Article
We make decisions constantly. What will I eat today? When will I take the car for servicing? What do I want to watch on TV this evening? We 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?
In early April, a client called to share that both of her parents and her oldest son had lost their job within the space of three days. In tears, anxious for her family’s health, and worried about her family’s financial security, Catherine needed to discuss changes to her portfolio to meet the unexpected financial demand to assist her son.
Sometimes, like Catherine, we are facing a decision when we our emotions are fraught and the risks for making a wrong decision are high. The decision tree is a methodical process that will help you get to the root of the issues involved in any decision and discover what the potential outcomes of your decisions may be. A smart decision can alleviate worry and provide much needed peace of mind.
Let’s look at an example that many of us are familiar with—whether or not to financially assist an adult child—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, you will avoid any biases towards or against a decision.
Some of the pros could include: helping your adult child with an immediate financial need allows him to maintain a solid credit score; keeping a child out of consumer debt might preserve her ability to save for retirement or a home in the future. Conversely, with too much assistance, you may compromise your own financial health; you may risk your child’s ability to create their own financial independence.
If you are making decisions as a couple, be careful to listen to each other throughout the listing of all of the pros and then throughout the listing of all of the cons without commentary.
SECOND: Seek perspective from others on the positives and negatives of the decision.
You might seek insights from friends, other family members, or your financial advisor or CPA. Talking through the pros and cons with a second “ear” is an invaluable way to add to both the pros and cons of the potential decision, clarify information, and surface your own values.
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, your CPA might suggest that a gift of stock with a low basis to an adult child with no income can result in no income taxes on the sale of the stock, which would mitigate the financial impact on you. Your advisor might recommend a low-interest loan to an adult child, which sets boundaries for financial assistance while providing support in dire circumstances.
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. Think five years from now to see what the decision will look like. For example:
What is the likelihood that my son will have gainful, meaningful employment within the next five years? Will our family dynamic change in positive or negative ways?
Projecting the decision in your head will allow you to envision what the decision will look like down the road—beyond tomorrow.
Twelve to 18 months after making the decision, look back at what you originally thought the end result would look like. Does the mental picture envisioned after making the decision 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 of using this process.
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 and your financial capacity.
