Apply a written five-question check to three money decisions coming up.
Most people who have learned about opportunity cost and sunk costs forget to use them when a real money decision comes up. Those decisions tend to arrive when you are tired, standing in a shop, or reading a message saying an offer ends tonight. None of these is a good time to work through theory. A habit helps more: a short routine you can run without thinking.
Set aside about 25 minutes. You'll do two things: write the routine down as five questions, then run three of your own decisions through it. Have a notes app, a sheet of paper or a spreadsheet ready, along with your workbook from lesson 6.4, "Build your time value of money worksheet". One of the questions depends on it.
Pick three money decisions you expect to face within the next three months. Using different kinds of decision gives the routine a fairer test, so aim for one purchase, one recurring cost such as a subscription or contract, and one choice about money you already hold. Each should involve at least S$100 so the answers matter. Write each decision on one line with the amount and the date you must decide by.
Together, the five questions draw on everything in modules 5 to 7. Write them out under each of your three decisions, in this order:
What is the best alternative use of this money or time? What does it cost in hours of work, and what would it grow to in 10 years? Which costs are already sunk, and which are still ahead? How does it score on risk, return and liquidity? What would change my mind?
The first question comes from lesson 7.1, "Every dollar spent is a dollar not doing something else". Your answer is the most likely other use of the money or time.
The second question comes from lesson 7.2, "Price a decision in hours of work and years of growth", and uses both of its measures. For hours of work, divide the amount by your after-tax hourly pay. For growth, pick a modest rate yourself and use the FV function in your lesson 6.4 workbook over 10 years. For a lump sum, use =FV(rate, 10, 0, -amount). For a monthly amount, use =FV(rate/12, 120, -monthly amount).
The third question comes from lesson 7.3, "Sunk costs are not a reason to keep going". A sunk cost is money you have already paid, such as the price of the phone you already own or a joining fee. It does not count in the decision. A future cost is one you might still have to pay, such as an early termination fee. Future costs do count, so look up the amount and write it next to the decision.
The fourth question places the choice on the risk, return and liquidity triangle from module 5. For a purchase, weigh what you get against the alternative use of the money. For a commitment, write down how easy it would be to get out of it.
The fifth question is there to stop you using the first four to justify something you had already decided before you started.
Keep each answer to a line or two. Use real figures where you have them and mark any estimates as estimates. Then record each decision as yes, no or not yet, with one sentence giving the reason. Not yet counts as a decision only if you state what you are waiting for, for example "Not yet, until the bonus is confirmed."
Aisyah is the example learner from lesson 7.2. She earns about S$24.23 an hour after tax and uses 3% a year for future value (every figure in her example is made up).
Her first decision is a S$3,000 evening course in data analysis, with a deadline at the end of next month. The alternative is to keep the money in savings for a flat renovation. The course costs about 124 hours of work, and =FV(3%, 10, 0, -3000) shows the S$3,000 would grow to S$4,031.75 in 10 years at 3%. She has paid no deposit, so nothing is sunk. The possible return is a raise or a better job, though that is uncertain, and the risk is that she never uses the skills. Liquidity is poor once she pays, because the fee is non-refundable after the first week. She would change her mind if her employer offered to fund a similar course. She decides yes, but will ask her manager first.
Her second decision is whether to upgrade her phone for S$1,600 when the new model comes out. The alternative is to keep her current phone, which still works, and set the S$1,600 aside. The upgrade costs about 66 hours of work, and =FV(3%, 10, 0, -1600) gives S$2,150.27. What she paid for her current phone is sunk and does not count. A new phone brings no financial return, and buying now takes S$1,600 out of her savings. She would change her mind if her current phone failed. She records not yet and will look again if the phone breaks.
Her third decision is whether to renew her 12-month gym contract at S$180 a month. The alternatives are a cheaper pay-per-class option or running outdoors. A year costs S$2,160, about 89 hours of work. If she saved S$180 a month for 10 years instead, =FV(3%/12, 120, -180) gives S$25,153.46. The joining fee she paid two years ago is sunk. If she signed and then left early, she would owe an early termination fee, which is a future cost, so she checks the contract and notes the fee. The return is to her health, which does not show in her bank balance. She goes three times a week and values it highly. She would change her mind if her attendance dropped below once a week for a month. She decides yes and renews.
She ends with two yes answers and one not yet. The routine isn't meant to produce no answers. When you do say yes, it makes sure you know the price in hours and in years, and what you gave up.
A finished check has three decisions, each with a deadline. Each decision has all five questions answered in a line or two, every figure marked as real or estimated, and one sentence of reasoning.
Keep it somewhere you will see it again. When each of your three deadlines arrives, you have already done the thinking and only need to reread what you wrote.
Write out the check for three decisions you face in the next three months, and record what you decide for each.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).