You will apply a written five-question check to three upcoming money decisions.
Knowing about opportunity cost and sunk costs is one thing. Remembering to use them at the moment a decision comes up is another, and that moment usually arrives when you are tired, in a shop, or reading a message that says the offer ends tonight. A habit needs a short routine you can run without thinking. In this exercise you write that routine down as five questions and run three of your own decisions through it.
It takes about 25 minutes. You need a notes app, a sheet of paper or a spreadsheet, and the time value of money workbook from lesson 6.4, Build your time value of money worksheet, for one of the questions.
Choose three money decisions you expect to face in the next three months. They work best when they are different kinds: one purchase, one recurring cost such as a subscription or a contract, and one about what to do with money you already have. Each should involve at least S$100, so the answers matter.
Write each one as a single line with the amount and the date you need to decide by.
Copy these five questions under each decision. They pull together the whole of modules 5 to 7.
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. The second uses the two measures from lesson 7.2, Price a decision in hours of work and years of growth: divide by your after-tax hourly pay, and run the amount through FV at a modest rate you choose. The third comes from lesson 7.3, Sunk costs are not a reason to keep going. The fourth places the choice on the triangle from module 5. For a purchase, you score what you get against the alternative use of the money; for a commitment, note how easily you can get out. The fifth question is there to stop the first four turning into a case for something you had already decided.
Answer each question in a line or two. Use real figures where you have them and mark any you estimated. Then write your decision and one sentence on why.
The decision can be yes, no or not yet. "Not yet, until the bonus is confirmed" is a perfectly good answer, as long as you write down what you are waiting for.
Here is Aisyah from lesson 7.2. Her after-tax pay works out at about S$24.23 an hour, and she uses 3% a year for future value. All figures are made up for the example.
Decision one is a S$3,000 evening course in data analysis, decided by the end of next month. The best alternative is keeping the money towards a flat renovation she is saving for. In hours, S$3,000 is about 124 hours of work, and =FV(3%, 10, 0, -3000) gives S$4,031.75 in 10 years. Nothing is sunk yet: she has paid no deposit. On the triangle, the return is a possible raise or a better job, which is uncertain; the risk is that she does not use the skills; once paid, the money is not liquid, because the course fee is non-refundable after the first week. She would change her mind if her employer offered to fund a similar course. Decision: yes, after asking her manager first.
Decision two is upgrading her phone for S$1,600 when the new model comes out. The best alternative is keeping her current phone, which works, and putting the S$1,600 aside. That is 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 phone gives no financial return, and spending the money now takes S$1,600 out of her savings. She would change her mind if her current phone failed. Decision: not yet, and she will look again if the phone breaks.
Decision three is renewing a 12-month gym contract at S$180 a month. The best alternative is a cheaper pay-per-class option, or running outdoors. A year of the contract is S$2,160, about 89 hours of work. If she kept paying it for 10 years, the same money saved monthly would reach =FV(3%/12, 120, -180), which is S$25,153.46. The joining fee she paid two years ago is sunk. An early termination fee, if she signs and leaves early, is a future cost, so she checks the contract and notes it. The return is to her health rather than her bank balance, and she goes three times a week, so she values it highly. She would change her mind if her attendance dropped below once a week for a month. Decision: yes, renew.
Notice that two of the three answers are yes. The check is not built to say no. It makes sure that when Aisyah says yes, she knows the price in hours and years, and she knows what she gave up.
A finished check has three decisions, each with a deadline, all five questions answered in a line or two, figures marked as real or estimated, and a decision with one sentence of reasoning. Keep it somewhere you will see it again. When each of your three deadlines arrives, the work of thinking is already done and you only need to look at 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).