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Creating Freedom Through Financial Independence


How To Make Better Financial Decisions: My 4-Part Framework

April 13, 2019

Today I want to chat to you about a seemingly simple topic – spending money.

But rather than tell you what to buy (hint: not much) and what to avoid (most things), I’ll share my own personal framework for making better financial decisions.

This stuff is like a mental checklist I run through, simply because I’ve learnt to be more thoughtful with my spending.  And that’s not because I’m a monk or we’re suddenly broke.  Instead, it’s down to the fact that every purchase we make has its own set of consequences – some good, some not so good.

Now of course, we could take the head-in-the-sand approach that most people take, or the hands-over-the-ears ‘la-la-la I’m not listening’ route.  But where would that get us?  Nowhere!

So it’s only rational that we consider what each purchase means and create a framework that helps us make better money decisions, effortlessly.


Financial Cost

We’ll start with the most obvious.  Every time we spend some cash, it lowers our bank balance, so there’s an immediate and unmistakable cost.

That’s not necessarily a bad thing.  Some things are definitely worth spending money on.  A trip to visit family you haven’t seen in a while.  Groceries to feed your household.  Phone and internet credit.  Beers to share with friends.  The list goes on.

But while we could justify almost any expense as worthy, we need to stop and question ourselves.

Why?  Because every single day that passes, if you’re not already financially independent, then you’re giving up your freedom for that spending.  So it had better be worth it!

And much of our spending isn’t one-off, it’s ongoing.  It may feel like that new piece of clothing you bought was random, or your car only needs repairs every now and then.

But if we zoom out a bit, it’s very likely that we’re spending a certain amount on these seemingly random things every single year.  So they aren’t random at all.  In fact, they’re usually quite predictable from year to year.

So they too need to be factored into our early retirement plans.  On that topic…


The Scary Math of Ongoing Costs

This point is worth repeating because it’s so important.

You probably know by now that you need around 25 times your annual spending saved up in sensible investments to be financially independent.  Invested in dividend-paying shares like index funds or LICs, your savings should produce a passive income stream of around 4%

So for every $1 you spend each year, you need $25 of investments to produce $1 of income to cover it.

So that $50 take-away meal each week ($2600 per year), is not just a small way to treat yourself.
It’s a $65,000 blowout!

How long will it take you to save that extra $65,000?  Still worth it?

Looking at it this way, some of your spending will likely scare the shit out of you.  And that’s probably a good thing.  But rather than dwell on it and think all is lost, let’s make it motivating…

For every $10 per week you can cut from your spending, that’s $13,000 less you need in investments to retire.  Not only that, but you’ve now got more cash each month for investing.

As I’ve written before, start stacking up those incremental savings and watch your progress.  Each time you lower your spending and increase your savings rate, plug it in this calculator to see your Financial Independence date creep ever forward.

So when I’m thinking about a purchase decision, I always think of the annual cost and multiply that by 25 to see what it’s really going to cost, in terms of how much investments we need to sustain that.

Many times that’s off-putting enough!  But if I’m still considering it, I’ll move to the next layer of my decision-making framework…


Happiness Outcome

Although it’s rarely said, the goal of much of our spending is to live a happy life.  And that’s perfectly fine.  There’s no finer goal than each of us building meaningful lives.

But there’s a disconnect.  It turns out we’re really bad at predicting what makes us happy.

So when I’m thinking about spending money, I try to answer this question…

Will this make me any happier?  Not just right now, but in a lasting way.  And the answer is nearly always, no it probably won’t.

It’s easy to get short-term sugar-rush highs of happiness, with a holiday or a new phone purchase.  But those fade quickly, leaving you back where you started, only with less cash than you had before.

In truth, the bulk of our happiness comes from the following:

  • A safe and comfortable place to live
  • Having access to water and nutritious food
  • Being healthy
  • Meaningful relationships
  • Personal freedom
  • Learning and growth
  • Helping others
  • Enjoyable work and purpose

So these are the key areas to focus our energy and effort on.  But most of what the average Aussie spends their money on, has either little to do with these categories, or is massive overkill!  This means all that cash is wasted, bringing no long term benefits.

Next time you’re about to spend money, think about this point.  And consider whether that purchase is going to bring you any lasting happiness.  Now I know it’s not always this cut-and-dry, but it’s at least worth pausing for a minute to think about.


Environmental Consequences

This layer of consideration has really come onto my radar in the last few years.

After seeing shows like War on Waste, it’s hard not to be deeply troubled and upset by the massive consequences of our seemingly small actions.

As individuals, a plastic bottle, coffee cup or piece of clothing thrown out doesn’t feel like much.  But we’ve gotta remember, there’s 25 million of us ‘individuals’ in this country alone!  So our habits as individuals, can lead to a very large issue as a nation.

And saying “it’s only me”, or “it’s only this small thing” is not an acceptable answer.  If that’s the case, then why not take a dump in the street?  After all, it’s only you!

The problem with this attitude is, we then have millions of people thinking their actions don’t matter, when nothing could be further from the truth.

If you haven’t heard, Australia has a ridiculously embarrassing waste problem.

Further, have you spent any time in a food court recently?

Not that long ago, on a rather un-frugal day, I was caught out having lunch at a shopping centre.  I noticed this particular food court had only general bins, no recycle bins.  So everyone’s packaging, drink containers, plastic bags and cutlery was all getting thrown in the general waste (landfill) bin.

After sitting there for about half an hour, I lost count the amount of people dumping tray after tray of paper, packaging and leftover food into the bins.  As I sat there, I realised this is only half an hour, out of one day!

Imagine the amount of waste for an entire day, an entire week, or a whole year!  And this was only one shopping centre out of the thousands in the country!

Thinking about the enormity of it all, I started to feel extremely sick and saddened.  So of course, when I finished my meal, I took my rubbish home with me to put in my own damn recycle bin.

This is now slowly starting to improve with more shopping centres adding recycle bins, which is a good start.  But man, it’s still insane the amount of waste we generate just from picking up a bite to eat!

Anyway, back to making better financial decisions…

Nowadays, I try to think about all the resources that went into making something before buying it.  Take a t-shirt for example.  It takes 2700 litres of water to create, plus the resources, plus the transport and factory pollution.

Almost every manufactured item you buy will have been made in a factory spewing out smog.  And almost everything is heavily wrapped in paper, cardboard or plastic, contributing to deforestation and yet more waste.  And you can be sure there’s been massive amounts of transport involved – in all those materials, in getting it to the ports, in shipping it across countries, and getting it to the shop, and in us going to purchase it too.

It’s a difficult and inescapable fact of modern life.  Of course, it doesn’t mean we simply opt out of modern niceties and never buy anything.  But instead, it means we become conscious about what we choose to buy.  Aware of all the resources that have gone into it and the environmental costs of producing it.

Ultimately, this helps us in being much more selective to determine whether that purchase is really worthwhile.


Opportunity Cost

After running through the above thoughts, this is the final step.  Opportunity cost is a fancy way of saying “what else could the money be used for?”

The most obvious answer of course is, investing!

Let’s say you’ve got a 15 year stretch until you reach Financial Independence.  As an example, consider having $50,000 tied up in a couple of near-new vehicles, rather than $10,000 for a good used car and a bike.

This is $40,000 more than is really required.  So let’s say you choose the more frugal transport option and invest the extra $40,000.

With a return of 7% per annum, over 15 years that $40,000 would grow to be worth $110,361.

So, the money foregone is not $40,000.  The opportunity cost here is actually over a hundred grand!

That one chunk alone is a massive step towards a free and wealthy future.

But maybe you’re in a different situation…

Maybe you’re already retired with enough investments to comfortably sustain you.  Now when you spend, you’re not forgoing any freedom, which is great.  But maybe you’ve got bigger plans for your savings.

Like me, maybe you’re excited by growing your money and being able to give away tons of it over your lifetime.  So let’s consider the opportunity costs now for an early retiree who receives a windfall of $100,000, whether through bonus income from their optional job, or an inheritance.

Sure, they could buy themselves a new Range Rover, or go on a number of elaborate holidays.  But they’re likely to remain just as happy if they instead direct that money to a more meaningful purpose.

We’ll assume our early retiree is currently 40, and they’ll give this money away at age 90, a decade or two before the end of their big adventure on earth.

Investing this bonus $100,000 would compound to become almost $3 million!

Or $2,945,703 to be more precise.  Holy shit, that’s what I’m talking about!

Imagine watching this charity pot grow and the feeling of giving so much money to good causes, rather than blowing it on a couple of short-term treats!

This is my last layer in the decision-making process.  And if you’re anything like me, thinking of growing your money to buy your freedom, and then later directing it towards improving the world somehow, is way more interesting than choosing to spend more simply because you can.



All up, this four-part mental checklist helps me make much better financial decisions, and my hope is it’ll help you too.

None of it is to say that spending money is bad.  Rather, that it should be done thoughtfully.

After running through this stuff in your head a few times, you’ll quickly realise that many things we spend our money on just don’t make sense, if we’re being a rational and thoughtful human.  The result is, you’ll be more content with the money you do spend because it’s passed through a rigid assessment first.  But there’s always exceptions, so we’ll never get it perfect.

That said, we must make a conscious effort to make better money choices, at least initially, until this self-questioning habit is formed.  Otherwise, that beautiful high savings rate we’d like to have will remain forever elusive.

My spending framework reminds me what the purpose of money is.  And it helps keep my decisions in line with my values and what’s important to me.

Maybe you have a different approach for making better financial decisions.  If so, I’d love to hear about it.  Share your tips in the comments…


27 Replies to “How To Make Better Financial Decisions: My 4-Part Framework”

  1. I follow a somewhat similar process to yourself with this Dave. One of the first questions I always ask myself is “Do I need this?”. If I do then I just buy it (usually after a bit of shopping around to make sure I’m getting the cheapest price). If It don’t need it then it becomes more of a question of will this be something that makes me happy, and for how long will it make me happy. I don’t tend to find myself wanting material things like clothes or electrical gear too much so that’s easy enough, and I’m comfortable with what we’re spending on groceries, utilities, stuff for the kids etc.

    My biggest problem is I have a sweet tooth and am constantly being tempted by chocolate, donuts, sweets and the like so I try to ask myself if I’m genuinely hungry or just wanting something tasty. And then I think about how much exercise I’m going to need to do to burn it off…

    1. Dave, great post. I have just started on this journey, about 8mts now and am already feeling the financial benefits. For myself it’s the little regular payments that add up, so i have been one by one eliminating as many of those as possible and i have found it has been a massive help to date. It’s incredible the benefits of comparing health insurance and phone plans ect!

      1. Thanks Essen. Great to hear you’re already seeing the benefits! And awesome job cutting down those ongoing payments. Small regular purchases and subscriptions are an easy way to make lots of money disappear unknowingly!

    2. Thanks for sharing your approach mate. The old sweet tooth ey 🙂 Must admit I also love a good donut or some dark chocolate! Looking at it through the lens of how much exercise it equates to is a great idea. Do you find that works as a motivation to stop yourself?

      “Do I need this?” is perhaps the best way to look at any purchase, though that assumes the person is willing to admit the difference between their wants and needs!

      I actually have trouble sometimes trying to figure out what people spend money on, since the vast majority of the time I don’t feel the need for anything. But of course I have to stretch the imagination and come up with some ideas to seem relatable 😉

      1. I find that thinking of how much exercise I’d need to do to work off somethign sweet works a fair amount of the time. It’s definitely not a sure fire thing, but it definitely reduces the spending that I’d be doing otherwise!

        As you say a lot of it comes down to what people thinking they need actually being a want. You don’t need an SUV for your kids, it’s a want although admittedly it would maybe make things easier. Likewise a lot of families probably don’t need a second car, they just want it because it makes life a bit easier. And then they buy a brand new second car, because well why not and then they wonder why they’re not getting ahead…

        You definitely seem to have that frugal mindset come easily to you, I find that I can do it with some areas of my spending but not others. I think a large part of the problem is likely that I used to spend a lot more when I was living overseas and once you’ve started down that road it’s hard to go back. Still, looking at my budget compared to most other I still seem to be doing ok.

        1. Awesome that it actually works a fair bit!

          Interesting! That could very well be the case, and you’re definitely doing well! We did used to spend way more than we do today, but it’s true I’ve never had any long standing expensive habits (though I did imagine a much more expensive life eventually, but that desire has now melted away).

          Yeah it’s funny (unfortunate?), making life that little bit easier or nicer across the board ends up with most people broke and with a mountain of debt/bills – life isn’t quite so easy then!

  2. Thanks SMA, good article.

    Yes, I tend to focus on the opportunity cost one the most – and consider the lifetime of returns I am giving up by making an expenditure in a depreciating (consumer) item, compared to the alternative. I’ve also found for me separating that out into an identifiable bucket – I use Raiz, but there are other ways of doing it is additionally motivating, as it becomes essentially a small but growing fund out arising of a series of small disciplined decisions.

    1. Cheers Explorer!

      Totally agree, that’s probably the biggest way to motivate people. As soon as someone learns the power of compound interest and starts thinking in terms of opportunity cost over 50 years, it’s mindblowing how much things are really costing.

  3. Hi Dave,

    I love that you have taken this beyond just hitting FI or retirement. Instead of thinking about what you can start spending all that money on, think about the ongoing impact of how you life and what you do with your money. Great stuff.

    Cheers, Frankie

    1. I appreciate that Frankie! Don’t want to get overly preachy but this stuff is really important for all of us. Thanks for your support mate 🙂

  4. After so many false starts over the years with budgeting, we have landed on the one that suits us best (no right and wrong here). We now budget by percentages.

    If you are young with time on your side then 20/20/60 approach of 20% invest/20% save for major purchases/60% everything else will work OK. If you are older like us before you sort your mess out (ha!), then we have 60/20/20 approach version of the above with 6% of income being invested etc ….. it’s much easier to start early, than trying to play catch-up (which you simply cannot truly do). I am thankful all my daughters have taken this seriously and are investing a goodly percentage of their incomes every fortnight.

    There is no perfect way to budget or organise money as long as the math works and you. Also, automate as much of it as possible. Automation is my key winning money tip.

    1. Thanks for sharing Phil. Great lesson in there about automating savings and starting early due to the power of compounding!

      I think that’s similar to the Barefoot approach? That would definitely work and put folks ahead of the game, since most people save close to nothing. Personally I never liked the idea of dedicated buckets and percentages, but certainly see how that works wonders for others. As you say, whatever works for you is the best approach to take 🙂

  5. Hi Dave,
    not that you are a financial adviser, , but
    I may come into some money. anywhere between 100k and 200k within the next 6 months.
    If I got the $200k ,my idea was to put 80k in super, $40k in blue chip shares and most of it in LICS, and 60k itowards the investment property I have. and the rest for renovations that I need to do.
    what do you think. I am single, own my home, and am 56, and may retire at 60.

    1. Hey Sue, thanks for the comment.

      I can’t tell you what to do obviously. But out of those options, paying down your investment property debt and putting money into super are the two most attractive options considering you’re pretty close to retirement. Your super is likely mostly invested in shares anyway so you’d still be buying shares just in a different way.

      That’s probably what I’d consider. Again, not advice, but hope those thoughts are helpful. Cheers!

  6. Great read Dave,
    Completely agreed about on going costs. I think it’s the elephant in the room for most people.
    I sit down and check my ongoing costs every year and try to minimise them. Makes a massive difference as you explained especially in the long run.

    Really nice to see you post on waste and it is too true that as a country, we should be ashamed of ourselves on that front.

    I also stopped budgeting ages ago. 20/20/60 is a great ratio to start with as per Mr HM (Phil) above but then that 60% can be 30k or 100K depending on how much money one is making so that can translate to a massive opportunity cost.
    So for me , unless the money contributes to the ” bulk of our happiness list ” that you put nicely in the post, it will go straight to savings/investing.

    1. Thanks very much Paul – I like your approach 🙂

      Yeah I think that’s absolutely true, it just pays to be mindful of everywhere our cash is going so we understand it fully and can decide whether that’s really a good idea or not.

      Totally agree with you on the buckets approach! It’s not for me either, but it’s probably not a bad rule of thumb for those new to saving.

      It means those on average incomes and higher will be blowing substantial amounts of money. For those interested in Financial Independence, I don’t see the value in having ‘splurge’ account for example, there should be nothing exciting about wasting money. If you really want something and it’s worth it, then buy it. But if not, just save and invest all your spare cash, minimise the waste and work on getting your freedom first.

      After that do what you like with extra cash, within reason. But until then, any money wasted is costing real freedom for no extra happiness.

  7. It’s interesting how being on the FIRE path makes you evaluate your mindset and decision making approach. Being on high incomes made us pretty lax in the budgeting department, especially since we could still see our savings growing easily despite living a consumerist lifestyle.

    Now that we have a young one we’re changing our spending habits. I ask “Do we really need this?” before every purchase. If we identify that it’s a true need and not a want, I try to see if we can get a secondhand version for cheap before we look at buying brand new. Going minimalist has been the best decision we’ve made!

    I also like your approach using opportunity cost as a factor in decision making. It adds gravity to the decision, makes you think what opportunities you could lose tomorrow if you made this spending decision today.

    1. Thanks for sharing your approach! Minimalism is something I really gravitate towards but I never knew why – but it makes sense on many levels.

      Great to hear the simple self-questioning is helping turn the ship around, it’s pretty powerful once you get in the habit of it! Great comment Ms FireMum 🙂

  8. Nice post, Dave.

    Here’s a quote from multimillionaire Jim Penman, founder of the company that runs Jim’s Mowing and Jim’s everything else.

    “I don’t like spending money and I don’t enjoy expensive things,”

    “I just don’t think it’s right — the purpose of money isn’t to live a luxurious lifestyle, it’s to be financially secure but with a sense of purpose”

    1. Thanks Robert, interesting quote. There’s much more important things you can do with money than spend it on a fancy lifestyle!

  9. Dave, have you come across the Buyerarchy of Needs?

    1. do without… does it really spark long-term joy?
    2. use what you have
    3. borrow or swap
    4. make it yourself
    5. buy used
    5. buy new

    1. I haven’t seen that before, but it’s pretty damn good! Thanks for posting!

  10. This is great – especially the first and last points!

    This is exactly why we’ve almost eliminated takeaway food – $50 even twice a month is $1,200 a year, which translates to around $1,000 wasted money each year (even allowing $200 to replace those 24 take out meals with home cooking). That means we need to invest an extra $25,000 to maintain that (more unhealthy) lifestyle – no thank you!

    If we decide we do need it, then the next step for us is “Can I get it cheaper? and then “Can I use less?” We’re still gradually optimising our household budget, but we’re finding things we buy regularly that we can get cheaper by switching brands or buying in bulk. I’m also realising I don’t need to use as much shampoo or need to put conditioner in my hair as regularly as I thought I did. These changes are very small, and won’t save us a huge amount of money, but every little bit counts if they’re sustainable changes.

    Still working my way through your back-catalogue 🙂 So much great stuff in this blog! Keeping me focused on the goals and ways to get there.

    1. I love that you’ve done the sums on that one. $20 a week sounds like peanuts, but really it’s a $25k cost as you said.

      It’s super cool that you’re reading all these older posts, thanks! Sometimes I wonder if they get forgotten about 😉

      1. I’m addicted to reading your old posts at the moment! So much great stuff in them.

        It is great to read about how you have evolved on your journey as well, and to read what you’ve learnt along the way.

        Such an inspiring blog – my current fav!

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