3 Secrets to Making Smart Financial Decisions

Making good choices about your money can pay off -- and these tips will make it easier.

Every financial decision you make, big or small, impacts your life.

Consistently making good choices can help you earn a high credit score and build wealth. However, it can be a real challenge to make the best choice all the time, or even most of the time -- especially since there's a lot of incentive in our culture to spend your money. But these three secrets to success can help you make decisions that pay dividends more often than not.

1. Define your financial goals

The first step to making smart money choices is knowing what you want your funds to do for you. Whether you want to retire early, see the world, or amass a fortune to give to charity, chances are good you have some aspirations for your financial life.

By defining your financial goals, you can better frame your financial choices, asking whether your actions help or hinder you in achieving them. If you want to retire early, for example, setting a specific goal lets you determine how much to save and invest each month. It could also prompt you to avoid things -- such as buying an expensive house -- if they make it impossible to fund your retirement account.

Outlining your financial goals also makes it easier to make short-term sacrifices for long-term benefits. If you know why you're giving up a meal out or foregoing a splurge, it's often easier to do.

2. Think long-term

When you make a financial decision, don't just think about the immediate impact. Also consider the far-reaching ramifications.

If you're considering using your credit card to fund a vacation, for example, it's easy to just think about the fun you'll have. You may even tell yourself you'll pay off the debt quickly. But pause to think about what it means over a longer time span.

Will a vacation loan restrict your future income so it's harder to live on your budget? Is that more likely to lead to additional debt? Could the monthly payments mean you put off other goals such as, say, saving a down payment for buying a house? Could property values go up in the meantime, causing you to pay more for your house, sacrifice retirement savings, and work longer?

By looking beyond the moment and considering such far-reaching effects of your choices, you're almost guaranteed to make better ones.

3. Always consider total costs

Many companies -- including lenders -- urge you to look only at the monthly payment. For example, leasing a cell phone may cost only $20 a month or taking a big loan may cost only $500 a month. This focus on monthly payments can often make whatever you're interested in doing seem affordable.

But don't look at the monthly cost alone -- total cost matters a lot, too. Just because you can afford a monthly payment on something doesn't always make it a good deal or a good fit for your budget. And if you stretch out your payoff timeline, you usually end up paying far more than if you had made higher monthly payments for a shorter time.

If you consider total costs, you can better assess how your decisions affect your future financial goals and how they will shape other financial choices over the coming months and years. These three steps can guide you in the right direction, and even make you happier with where you end up financially.