process. Don’t make the mistake of being logical and systematic the first time through and then being very informal the second time you wrestle with the same decision. Every decision is a combination of your analysis and your judgment. If you have a consistent process, you’ll likely improve the quality of both your analysis and your judgment.

Final Thoughts
Keep in mind that a credit card can turn out to be a long-term relationship. If you pay your bills in full every month, it can be a very happy and harmonious relationship. If you fall behind, it can turn real ugly real quick.

Next Lesson: Solving the Wrong Problem

How to Manage Finance, Work-Life Balance, and Sales-Marketing Activities of Your Home Business

Work-life BalanceMany, if not all, home businesses are Sole Proprietor – They handle everything themselves or with the help of family members.

With many responsibilities in running such business, home business owners need to keep control in their home intact.

Three of the controls that home business owners’ often having troubles are:

  1. Separating business from personal finance (and vice versa.)
  2. Managing work-life balance.
  3. Managing sales and marketing activities to grow the business.

Mastering the three controls is essential in mastering in other controls – You can say that those three are prerequisites. The following are some tips and ideas on maintaining control on all three.

How to separate business from personal finance – and vice versa

Separating personal and business finance is important. Not only the business’ revenue to grow itself, you also need to control your personal finance so that it will not get carried away and infusing every penny you have into your home business.

You can basically start with separating bank account, so that your business and personal finance each has an account on itself. In book keeping, you need to localise your income-expense: Your business account only deals with any income and expense related to your business, and your personal account only deals with any income and expense related to your daily activities.

How to manage work-life balance

This is the trickiest of all – You more often than not, got carried away with your business venture, in such a way that your personal life is sliding away from you. All of a sudden, you feel that your entire day is devoted to your business.

Having a good work ethic is important, but over-do work will only leave negative results – You might be stressed out, you could be anti-social, you could damage your relationship with your spouse, kids or other people important to you.

The surest way to maintain (or regain) control in your work-life balance is to have a written schedule to be placed in prominent places, as well as setting up reminders and to do lists for day-to-day business activities.

The critical part in maintaining control in your work-life balance: Stick to your schedule, no matter what!

How to manage sales and marketing activities to grow the business

This is often neglected, simply due to the nature of Sole Proprietorship itself – You handle everything yourself, and this means you will prioritize things. From experience, prioritisation is done the wrong way.

Usually, you first priority is to finish projects on time, before deadline. And, unfortunately, one of the neglected ones are your sales activities, including managing leads.

Your decision to outsource some of your business functions, in this case, sales and marketing functions can make or break your home business.

You can use CRM software for your sales and lead management.

In fact, sales management software not only can help you to control your sales and marketing activities, but also can help you increase close rate.

The key: having the right mindset

Your mindset rules your decision in everything, logical or not. In this case, no matter how much you know about gaining control in your business and personal life (especially finance), your mindset determine your success.

So, first, regain control of your mindset and learn to apply the principle of kaizen or continuous improvement for the benefit of your money and mind.

image by eyeliam.

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How Living Cheap, Looking Rich Can Help Your Personal Finance and Career in Recession

Live Cheap, Look RichLiving below your means doesn’t seem a desirable decision to survive today’s recession.

There are better ways, and although living below your means are the next logical step when you are in financial strain, your sense of achievement must be maintained.

Why is that?

In order to keep yourself on track in navigating through the economic storm, you need to stay focus. Staying focus can be achieved through the fulfillment of your need for achievement – and living below your mean is not the way to fulfill yours.

Live cheap, look rich

Living cheap is not living below your means. Living cheap means living within a closely controlled budget to achieve the living standard that anybody else has on a higher budget.

The main idea of living cheap, looking rich is to aim to get the best deal in every way, including clothing, entertainment, etc. in such a way that nobody would know that you spend less for the look you have right now.

‘Look’ here is not only clothing, accessories, or any other apparel and fashion related products – ‘look’ is your lifestyle, in a standard that can’t be achieved by living below your means.

‘Look’ is going to Starbucks occasionally, and socialise with your friends and colleagues. ‘Look’ is how people perceive of you, no matter you achieve ‘it’ by bootstrapping. You shouldn’t overdo them, though.

The key in living cheap is total control of your budget.

Why living cheap, looking rich is smart

We live in a society that value physical appearance, lifestyle and charisma. Enhancing yours will actually help you land better job, secure more business, or socialise with more people (which can present you with more opportunities) – all in all will affect your bottom line: your personal finance, in a positive way.

You deal with people, and most of them don’t really care how much you make – what they care is what they see, and how they preceive of you. For example, in a meeting with business prospect, you need a professional look that commands confidence, charisma, and trustworthy. You don’t want to meet your future client in your t-shirt, don’t you.

How to live cheap, look rich

There are ways you can consider to live cheap but look rich:

  • If you are into fashion and business as well, purchase your clothing needs with a wholesaler. While hard to find, wholesale clothes can save you a lot of money. The problem is, they usually only allow you to buy in bulk (usually in half-dozen or dozen).
  • Alternatively, you can shop in consignment and/or discount stores.
  • Shop for everything on the web – groceries, clothing, accessories, electronics, travel deals, etc. You can always receive a lower price for the same item you want.
  • Attend charity events and/or be volunteer. Charity events – the large one – are where socialites and celebrities. Attending the events, as an attendee or a volunteer will help you raise your profile.
  • Purchase used car – no body is really care how much you pay for the car, as long as its condition is top-notch.

Remember, don’t live below your means – Live cheap, look rich. That is good for your economics and, in effect, your personal finance endeavour.

Image by net_efekt.