Finance: A formula for prosperity
PHUKET: There is a fantastic equation that can be used in almost any decision you make in life.
I learned this from the supplement company that I work with but it also applies to financial planning, life planning, and many other areas in life. The equation is simply X=Y.
In the equation we can substitute any action for X so that Y is the result of that action.
An easy example: if you wish to lose weight and get more fit, then Y is ‘losing weight’, because that’s the desired result. X is the action you have to take to achieve the weight loss, such as eating healthier and exercising more.
If you are not getting enough Y – the pounds aren’t coming off – then you simply haven’t done enough X, so you need to exercise more and control your diet better.
If we substitute ‘investment’ for X and ‘return’ for Y, we can then use this framework to decide the best option between competing alternatives when considering what to do with our money.
For example, consider investments A and B (X) both return $100,000 (Y). Investment A requires $1,000,000 and investment B only $500,000. As Y is the same, we choose from the options of X.
I know this is a simple example but it demonstrates the point that when Y is the same we choose the easier X.
However, if both investments required $500,000 but A returned twice as much as B, we would obviously choose A. So if X is the same we will choose the better Y.
Another example of this could be where X and Y are equal but one X is less risky. In that event we choose from whichever X has less risk.
Of course, when investing, we don’t always have all the information that we need, but thinking along this framework can aid the decision making process.
This is even more the case if we have a very clear Y. Knowing exactly what you are trying to achieve makes it much easier to choose the best path to get there.
If you get to the train station without knowing where you want to go, you won’t know which train is right. Choosing the fastest train may simply put you even further in the wrong direction.
When planning our life, or our retirement, it is very important to make our goals as clear as possible, and then explore as many different paths as possible to get us there.
If our Y is very clear, then we can examine and choose the best X to get us there. If we are not getting enough of the result we want, it is often a case of us simply needing to increase the X.
In finance terms, that may mean we need to save more money out of our monthly pay packet. Using this framework may also help us decide if that money is best put towards real estate or some kind of financial investment.
In any event, it is a nice framework to substitute into any area of life, even our marriage. If a happy marriage is our desired result, we can look at how we spend our Friday night as a choice between various cases of X and how they will affect the Y we have chosen.
Often our actions don’t always match up with what we really want in life, simply because we don’t take the time to think things through all the way.
David Mayes, MBA, resides in Phuket and provides wealth management and life coaching services to expatriates around the globe, specializing in UK pension transfers. He is a regional representative of the Faramond Group, located in Kuala Lumpur, Malaysia. Faramond UK is regulated by the FCA to provide advice on pensions and taxation. He can be reached at 085-335 8573 or david.m@faramond.com
— David Mayes
