Every Financial Decision Has Consequences

Every financial decision a household takes produces consequences that continue after the day of the decision. Some of those consequences appear on the next payslip. Others appear only after several years, as tax, as interest, as a reduction in liquidity, or as a goal that can no longer be funded on the original date. Wealth Optimization is, in large part, the habit of examining those consequences before the decision is taken, rather than explaining them after they have arrived.

This series does not introduce a new product. It introduces a method of looking at choices the household already makes: to borrow or to wait, to spend a bonus or to assign it, to sell an asset or to hold it, to raise an existing investment or to open another. The first article states the principle. The articles that follow give it a vocabulary — opportunity cost, cash flow, net worth — and then a working checklist.

Four Classes of Consequence

First, tax. The same rupee received as salary, as rent, as professional income or as a capital gain is not computed in the same way. Series 1 of this pillar described those heads. A decision that changes the head — a sale, a change of use of a property, a change in the composition of salary — changes the tax of the year and sometimes of the years that follow.

Second, the cost of debt. An instalment that is comfortable in the month it is sanctioned may remain comfortable only if income is uninterrupted. Interest on an unsecured balance continues whether or not the household later regrets the purchase. The series on loans will examine this at greater length. It is enough here to note that borrowing is not a single category of decision.

Third, liquidity. Money placed in a public provident fund, in an under-construction flat, or in a five-year notified bond cannot be recalled on the same terms as money placed in a liquid fund. A decision that reduces liquidity is not therefore a poor decision. It is a decision that must be matched to the date on which the money may be required.

Fourth, existing goals. A new commitment that absorbs the surplus previously assigned to an education date or to a retirement contribution does not leave those goals untouched. It postpones them, or it reduces the amount that will be available on the original date. That effect is often omitted from the conversation because it is not printed on the invoice.

Small Decisions Accumulate

A single festival purchase financed by a revolving credit-card balance is a small event. Twelve such events in a year are a change in the household’s interest cost and in the surplus available for the systematic investment plan. A single year in which the tax regime is not recomputed after a home loan is a single year. Five such years are a material difference in the amount retained. The principle does not apply only to large transactions.

Recording the Decision

A household that writes, in a few lines, what was decided, why it was decided, and which goal or reserve was affected, is in a position to review the decision a year later. A household that relies on memory is not. The annual review described later in this pillar is useful only if the year’s decisions can be found.