Copyright Goodheart-Willcox Co., Inc. Section 1.2 Managing Your Personal Finances 17 families, businesses, and governments. It is another strategy used to make decisions to satisfy needs and wants. Trade-Offs and Opportunity Costs The choices you make involve trade-offs and opportunity costs. A trade-off is the choice you give up when you make one choice over another. Opportunity cost is the value of the option you gave up. When you make a choice, you trade off, or give up, the other choices you could have made. For example, there is a trade-off when you spend $50 to buy a jacket. The trade-off is the other ways the $50 could have been used. When you choose one of two options, the trade-off, or what you give up, is the opportunity cost of the choice you made. It is the consequence of an economic decision. If you turn down an after-school job because you have to be at soccer practice, there is an opportunity cost. The opportunity cost of playing soccer is the after school job and the money you could have earned. The opportunity cost of working instead of playing soccer would be the pleasure and advantages you get from playing a team sport you love. Opportunity cost can be measured in terms of dollars, time, enjoyment, or something else of value. The opportunity cost of a decision often varies from one person to the next. It depends on what the person who makes the decision values. Opportunity cost applies to economic choices of families, businesses, and governments as well as individuals. Weighing opportunity costs is a valuable decision-making tool. Common Sense Even before applying laws of economics to help make financial decisions, one rule is obvious. You do not want to spend more than you can afford. The key to financial well-being is spending less than you earn. Living within your means is the only way to have financial peace of mind. No matter how much money you have, you cannot afford everything you want. Consequently, you need to establish priorities and plan carefully. Needs should be covered before satisfying wants. If there are family responsibilities, the needs of the family generally come before the wants of individual family members. Your financial future is in your hands. It pays to develop a clear understanding of your financial situation before making decisions that involve current or future money matters. Today’s economic choices determine tomorrow’s economic security. OLJ Studio/Shutterstock.com The decisions a person makes today will affect his or her finances tomorrow.
Previous Page Next Page