FINANCIAL DECISION MAKING

The following decision making model will help you consider relevant information that will lead to an informed choice:

1. Define the Issue or Problem. Timothy wants to buy a car.

2. Gather Information. Before going to a dealer, Timothy searches the Internet to learn more about the types of cars in his price range, the safety an reliability of the models, and the resale value of the makes and models that interest him. He also looks in automobile magazines and talks with an auto mechanic and insurance agent to learn about the additional costs of car ownership.

3. Consider Alternatives and Consequences (trade-offs/opportunity costs). Timothy explores his full range of choices. Would it be better to use public transportation? Should he purchase a new or used car? What will he have to give up to buy this car? Will he have to work more hours each week ? Will he have to forego other activities that require spending money?

4. Make a Decision and Take Action. After much consideration, Timothy decides to purchase a used car that is two years old, reliable, and safe. He also decides to put off the purchase for several months so that he can make a larger down payment.

5. Modify Plans as Needed. Two years after purchasing the car, Timothy moves to a big city. For a few months he pays the high costs for parking, but soon realizes that it is much less expensive to use public transportation, so he decides to sell his car.

Your financial picture is all about the decisions you make now...and for your future. In the financial decision making process, there are many different choices or alternatives that cosumers must weigh. Each choice will have benefits and costs. As you weigh the benefits and costs of each alternative, it is important also to consider trade-offs and opportunity costs. Trade-offs are those items foregone as a result of choosing one option over another. Opportunity costs are those valued alternatives that are given up as a result of choosing one option over another. The concept of "opportunity" is key to understanding the power and benefits of investing for the future.

Consider Timothy's car buying experience to explore needs, wants, choices, costs, benefits, trade-off, and opportunity costs.

* Needs. Timothy must use some type of transportation to get him to and from work each day. Without transporttion, he would not be able to get to his job, and without his job, Timothy cannot purchase food, clothing, and shelter.

* Wants. Timothy has used public transportation in the past, but in the suburban area where he currently lives, a car is considerably more convenient. It will allow him to accomplish more of his other goals because he will spend less time commuting.

* Choices. Before going to the car dealership, Timothy makes a list of all his alternatives. Even though he knows that biking, walking, and taking a taxi are not feasible, he decides to include them in his list so he can fully consider all his options.

* Costs. There are many financial and non-financial expenses involved with automobile ownership. Time expenses, for example, include taking the car to and from the auto shop when it needs repairs, or maintenance. Financial expenses include the monthly payment, gas, insurance, repairs, taxes, and incidentals.

*Benefits. Owning a car will give Timothy more free time and allow him to work on other goals he has been putting off because of his long commute.

* Trade-offs. Though driving will prevent Timothy from reading on the way to work like he did when he took the bus, since he will get home earlier in the evening and leave later in the morning, he will have more free time.

* Opportunity costs. When Timothy purchased his car, he immediately increased his transportation expenses. As a result of choosing to purchase a car over using public transportation, she will have to cut down on some of his expenses, such as entertainment or dining out.

Before making any financial decision always explore your options.

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