Decision making, Financial Philosophies

The effort reward matrix (aka the guide to life)

Food for thought!

What is shown in the matrix 👆 is illustrative and will vary based on your skills, experience and your subjective definitions of time, effort and impact.

The effort reward matrix is a decision making framework to help you make better decisions

On the vertical axis is impact – here impact means potential payoff or reward. There are very few guarantees in life and this is not one of them! 😅 On the horizontal axis is effort – this could time, money or a combination of both.

Starting from the top right quadrant (high impact and relatively easy to do). These are our 3 must dos.

  1. Sort out your superannuation (🇦🇺) / 401k (🇺🇸)
  2. Pay off high interest debts
  3. Build an emergency fund

Then moving to the bottom left (low impact and hard to do), also known as the area to avoid. For example cutting non-discretionary expenses. There’s no harm in trying to find a cheaper place to live, but that’s probably not the easiest thing to do.

Then there’s a choice. How interested much time and effort do you want to spend managing your money?

If your answer is, not much, then go to the bottom right (low impact and relatively easy to do). This includes saving and cutting discretionary expenses because they require no monetary outlay and are essentially about changing behaviour, or in the case of Raiz / Acorns (or really, any other automated investing app), very little money outlay and basically no change in behaviour.

You’ll notice that most types of investing fall into the higher impact but harder to do bucket so it is not surprising many people choose to do nothing. It’s also why the investing industry exists, right? Pay someone else to do it for you (if you don’t want to do it yourself).

 

So when should you use the matrix?

All the time!

Seriously, it’s a super helpful tool to figure out where you should spend your time, effort and resources.

Sit down and draw up your own version. See what works and doesn’t work for you.

Make better decisions, start today! 😎

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