Trade The Journey

Trade The Journey

Cost Benefit Analysis

Cost-Benefit Analysis sounds like a complex term doesn’t it? How does it relate to you? It sounds like a process you would go through in order to make a good business decision. As unlikely as it seems, we are businesses, each of us individually. We earn, we invest, we save, we spend, and we borrow which is everything a business does. We even market and advertise when looking for a new job.

Cost-Benefit Analysis can be thought of simply as “Is it worth it?” Do the benefits over an amount of time outweigh the cost? An opportunity cost also exists. In order to receive something, I have to give up something. So does the benefit of making this purchase outweigh the cost and is making this decision outweigh what I am giving up to purchase something. Another way of thinking of this is if I were to spend this $100 for example, what is the investment return I am giving up by spending it instead?

This can complicate things causing you to overthink things which can also hurt you when you need to make a decision.

Here are some ways in which you can asses the situation:

Identify all of the cost that you can think of when entering into a purchase or perhaps investing in a business opportunity. They could be a one-time cost or a series of costs over time. There could also be fixed cost and variable cost involving in making the decision.
Identify the benefits of making the purchase or investing in the possibility of additional revenues. Most people don’t have a hard time thinking of the benefits, I don’t.

Identify any cost savings to be gained if there are any. For instance, a purchase at Costco can potentially save you money throughout the year when you buy in bulk.

Create a way for you identify when the potential revenue or cost savings will occur and when the cost will occur.

Lastly is there anything that you have not thought of associated with the purchase.

This involves a considerable amount of work in the beginning but it is a good idea to invest the time. Knowing how to do this will help you make smarter and faster decisions when needed because you will know the fundamentals involved in making a great purchase. You won’t need the exact amount or need to map out when the benefits will outweigh the cost of the purchase. It will become second nature and that’s the goal, to make great financial decisions without thinking.

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