Making Financial Decisions | Identifying Alternative Courses of Action

Developing alternatives is crucial for making good financial decisions. Although many factors play to influence the available alternatives, possible courses of action usually fall into the following categories :

  • Continue the same course of action e.g. determine if the amount you are contributing for an emergency fund each month is still appropriate.
  • Expand the current situation e.g. contribute a larger amount each month to your savings plan.
  • Change the current situation e.g. use a money market account instead of a regular savings account to save for your emergency fund.
  • Take a new course of action e.g. use your monthly savings to pay off credit card debts.

Whereas not all of these categories will apply to every situation they do represent possible courses of action. Creativity is vital to making effective choices.

Therefore, consider all of the possible alternatives to make effective and satisfying financial decisions.

A Quick Side Note:

While evaluating possible courses of action, it is important to take into consideration your life circumstances, personal values, and current financial conditions.

Also consider how the ages of dependants will affect your saving goals, how you would like to spend leisure time and how changes in interest rates will affect your financial situation.

Evaluating Alternatives

Once you have identified alternative courses of action, it is important to evaluate them. Every decision made closes off other alternatives.

For example:

  • A decision to re-invest your dividend cheque may mean you cannot have cash for a weekend getaway you have desired to go.
  • A decision to go to class fulltime may mean you cannot take a fulltime job.

Every decision you make will have an opportunity cost to it. This cost, commonly referred to as the trade-off of a decision cannot always be measured in terms of cash.

It may refer to the money you forgo by attending school rather than working, and may also refer to the time spent on window shopping for a major purchase. In either case, the resources you give up (money or time) have a value that is lost.

Remember, decision making will be an ongoing part of your personal and financial situation. You therefore need to consider the lost opportunities that result from your financial decisions which vary from one individual to another.

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