Financial decision making
It is important for decision making to be based on comparisons of calculations. A strategic plan based on individual goals should be investigated. The following questions addresses the importance of making comparisons in decision making,
1. Developing a personal strategic plan:
- What time span is the plan to cover (1-5 years, 5-10 years)?
- What is the main personal focus over this time period?
- What is to be achieved in the time span in addition to the main focus?
- Are there any other financial issues to be addressed in the time span?
(After addressing these issues, a personal strategic plan with aims and objectives can be developed)
2. Checkpoint,
- How often are these aims and objectives to be reviewed (e.g. yearly)?
- How are the elements in the strategic plan achieved (e.g. through savings, inheritance, capital gain)?
- Is the strategic plan realistic?
(After addressing these questions, it is now possible to develop an action plan that sets out what needs to be done to achieve the aims and objectives in the strategic plan)
3. Developing an action plan:
- What level of income is expected to be earned over the time span?
- What percentage of income is to be spent on a weekly basis?
- What percentage of income is to be set aside for bills?
- What percentage of income is to be set aside for investing?
- What percentage of income is to be set aside for holidays?
- What percentage of income is to be set aside for emergencies?
- How is clothing to be financed?
Spread sheets:
Spread sheets can be utilised to aid in decision making. A ‘ready reckoner’ can be developed to achieve a quick method for comparing various levels of borrowings.
Ready reckoner using flat interest rate:
It can be seen that the ready reckoner shows that $80,000 invested as a flat interest rate of 7% would generate $5,600 interest per year. (formula: $A7*F$3/100)
Ready reckoner using effective interest rate:
A ready reckoner using effective interest rate shows that $80,000 invested at compounding interest rate of 7% would generate interest of $5,783.21 per year. (formula: ($A7*(((1+((F$3/100)/12))^12)-1)) ) Note: Similar spreadsheets can be made with quarterly and yearly compounding time periods.
By using spreadsheets, this gives the investor an image of how much the value of an investment may yield with different interest rates.
(Source: Accounting Concepts and Applications 4th edition, Phillipa Greig, Joan Mackay, Stacey Beaumont, Rosette Sanger, 2008)
