Feeling Stumped? Use the Decision Tree

By Aaron E. Graham, CFP® 

 

We make decisions constantly.  Where do I eat?  What should I buy?  Should I attend an event?  We often make many decisions on the fly, either because the answer is obvious or the choice is simple.  What do we do, though, when the right answer isn’t so clear, or the decision could have substantial consequences?

Sometimes, we’re so inundated with information we can’t see the forest for the trees. The decision tree will help you get to the root of the issues involved and discover what the potential outcomes of your decisions may be.

Let’s look at an example that most of us are familiar with—deciding whether or not to buy a home—to see how the decision tree can be put to work:

FIRST: Start by listing only the positive outcomes of the decision. Then list all the negatives. By listing the pros first, and the cons second, any biases towards or against a decision are avoided.

Some of the pros could include: building equity and having the freedom to renovate and decorate as you wish. Conversely, home ownership carries expenses for maintenance and repairs and added costs for property taxes and homeowner’s insurance. (Unlike renter’s insurance, which may be optional, homeowner’s insurance is required if the home has a mortgage.)

SECOND: Gain perspective from others on the positives and negatives of the decision.

After speaking with your financial advisor and CPA, they may tell you that on-time mortgage payments can increase your credit score and that mortgage interest expenses can be tax deductible. On the other hand, they may tell you that homes are not a liquid asset should you need funds relatively quickly and that the money used for a down payment could have possibly been invested for a higher return.

THIRD: Can the positive aspects of the decision be enhanced, or can some of the negatives of the decision be mitigated to make the decision more appealing?

For example, the same financial advisor may comment that a fixed-rate mortgage will stabilize your housing costs as opposed to the variable housing cost when renting. A mortgage broker may offer strategies for reducing the amount of down payment due at purchase, which would free up money reserved for a down payment to be invested elsewhere for higher returns.

FOURTH: Stop and assess whether or not the decision is still the right one: A decision of YES may be apparent at this point, or the process may need to be taken one step further.

If the decision is still not clear at this point, find someone who can answer any questions that still remain.

LAST: Once any lingering questions have been answered, imagine what the results of the decision would look like in the future. For this home buying decision, think five years from now to see what the purchase will look like:

What is the likelihood of relocating within the next five years?

Will family changes require a larger or smaller home?

Projecting the decision in your head will allow you to envision what the decision will look like down the road – beyond tomorrow.

After the decision has been made, look back at what you originally thought the end result would look like. Does the mental picture envisioned in the beginning match the reality of what the decision looks like after some time has passed? Your ability to think through the outcome of your decision will improve with experience.

As the late Roy E. Disney once said, “It’s not hard work to make decisions when you know what your values are.”  The decision tree model can be a powerful tool to get to the root of the issues around your decision making and help you make a decision that best aligns with your values.

 

* Concepts in this article were developed by James Grubman PhD of FamilyWealth Consulting.

Aaron E. Graham, CFP® graduated from Coastal Carolina University in 2007 with a BS in Business Administration with an emphasis in Finance. He joined Abacus in July 2013 and earned the CFP® designation in August 2015. As a member of the financial planning team, Aaron works closely with clients to understand their objectives in order to develop, implement and monitor a comprehensive financial plan to achieve those goals.

Abacus is a financial advisory and investment counsel firm known for its passion in creating success for clients and family businesses through skillful listening and smart financial decision-making. Managing over $830 million on behalf of its 190 clients, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.