How to Use a Cost-Benefit Analysis to Make a Personal Economic Decision

How to Use a Cost-Benefit Analysis to Make a Personal Economic Decision
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Business owners and managers use cost-benefit analyses on everything from short-term purchases to long-term personnel decisions. In a cost-benefit analysis, businesses look at their current financial situation, consider alternatives and make choices based on the long-term financial benefit of those alternatives. Both business and consumer spending decisions involve many of the same facets, such as product or service cost, value and availability. The business principles behind a cost-benefit analysis can be easily applied to consumer spending and budgeting to help individuals make the best personal financial decisions.

Create a plan to track a month of grocery purchases. Tracking what you use and how much you spend can help you determine the exact cost of items, as well as your total spending.

List each item you purchase and where you purchased it, documenting each item's total cost and unit cost. At most stores, the unit cost is found on the store shelf tag next to the price.

Figure out the monthly cost of a particular item to calculate the amount spent annually on that item. For example, if you purchase 10 gallons of milk each month, you can project that you will buy 120 gallons in one year. If the unit cost of milk is $3 per gallon, you would spend $30 per month on milk, or $360 annually.

Choose an alternate source for grocery purchases, such as a wholesale club, to compare with the purchases made in a regular grocery store. In addition to item costs, consider variables such as club membership fees, availability of items and convenience.

Calculate the annual cost of a particular item purchased at the wholesale club using the same method you used to determine the annual cost of an item purchased at a grocery store.

Factor in the additional costs associated with the wholesale club, such as the annual membership fee and any surcharge added to each order. Compare the two annual amounts; subtract the smaller number from the larger one to see your projected annual savings. Consider the other factors, such as convenience and item availability, in your cost-benefit analysis to make your decision.

Warnings

  • Consider the quality of products and services you purchase, as this can affect the long-term financial benefit.

    When examining your savings at wholesale clubs, consider whether buying in bulk is reasonable for you.