Lesson 1 - Financial Planning - Part 8

Making Financial Decisions

Insights

Making Financial Decisions can be a complex process for anyone to undertake. Every time we make a choice in life we are choosing one from a list of alternatives. To be able to properly plan which choice we should take, we must firstly determine what choices we have available. In most cases, determining what available choices we have to choose from will be the most difficult part. After we have a list of choices, we will secondly need to weigh each choice to see which one will provide the best outcome for our Goals.

Opportunity Costs

After you have made your list of choices, you must weigh each choice to see if it is the best choice for your Goals. This is accomplished by using a few simple measurements. Opportunity Cost is the most important of these measures. To put it simply, when you make a choice we need to think about what we are giving up if we had picked one of the other choices. For example, choosing to get a full-time job means that we won’t be able to lounge around the pool all day. That is the Opportunity Cost of getting the full-time job.

This might seem small but in big decisions opportunity cost can play a significant role. We must ask ourselves what is the Opportunity Cost when choosing one career over another. What is the Opportunity Cost of Renting a home versus buying a home. Or leasing a car verses buying a car. While some of the Opportunity Costs can be easy to measure in terms of a dollar amount, there are also other Opportunity Costs that can be tied to personal preferences and are harder to measure. Whenever you make a choice, always ask yourself what are you giving up if you choose one alternative over another.