1. Foundations of Personal Finance Ch. 5
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2. Making Smart Decisions5
Making Smart Decisions
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3. 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
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4. Chapter Objectives Plan the use of resources available to you.
Use the decision-making process.
Apply management principles to help you achieve important goals.
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. Foundations of Personal Finance Ch. 5
Evaluating Goals
List each goal and rank it according to its importance
Is it realistic and possible?
continued
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12. 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?
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13. 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
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14. 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
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15. 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
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16. Identifying Resources
Foundations of Personal Finance Ch. 5
Identifying Resources
Resources are the tools needed to reach goals
continued
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17. Identifying Resources
Human resources include
skills
energy
knowledge
motivation
Nonhuman resources include
money
time
capital
natural resources
public resources
continued
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18. Identifying Resources
Practicing good resource management means remembering that
resources are scarce
resources are manageable
resources are related to one another
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19. Making Financial Decisions
Foundations of Personal Finance Ch. 5
Making Financial Decisions
Making good decisions requires careful thought and planning
continued
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20. Making Financial Decisions
People often make bad decisions by
acting out of habit
acting on impulse
failing to act
continued
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21. Making Financial Decisions
Tools of financial decision making include
cost-benefit principle
marginal analysis
commonsense rule
systematic decision making
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22. 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
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23. 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
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24. 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
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25. Foundations of Personal Finance Ch. 5
A Commonsense Rule
Do not spend more than you can afford
Live within your means
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26. In Your Opinion
Why do you think it is difficult for some people to live within their means?
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27. 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
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28. 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
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29. 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?
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30. 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
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31. Foundations of Personal Finance Ch. 5
Action Phase
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32. 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
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33. Foundations of Personal Finance Ch. 5
Evaluation Phase
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34. 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.
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35. 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.
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36. Glossary of Key Terms
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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.
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37. 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.
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38. Glossary of Key Terms
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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.
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