4. Evaluate Alternatives
5. Create and Implement a financial action plan
You need to evaluate possible courses of action, taking into consideration your life situation, personal values. and cunent economjc conditions. How will the ages of dependents affect your saving goals? How do you like to spend leisure time? How will changes in interest rates affect your financial situation?
Consequences of Choices Every decision closes off alternatives. For example, a decision to invest in stock may mean you cannot take a vacation. A decision to go to school full time may mean you cannot work full time. Opportunity cost is what you give up by making a choice. This cost, commonly refen-ed to as the trade-off of a decision, cannot always be measured in dollars. It may refer to the money you forgo by attending school rather than working, but it may also refer to the time you spend shopping around to compare brands for a major purchase. In either case, the resources you give up (money or time) have a value that is lost.
Decision making will be an ongoing part of your personal and financial situation. Thus, you will need to consider the lost opportunities that will result from your decisions. Since decisions vary based on each person's situation and values, opportunity costs will differ for each person.
Evaluating Risk Uncertainty is a pm1 of every decision. Selecting a college major and choosing a career field involve risk. What if you don't like working in this field or cannot obtain employment in it? Other decisions involve a very low degree of risk, such as putting money in a savings account or purchasing items that cost only a few dollars. Your chances of losing something of great value are low in these situations.
In many financial decisions, identifying and evaluating risk is difficult. The best way to consider risk is to gather information based on your experience and the experiences of others and to use financial planning information sources.
Financial Planning Information Sources When you travel, you often need a road map. Traveling the path of financial planning requires a different kind of map. Relevant information is required at each stage of hte decision-making process.
Changing personal, social, and economic conditions will require that you continually supplement and update your knowledge.The Financial Planning for Life's Situation box and the appendix to this chapter provide additional information.
5. Create and Implement a financial action plan
In this step of the financial planning process, you develop an action plan. This requires choosing ways to achieve your goals. For example, you can increase your savings by reducing your spending or by increasing your income through extra time on the job. If you are concerned about year-end tax payments, you may increase the amount withheld from each paycheck, file quarterly tax payments, or shelter current income in a tax-deferred retirement program. As you achieve your immediate or short-term goals, the goals next in priority will come into focus.
To implement your financial action plan, you may need assistance from others. For example, you may use the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds. Your own efforts should be geared toward achieving your financial goals.
6 Re-evaluate and Revise Your PLan
Financial planning is a dynamic process that does not end when you take a particular action. You need to regularly assess your financial decisions. You should do a complete review of your finances at least once a year. Changing personal, social, and economic factors may require more frequent assessments.
When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decisionmaking process will help you make priority adjustments that will bring your financial goals and activities in line with your cunent life situation.
