Goals & Decision-Making

Transcription

1 How to Really Become a Millionaire Goals & Decision-Making The choices you make at any point in your life will have major consequences for your future. In order to make decisions you need to distinguish between wants and needs and incentives matter! need a necessity, like food and clothing want something you desire but can live without Achieving personal wealth involves planning and making sound financial choices. Most millionaires didn t get rich by winning the lottery the became rich by making sound choices Most millionaires are college graduates. Most millionaires work 45 to 55 hours. More than half of all millionaires never inherited money. Most millionaires attended public schools. Most millionaires don t drive expensive new cars. Most millionaires work in ordinary industries or jobs. Most millionaires are self-employed or consider themselves entrepreneurs. Most millionaires are married and stay married. Few people get rich by luck poor people are not likely to become millionaires by winning the lottery. A college graduate earns almost double the income of a high school graduate. Investors who buy and hold stocks for the long-term have better long-term returns than those who buy and sell stocks more frequently. Millionaires tend to invest in the stock market. Because of compound interest small savings can make a difference. Because of compound interest the earlier you begin saving, the better. Live below your means spend less than you earn!

2 Rules for improving your financial life: 1. Get a good education 2. Work long, hard, and smart 3. Learn money-management skills 4. Living below their means spend less than you can spend 5. Invest in the stock market for the long term 6. Gather information, develop criteria, and consider the alternatives before making a decision Benefits of Good Financial Making In order to achieve the highest quality of life possible, have a good plan: 1. Create a budget 2. Plan to manage your liquid assets (e.g., saving and checking accounts, etc.) 3. Plan for managing your borrowing (e.g., loans for school, home, etc.) 4. Plan to make sure you have enough insurance health, dental, life, home, etc. 5. Plan for retirement 401K or 403B Most Americans rely on credit cards and other forms of debt: more than 30% of high school students use a credit card more than 80% of undergraduate college students have at least one credit card more than 2 million people filed for bankruptcy in years BEFORE the Great Recession!! the level of savings in the US is negative people are spending more than they earn about half of the people working full-time surveyed were living paycheck to paycheck about 40% of people who work full-time DON T save money for retirement!

3 Goals & Decision-Making Remember: each action/decision has an opportunity cost what you give up to get something else e.g, if you spend the money it will take you longer to save the money you need to build the funds you ll need for college if you save the money you ll give up the satisfaction of owning a new product or attend the concert that you really want right now. The Handy Dandy Guide 1. People choose. 2. All choices involve costs opportunity costs! - opportunity cost of a decision the next best alternative that is given up; the value of what you give up in order to get what you want 3. People respond to incentives in predictable ways - incentives are the benefits or costs that influence your decision. - incentives encourage specific behavior and motivate you to take specific action e.g., businesses use incentives to motivate workers e.g., bonuses & salary businesses use incentives to encourage consumers to buy their products government uses incentives it offers tax deductions 4. People create economic systems that influence choices and incentives -you re free to start your own business, get an education, buy goods and services but whatever you decide, comes with an opportunity cost 5. People gain when they trade voluntarily -there must have been a benefit that was greater than the cost because you were doing/buying/choosing something because you wanted to NOT because you were forced to 6. Peoples choices have consequences for the future - you shape your future by your decisions you make today How can you decide? There s no such thing as a free lunch everything/everyone faces scarcity (limited funds). If you think about all your needs and wants, you ll realize that you can t get them all with the limited funds you have this is the economic principle called scarcity scarcity requires you to make choices: you ll decide which goods and services to use (or not use) due to limited resources and unlimited wants

4 More money doesn t eliminate or reduce scarcity. Because of scarcity you must make choices and every choice involves an opportunity cost Five Step Decision-Making Process Step 1 Define the problem Step 2 List the alternatives Step 3 Identify your criteria Step 4 Evaluate your alternatives Step 5 Make a decision Use a decision-making grid to help organize your criteria and alternatives and through a logical and proven process you can slow-down your decision making, consider all possible alternatives and make a final decision The criteria may need to be weighted (judged more or less important) by using +, ++, +++ or -, --, --- The opportunity cost will be the highest-ranked alternative that is not chosen A wise decision involves weighing the benefits and costs of the alternatives from which individuals must choose. Your wants are never fully satisfied no matter what we have already, we would like to have more. resources are limited we only have so many human resources, natural resources, and capital resources Factors of production resources need to produce goods and services; everything made requires the four factors of production: human the physical, intellectual, and creative talents of people; people and all the work they do as well as their skills and abilities when people are better educated, they tend to be more productive natural gifts of nature; the natural resources not created by people water, forests, natural gas, oil and climate

5 Goals & Decision-Making capital those goods that are used to produce other goods and services; the tools, equipment, and factories used to make goods and perform services Money is NOT capital. Money is a medium of exchange and it s used to make the buying and selling of goods and services easier Many factors will influence your day-to-day decisions: life situations, personal values, and economic factors Factors that can influence a decision Values Peers Habits Feelings or emotions Family Risks and consequences Age Common Decision-Making strategies There are strategies that can help explain how people make their decisions Spontaneity Compliance going along with family, school, work expectations Procrastination Agonizing accumulating so much info that it becomes overwhelming Intention choosing an option that is both intellectually and emotionally satisfying Desire choosing the option that achieves the best result, regardless of the risk Avoidance choosing the option that is most likely to avoid the worst possible result Security choosing an option that will bring some success with least risk Synthesis choosing an option that has a good chance to succeed and you like the best

6 How to Set Goals Goals the things you want to accomplish writing down your goals is important because it keeps you more focused on achieving them and gives you something physical as a reminder to refer back to Time frame of goals. Short-term less than 1 year to achieve e.g., saving & buying a computer, applying to colleges Medium-term two to 5 years to achieve e.g., saving for two month s rent payment, saving for a car Long-term more than 5 years e.g., paying off student loans, planning for retirement It s important for you to set realistic goals because you ll be able to accomplish them and you ll feel good about yourself successfully accomplishing your goal will lead to more success and confidence to accomplish even more goals When setting goals, decisions need to be made because you ll have limited resources you ll need to choose between alternatives (opportunity costs!!)