Douglas A. Boneparth is a Westfield resident and Founder of Bone Fide Wealth, LLC, a boutique wealth management firm in New York City, and co-author of The Millennial Money Fix. Contact Douglas to learn how he’s not your parent’s financial advisor.
I’ve lost track of how many different iPhones I’ve owned in my life. I’m a ride or die Apple nerd so you know I scooped up the new iPhone 11 Pro Max post haste. While the new camera is absolutely bonkers, I’m not quite sure what it offers above and beyond what my previous iPhone XS Max did. Nonetheless, I shelled out $1,250 for the latest and greatest in mobile super-computing technology. Boy, do I miss the old days of getting $200 off my new phone and selling the previous one on eBay for like $1 million and retiring.
Early on in my career, my father taught me a process that could help anyone make an informed financial decision. I actually use it both personally and in practice quite a bit. I call it, the “Three Criteria,” and it involves answering “yes” or “no” to three questions.
They are as follows:
- Can I afford it?
- Will I feel good about doing it?
- Does this decision make sense?
Now, the goal of the exercise is to see if you can say “yes” to all three questions. If you can, it means the decision you are about to potentially make is an informed one. However, it does not mean that you should go ahead and do it. It simply means you’ve met the criteria for making an informed decision should you then choose to do so.
The reason I like this system so much is because it addresses both the objective and subjective nature of personal finance. For example, affordability is a matter of knowing your actual numbers. Do you have enough money to make the purchase? How would financing impact your cash flow? How will this purchase affect other financial goals? The beauty here is that asking this question calls into question your understanding of your own financial situation. While I don’t think most people have a clue as to what they can really afford, the good news is that this serves as a call to action to go figure that out.
Feeling good is very much up to the individual making the decision. It’s addresses the inherently subjective and often emotional components of a financial decision. Buyer’s remorse is an awful feeling to have to live with and nobody wants to be constantly reminded of a bad decision, which is why a careful analysis of whether or not the decision you’re going to make is one that will bring lasting enjoyment and satisfaction versus temporary excitement. Furthermore, making a bad decision not only hurts your feelings, but it hurts your pocket as well.
Whether or not a certain decision makes sense is a combination of subjectivity and objectivity. Having to replace something critical to your everyday life, like a car or a phone usually isn’t up for debate. However, what it gets replaced with generally is. For example, replacing your family SUV with a two-seater sports car, even if affordable, may not make a whole lot of sense assuming you still have kids to transport to and from all their activities. Decisions around investing, both in the financial markets and directly in oneself, is also a mix of subjectivity and objectivity. Outside of a cash reserve, money shouldn’t just sit in cash, but where and how it gets invested is a matter of one’s subjective goals and risk profile.
I bet you’re wondering where this all fits into the purchase of my new iPhone. Well, when I applied the three criteria I was unable to get the three yeses necessary to move ahead with buying the phone. It was affordable, I knew I would feel good about doing it but, with there being no real need for a new phone outside of wanting the *coolest* one with the latest features, it didn’t really make that much sense. Yet, I bought the phone anyway. So, I wonder, was my decision out of habit or was it something else that had me break my own rules?
I think the answer lies somewhere in between the two. As much as I hate to admit it, my everlasting love for technology and gadgetry has created an impulsive behavior that I seem to have justified through the lens of affordability and gratification. That might not be a good thing, yet the financial planner in me knows that if I’m hitting all of my financial goals, inclusive of my decision to buy the phone, there should be no issue with making the purchase. So, what does that then mean for the three criteria?
I suppose it just means the system is more of a guide than a hard set of rules to live by. Go figure that the one question which blends both objective and subjective components is the one that gives leeway in the decision making process. However, it kind of makes sense because financial decisions are always personal and thus impossible to simply leave to the answering of any number of questions to provide you with a course of action. In typical financial planning fashion, it seems to always come back to your goals and what it is you really want for yourself.
This post originally appeared on my blog.
Advisory services offered through Bone Fide Wealth, LLC, a Registered Investment Adviser.