Foundations of Personal Finance Ch. 5 © Goodheart-Willcox Co., Inc.

Making Smart Decisions 5 Making Smart Decisions © Goodheart-Willcox Co., Inc.

Chapter Objectives Explain how needs, wants, values, goals, and standards serve as guides to consumer decisions. Identify personal goals to guide your decisions. Prioritize your goals. Identify the resources available to you. continued © Goodheart-Willcox Co., Inc.

Chapter Objectives Plan the use of resources available to you. Use the decision-making process. Apply management principles to help you achieve important goals. © Goodheart-Willcox Co., Inc.

Personal Side of Consumer Choices Developing management skills can help you achieve goals Management involves identifying resources setting goals making decisions solving problems evaluating results © Goodheart-Willcox Co., Inc.

Importance of Needs and Wants Foundations of Personal Finance Ch. 5 Importance of Needs and Wants Knowing your needs and wants can help determine how you use resources © Goodheart-Willcox Co., Inc.

Importance of Values Values govern and direct your life influence decisions, actions, and behavior differ among people can change over time The things you value become part of your value system © Goodheart-Willcox Co., Inc.

Importance of Ethics Ethics conform to accepted standards of right and wrong Individuals, businesses, and governments are expected to behave ethically Unethical behavior is wrong, even illegal © Goodheart-Willcox Co., Inc.

Importance of Goals Goals are related to values “To be” goals relate to character and personality “To do” goals relate to accomplishments “To have” goals relate to possessions and purchases © Goodheart-Willcox Co., Inc.

Timing of Goals Short-term goal—can be reached within a year Medium-term goal—may take one to three years to reach Long-term goal—takes longer than three years to reach © Goodheart-Willcox Co., Inc.

Foundations of Personal Finance Ch. 5 Evaluating Goals List each goal and rank it according to its importance Is it realistic and possible? continued © Goodheart-Willcox Co., Inc.

Evaluating Goals Can you break it up into smaller goals? Can progress be measured? What will it cost in time, money, and effort? Will you still want the goal when you reach it? © Goodheart-Willcox Co., Inc.

Interdependent and Conflicting Goals Interdependent goals—one must be achieved to reach the other Conflicting goals—one must be given up to achieve the other Your priorities and values can help you choose between conflicting goals © Goodheart-Willcox Co., Inc.

Establishing Priorities Goals listed in priority order help you direct your time, energy, and money You make a priority judgment when you decide one thing is more important than another © Goodheart-Willcox Co., Inc.

Standards of Quality and Excellence Standards grow out of goals and values People set standards for how they want to live what they want to do the goods and services they want to buy © Goodheart-Willcox Co., Inc.

Identifying Resources Foundations of Personal Finance Ch. 5 Identifying Resources Resources are the tools needed to reach goals continued © Goodheart-Willcox Co., Inc.

Identifying Resources Human resources include skills energy knowledge motivation Nonhuman resources include money time capital natural resources public resources continued © Goodheart-Willcox Co., Inc.

Identifying Resources Practicing good resource management means remembering that resources are scarce resources are manageable resources are related to one another © Goodheart-Willcox Co., Inc.

Making Financial Decisions Foundations of Personal Finance Ch. 5 Making Financial Decisions Making good decisions requires careful thought and planning continued © Goodheart-Willcox Co., Inc.

Making Financial Decisions People often make bad decisions by acting out of habit acting on impulse failing to act continued © Goodheart-Willcox Co., Inc.

Making Financial Decisions Tools of financial decision making include cost-benefit principle marginal analysis commonsense rule systematic decision making © Goodheart-Willcox Co., Inc.

Cost-Benefit Principle Examine the benefits and costs of a decision and act only if the benefits are at least as great as the costs The cost-benefit principle applies to economic decisions of individuals, businesses, and governments © Goodheart-Willcox Co., Inc.

Foundations of Personal Finance Ch. 5 Marginal Analysis Examine the added benefit, versus the added cost, of one more unit of an item or an experience continued © Goodheart-Willcox Co., Inc.

Marginal Analysis Marginal benefit: change in total benefit of using one additional unit Marginal cost: change in total cost of using one additional unit The marginal benefit of using each additional unit of something tends to decrease as the quantity used increases © Goodheart-Willcox Co., Inc.

Foundations of Personal Finance Ch. 5 A Commonsense Rule Do not spend more than you can afford Live within your means © Goodheart-Willcox Co., Inc.

In Your Opinion Why do you think it is difficult for some people to live within their means? © Goodheart-Willcox Co., Inc.

Systematic Decision Making Systematic decision-making process involves five steps 1. Define the problem 2. Explore all alternatives 3. Choose the best alternative 4. Act on your decision 5. Evaluate your decision © Goodheart-Willcox Co., Inc.

Managing Resources to Reach Goals Management involves more than making decisions and solving problems Management is a three-part process Planning phase Action phase Evaluation phase © Goodheart-Willcox Co., Inc.

Planning Phase Involves identifying goals, obstacles, and resources What do you want to achieve? What stands between you and your goals? What can you use to reach your goals? © Goodheart-Willcox Co., Inc.

Action Phase Depends on two personal qualities: Determination Flexibility Involves putting your resources to work to overcome obstacles to your goals, such as the next slide shows continued © Goodheart-Willcox Co., Inc.

Foundations of Personal Finance Ch. 5 Action Phase © Goodheart-Willcox Co., Inc.

Evaluation Phase Assess your progress Determine better ways of using resources to reach goals Decide what worked and what did not work Remember that evaluation is ongoing continued © Goodheart-Willcox Co., Inc.

Foundations of Personal Finance Ch. 5 Evaluation Phase © Goodheart-Willcox Co., Inc.

Central Ideas of the Chapter Careful decisions and wise use of resources can help you achieve your financial goals. Reviewing the success or failure of past decisions helps you make better decisions. © Goodheart-Willcox Co., Inc.

Glossary of Key Terms Back cost-benefit principle. The idea that an action should be taken or a purchase made only if the benefits are at least as great as the costs. decision-making process. A method of choosing a course of action after evaluating information and weighing the costs and benefits of alternative actions and their consequences. © Goodheart-Willcox Co., Inc.

Glossary of Key Terms Back ethic. A moral principle or belief that directs a person’s actions. goal. An objective a person wants to attain. management. The process of organizing and utilizing resources to accomplish predetermined objectives. marginal benefit. The change in total benefit of using one additional unit. © Goodheart-Willcox Co., Inc.

Glossary of Key Terms Back marginal cost. The change in total cost of using one more unit. priority. A goal or value that is given more importance than other goals or values. standard. An established measure of quantity, value, quality, or excellence. © Goodheart-Willcox Co., Inc.

Glossary of Key Terms Back values. Beliefs and principles about what is important or desirable. value system. A system that guides a person’s behavior and provides a sense of direction in his or her life. © Goodheart-Willcox Co., Inc.