Most financial strategies, from the very simple to the most complex, can be contemplated and compared once complexity is removed and replaced by answers to three key questions:
- What after tax money will I need to inject into the strategy and when?
- What after tax money will I receive in return and when?
- What risks are there that the first or second point won’t materialise as predicted?
At WealthSpan we call this decision making process – Warranomics and it’s based on the internal rate of return method of decision making adopted by the world’s most successful investor – Warren Buffett. Internal rate of return or IRR is a measure of a strategy’s cash flow over its life, expressed as an annual rate. This approach allows us to make meaningful comparisons between any number of wealth creation strategies – one simple example is:
Should I pay off my home loan or make additional contributions into superannuation?