A Framework for Better Financial Decisions

The previous articles have supplied the elements of a decision: consequences, the next-best use, cash flow, net worth, and the common trade-offs. This article arranges those elements as a checklist that can be used before any commitment large enough to change the year’s tax, the stock of debt, liquidity, or a goal that already has a date. The checklist is deliberately short. A framework that cannot be completed in one sitting will not be used.

Six Questions

1. What is the purpose, and what is the date? If the purpose cannot be stated, the commitment is a preference, not a plan. If the date is inside three years, instruments that can fall sharply in that window are unsuitable.
2. What does it do to cash flow? Can the household service the commitment if one income is interrupted for six months, using only the emergency reserve?
3. What does it do to net worth? Does it add an asset, add a liability, or exchange one for the other? Is the asset divisible if a part of the money is later required?
4. What is the tax consequence? Does the commitment change the head of income, the regime comparison, or the capital-gains computation if an existing holding is sold to fund it?
5. What is the next-best use of the same money? Name a specific alternative: an expensive balance, the emergency reserve, the existing systematic plan. If that alternative is clearly superior on a certain cost — for example interest at 36 per cent — the commitment waits.
6. Who else must be able to find this decision? A spouse, and, where one is engaged, the financial planner. A commitment that exists only on one person’s telephone is not yet a household decision.

When to Use It

The checklist is for commitments that are not routine monthly expenditure: a loan, a property booking, a large redemption, a change in tax regime, a new investment folio, a vehicle purchased on instalments. It is not for groceries. Using it for groceries will exhaust the household’s patience and the framework will be abandoned.

If the answers to questions 2 or 5 are adverse, the work stops. There is no need to complete a sophisticated tax note on a commitment that cash flow cannot support or that is inferior to retiring an expensive balance.