Financial decisions often involve many criteria. It can be difficult to choose among several options that differ according to multiple criteria, some of which favor each option. A decision matrix makes it easier to compare the options and helps clarify your decision-making. A decision matrix stops you from going around in circles, flipping from one choice to another.
A decision matrix is particularly useful when making a complicated financial decision, such as shopping for a home mortgage, auto loan, credit card or student loan, buying a car or home, picking investments or choosing a college.
To create a decision matrix, draw a grid on a single piece of paper. List the choices across the top of the page, with one column per option. List the criteria or characteristics in the rows.
Here’s a sketch of a decision matrix for comparing loans.
Example decision matrix for choosing a loan
This decision matrix compresses the choices and criteria to fit on a single page. This lets you see the most important differences all at once.
Choose criteria that are important to you. When choosing a loan, this might include criteria relating to cost, such as the interest rate, fees, monthly payment and total payments. When choosing a college, this might include financial fit, academic fit, social fit, extracurricular fit and environment fit. Or, it could include distance from home, student-faculty ratio, net price, cleanliness of the dorms, and magazine ratings. When choosing a home, this might include location, location and location.
Fill in the matrix by writing key details within each cell. Good examples include numbers, yes/no answers and other one-or-two-word summaries.
If the decision matrix is more than a page long, you will need to simplify it by removing rows that do not differentiate among the options.
MORE FOR YOUNotice how some of the criteria are the same for all of the options? You can eliminate the Fixed or Variable Rate, Fees, Down Payment and Cosigner Required dimensions, since they will not affect your choice.
Next, some of the rows may differ, but the difference might not be important to you. For example, if you don’t care whether the lender’s call center has evening or weekend hours, you can eliminate the Call Center Hours row. Other rows may differ, but the difference may not be big enough to matter. Eliminate any rows for which there isn’t a significant difference in the scores.
It is also helpful to cluster related criteria. You could group all of the cost-related rows together, followed by a group of all of the convenience-related rows. You could even roll up the ratings for each criterion into an overall rating for the cluster.
If you are using a piece of paper instead of a spreadsheet, cross off the unimportant rows and make a clean copy of the decision matrix on a new piece of paper.
Within each row, highlight the cells using a traffic light theme. Use green for the cells that are better than the rest and red for the cells that are worse than the rest. Do not shade any cells that are average.
For each column, count the number of green cells and the number of red cells. Also, subtract the number of red cells from the number of green cells.
The counts may help you identify the overall winner, if one column has many more green cells and fewer red cells than the others. The difference between the number of green and red cells makes sure that an option’s strengths in some criteria are not offset by weaknesses in other criteria.
If there’s a tie, you could treat the most important row as a tie-breaker. Or, you could assign weights to each row based on their importance to you and calculate a weighted sum so that the counts are adjusted based on importance.
If you find it difficult to choose a winner, try eliminating the losers. That will narrow your choices to just a handful of options.
As you go through this process, you may find your priorities changing. Or, you may identify a criterion that you overlooked. It is straightforward to update the decision matrix with the new criteria and priorities.