18 Chapter 1 Personal Finance: An Overview
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 Rule
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. Make
sure to cover your needs before satisfying your 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.
Systematic Decision-Making
When deciding important matters, a systematic or rational decision-
making process can help you arrive at the best course of action. Systematic
decision-making is a process of choosing a course of action after evaluating
available information and weighing the costs and benefits of alternative
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and discussed below.
0-Define the decision to be made. You need a clear idea of the challenge to
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1-Explore all alternatives. Analyze possible solutions to your problem. If you
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Steps in the Decision-Making Process
Step Keyword Approach
1 Problem Define the problem or challenge.
2 Alternative Explore alternatives.
3 Choose Choose the best alternatives.
4 Act Act on the decision.
5 Evaluate Evaluate the decision.
Goodheart-Willcox Publisher
Figure 1-1 The five steps of the decision-making process can help you solve
problems effectively.