Copyright Goodheart-Willcox Co., Inc. Section 1.2 Managing Your Personal Finances 15 is having the ability to understand basic topics related to finance such as wisely making, spending, and saving money. Individuals, families, businesses, and government apply multiple strategies when making decisions to satisfy needs and wants. Some of those strategies are cost-benefit analysis, marginal analysis, trade-offs, and opportunity costs. In other situations, sometimes common sense is the best strategy. Cost-Benefit Analysis Cost-benefit analysis is a method of weighing the costs against the benefits of an action, a purchase, or a financial decision. It shows that it is in your interest to take an action or make a purchase only if the benefits are at least as great as the costs. For example, if you want to vacation in a distant place, you may need to decide whether to drive or fly. Flying costs $350 more than driving. It also saves you eight hours of driving time. Is the benefit of saving eight hours worth the cost of $350? The choice depends on the value you place on time saved and on how much money you can comfortably spend. The choice will be different for different people. You can use cost-benefit analysis to decide whether or not college is worth its cost, whether a new car is worth a higher cost than a good used car, or whether a big wedding is worth its cost compared to the cost of a small, simple wedding. You simply calculate the cost, put a value on the benefits, and compare the results. In some situations, you will be weighing dollar costs against social, psychological, or emotional benefits. A vacation presents pleasure, time with friends or family, adventure, and new experiences against the costs in time and VGStockStudio/Shutterstock.com A cost-benefit analysis will help a person decide to take action only if the benefits are worth the costs.