When making important engineering decisions, it is critical to follow a set process to investigate all options and variables to identify the best possible solution. The same process used in engineering can also be applied to financial decision-making.
Financial matters share a fair amount of overlap with engineering; they both involve numbers, analysis, and critical thinking. Maybe this is why I have become more and more interested in finances over the years. That and I do not want to have to work until I am 70 years old. 🙂
In this post I will examine how the engineering design process can be applied to financial decisions. I call this the Engineering Cents Financial Decision Process (ECFDP).
Engineering Cents Financial Decision Process:
1. Define the Problem
The first step in the engineering design process is defining the problem at hand. Only by clearly knowing the problem can you begin forming an effective solution. Whether you know it or not, you yourself have likely already defined many problems.
Every day millions of people define problems by going to a search engine and typing in a question. I have done this many times when trying to solve a problem, such as how should I invest my money, how much should I save for retirement, or how to get a promotion. The “great” thing about this step is that is does not require much effort on your part, life has a way of naturally presenting problems as you progress through its different stages.
2. Research Possible Solutions
Once you define the problem, the next and perhaps most important step is to perform research on possible solutions. Engineers rarely rely on a single data point as a basis for making a decision, because several data points are necessary to establish a trend to form a basis for a solution.
Much like researching for the engineering design process, researching a financial problem can be done in a variety of ways: searching the internet, talking to friends and family, and/or consulting with a professional. I often start with the internet but it is important to remain skeptical as you may encounter websites with biased information.
Asking a professional may be useful, but just like the internet, professionals may be biased because they are often paid based on the types of services they encourage you to purchase.
To avoid these potential biases, you may consider talking with friends and family. Friends and family are a good resource, but many financial decisions involve personal details that you may not feel comfortable sharing.
As an alternative to these potentially biased sources, I often turn to personal finance blogs for my research. Most bloggers, including myself, want to provide unbiased advice and forums for discussions on finances where you the reader can remain anonymous.
Regardless of the resources you choose to consult for research purposes, gathering information from varied perspectives is an important step in the process of making a wise financial decision.
The planning and analysis phase consists of creating different courses of action based on the research and deciding which one works best for you and/or your family. To assist with the planning phase, you may choose to use a variety of resources to analyze your options, such as an online calculator to determine how much you need saved for retirement or to determine how much life insurance you need.
Based on my experience as an engineer, it is common to get stuck in this stage due to something referred to as “analysis paralysis.” This occurs when you find yourself unable to stop analyzing every possible scenario, preventing you from actually taking action. It is important to know when to call it quits on running different scenarios as eventually you will hit a point of diminishing returns.
4. Implement Plan
After all the research and planning is complete it is time to take action. Implementing the plan you have decided on could consist of things such as setting up brokerage accounts, making an offer on a house, or accepting a new job offer. If you have completed the previous steps, you should feel confident in this stage that you have made a good decision for yourself and/or your family.
Once you have implemented the plan, it does not mean your decision has to be final. Engineers work hard to get everything right, but it is impossible to account for every scenario that may occur. Often products need to be updated or recalled to fix something that was missed in the design and test phase.
Similarly, life happens and plans should be updated as necessary to adapt to changes, such as getting married, having a baby, or starting a new job. Each of these life events will trigger new financial situations that may change you or your family’s needs. Personal finances are a lifelong journey with many different stages, so there will always be a need to re-evaluate you and/or your family’s needs along the way.
Applying the ECFDP steps can be useful in financial situations with varying degrees of complexity. The more complex the situation, the more beneficial using these steps will be. No one likes making mistakes, but following a set plan can help to minimize the common ones made in personal finance situations.
Readers, do you follow a set process when making financial decisions? Have you made mistakes in the past that the ECFDP would have helped avoid?
Thanks for reading!