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Application of strategic decision-making should not be limited to just business. It helps to think strategically about long-term as well as day-to-day decisions that occur in life. One example is how to navigate whether to lease or purchase a car. There are many factors that one should consider before making this decision: 1) How is my current financial situation (i.e. amount of debt, income, liquid capital)? What is my likely financial situation in 3-5 years? What can I comfortably afford? What are the maintenance costs? Insurance costs? Will I need to sacrifice anything (i.e. shopping, dining out, travel) if I want to buy? What kind of value does this type of car maintain when considering a potential resale? How many miles will I put on the car?
The questions all relate to one another and are all strategically evaluating the factors influencing your decision. Here is a list of the applicable strategic considerations presented in my previous blog about for-profit and non-profit organizations:
1) Understand your customer
2) Competitive analysis
3) Return on investment (ROI)
Now let’s dig in to how this applies to making personal life decisions.
1) Understanding your customer - YOU! Prior to making a decision, it is important to understand your personal situation. What is important to you? What do you consider to be valuable? Are you comfortable with risk or risk-averse? Someone who considers family time extremely valuable may choose a job or career that pays significantly less, so that his lifestyle can accommodate driving kids to school, weekends and holidays off, and frequent time off. Someone else may look at the same decision and choose a career that will help her comfortably provide for her children to attend the best private schools, help with purchasing their first homes, and provide incredible worldly family experiences.
2) Competitive analysis - Most people are going to have competing interests of where to invest time and money. Let’s look at saving for retirement. If you are older, single without kids, in a comfortable job, and anticipating an inheritance, you do not need to invest as much per month as a family with young children living paycheck-to-paycheck. And yet, the family is likely going to have a harder time saving for retirement while putting food on the table at the same time. The single individual may consider balancing factors such as how much to spend on vacations versus how much to save and she has to decide whether she values incredible vacations while she is still active more, or having a comfortable lifestyle in case she lives into her 90s more. The family will likely need to assess its situation much differently; how much can we spend on birthday gifts for the kids and still contribute enough to be able to retire by a reasonable age?
3) Return on investment (ROI) - Assessing ROI in personal finances can literally mean evaluating where we should invest your capital to ensure the greatest return, but it can also mean analyzing your personal situation and ensuring that you are maximizing the available capital where and when you need it. My husband and I reassess the balance of our ROIs at every major life event. We did it when we had our son, when I took out a student loan, when we bought our house, when I started my consulting firm. There have been times when contributed 30% of our income to 401Ks, ETFs and mutual funds, and there have been times where we have had to maintain significant debts to ensure we can pay our mortgage and for childcare. There are times where it would be more valuable to pay for furniture outright at a 20% discount, and times where it makes more sense to accept 0% financing to pay it off over a year. We took a loan out against our IRAs to help increase the down payment on our house. We have bought cars and leased cars. The key is understanding your personal situation, weighing benefits and risks, filling in ambiguities, analyzing options, and reassessing often.
Most people’s personal and financial situation is fluid and ever-changing. By evaluating each component thoughtfully and strategically, you can maximize your personal life value and make decisions that help you in the long-run and in the short-run.
Alpha Data Strategies is a consulting firm that specializes in developing data-driven strategies to create business solutions.
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