Evaluate Your Alternatives In Personal Financial Planning

In this step, you evaluate your alternatives as part of the financial planning process. Use the many sources of financial information that are available. Look at your situation in life, your present financial situation, and your personal values. Consider the consequences and risks of each decision you make. This is like comparing personal financial planning theory and practise

Sources of Financial Information

It is important to keep up- to-date with social and economic conditions because they can affect your financial situation. For example, a company that manufactures the latest technology or designs the trendiest clothes may be a good investment. On the other hand, if you learn that the company is being sued, would you invest in it?

Consequences of Choices

When you choose one option, you eliminate other possibilities. You cannot choose all options. Suppose that you want to become a full-time college student. You also want the income you would earn at a full-time job. In choosing to pursue your education, you give up the opportunity to work full time, at least for the moment. An opportunity cost, or a trade-off, is what is given up when making one choice instead of another. The opportunity cost of going to college would be the benefit of having a full-time job.

However, choosing involves more than knowing what you might give up. It also involves knowing what you would gain. For example, by going to college, you could gain a higher-paying job.

Understanding Personal Finance Risks

If you decide to ride your bicycle on a very busy city street, you are taking a risk of having an accident. When you make a financial decision, you also accept certain financial risks. Some types of financial risks include:

• Inflation Risk—If you wait to buy a car until next year, you accept the possibility that the price may increase.
• Interest Rate Risk—Interest rates go up or down, which may affect the cost of borrowing or the profits you earn when you save or invest.
• Income Risk—You may lose your job due to unexpected health problems, family problems, an accident, or changes in your field of work.
• Personal Risk—Driving for eight hours on icy mountain roads may be hazardous. The risk may not be worth the money you would save on airfare.
• Liquidity Risk—Liquidity is the ability to easily convert financial assets into cash without loss in value. Some long-term investments, such as a house, can be difficult to convert quickly.