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Personal finance: Don't trust your gut

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Elaine Thompson/AP/File

(Read caption) In this file photo, a customer swipes a MasterCard debit card through a machine while checking-out at a shop in Seattle. swiped. Hamm argues that financial decisions should not be based on instinct, but on careful planning and preset rules.

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A few weeks ago, I was exchanging emails with a reader (who asked not to be quoted, but said I could paraphrase the conversation). She told me that she makes most of her decisions entirely on instinct and intuition and feels that this is why she often gets into financial trouble.

Frankly, I agree with her conclusion. You can most certainly get into a lot of financial trouble if you operate entirely on intuition, instinct, and impulse.

When you’re shopping, if you make a purchase based on instinct without running the numbers, you’re probably wasting significant money.

When you’re investing, if you rely on a gut feeling for your investment choices, you’re probably going to lose money on that investment compared to what you could have made.

When you’re planning for the future, relying on intuition often means that you find it really difficult to set a goal and follow a plan to get there.

I speak from experience in each of these cases. I’ve found that, time and time again, your gut reaction can lead you down a very dangerous money path. Yes, sometimes it can result in good things, but the number of mediocre and poor things that can result from intuition overshadows this.

What can you do about it, though? It is often too tall of an order to simply tell someone to stop relying on their gut when they make decisions. You can’t completely alter how people think and how they make decisions.

Instead, what you can do is alter the basis upon which they make those decisions.

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If you spend some time researching the products you buy in advance until you know about them and know how to evaluate their prices and relative quality, you’ll naturally incorporate that into your shopping decision.

If you spend some time researching various investments and understanding what the various risks and benefits are of different options, you’ll naturally incorporate that information into your investment decisions.

If you spend some time carefully planning for goals and setting up a very clear plan to get there that is obvious and clear to follow along the way, you’ll use that when making all kinds of time and money decisions along the way.

The key is preparation. If there is one real key to success in almost any area, it’s the preparation you put into it. The more you understand the options before you, the more likely it is that you’ll make a good decision when you’re faced with a choice. That decision will probably still be based on intuition, but that intuition is a flower grown from a rich topsoil of knowledge.

When you’re not pressed for a decision, spend some time investigating the decisions you make every day – or the big ones you know you’re going to be making soon.

Look up the products you regularly buy on the internet. Figure out where the least expensive place is to buy them, and compare the products to competitors. That way, you can make a better decision about not only which specific product to buy, but where to buy it.

Read a well-rounded book or two on investing topics, and take the time to actually understand what is being said in them. Take it slow, and look up terms you don’t know on the internet.

Plan out what you want from your future, then think about what you’ll specifically need to do to get there. What can you be doing each and every day to make that future come true?

For me, I find that the more I think about such things and the more I learn, the better my intuition and instinct becomes. They draw on the foundation of knowledge that I have and the time that I’ve invested thinking about these issues.

Simply put, learning and thinking helps your finances.


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