I generally don’t make a financial move unless I’ve researched the ins and outs of that move thoroughly. I want to understand exactly what I’m doing and why I’m doing it before I move any of my money around.
Understanding the ins and outs of the various financial options before us is a vital part of personal finance. Without that knowledge, it would be extremely easy to make poor choices that, while they probably won’t lead us to financial ruin, may lead us to poor returns or the unavailability of funds when we need them.
Naturally, that means research. It means finding several sources of information about an issue, reading them thoroughly, and studying up on any terms that you don’t know.
Much of the time, those sources you find will largely be in agreement on the course of action that you should take. It’s a good idea to pay off high interest debt, for example – most personal finance writers will completely agree on that statement.
Sometimes, though, the sources don’t agree. You’ll read one plan of action from one source and another plan from another sources. Sometimes you’ll even find three or four ideas out there floating around. You might find two or three articles or books that advocate one thing, then you’ll find two or three other sources that talk about something completely different.
How do you figure out what’s right? Having such conflicting perspectives can be really, really confusing.
Whenever I find myself in a situation where I’m trying to figure out the best solution but I’m presented with several different plans for solving the problem, I rely on a few specific tactics to figure things out.
First, do I fully understand all of the plans presented to me? I try to understand what each plan is all about. How does it work? What does the person following the plan need to do?
Next, I try to figure out the risk involved with each plan. Which plan involves more risk for me personally? If I lost my job in a year, which plan would have me in a worse position? I tend to be risk averse, so plans that would leave me in a bad place should something difficult happen in my life are plans I don’t pay much attention to.
After that, I try to figure out if the author of the article has a hidden motive. This is particularly true if there’s a specific financial product involved, such as an insurance package.
Health insurance, for example, can have lots of different approaches, some of which are going to be unbiased and some of which are going to be shaded by the author’s interest in promoting a particular package. The Simple Dollar has a very strong health insurance guide, but you should always look for multiple sources and make sure you understand the issues thoroughly.
Most of the time, even when an author’s agenda is obvious, they’re not doing it for malicious intent. People can often be true believers in something and believe it is the right solution for everyone, even when it’s not.
Another factor I try to look at is the time in which the advice was written. While a lot of older advice is still fantastic in many regards, the time and place in which an article was written can have a great deal of impact on the advice. Advice on homebuying and flipping homes from 2005, for example, might not match what makes sense in 2013.
For me, these four factors usually eliminate most of the bad advice I might receive and often helps me figure out which is the right path.
A final note: most of what I read in terms of financial advice is good advice. It usually comes from people who want to provide you with genuine assistance. The challenge comes from outdated (but not intentionally wrong) advice, advice from true believers in their product, advice from people with different risk tolerances, and advice that I don’t fully understand. If I can overcome those obstacles, I virtually always find the right answer for me.