We make decisions every day, from what to have for breakfast to choosing which classes will give us the skills needed to move forward in life. Each of these decisions is like a teeter-totter in our heads, rocking back and forth in deliberation. Yes, it's just a decision, but it's also a cost-benefit analysis.

A cost-benefit analysis is used to determine the potential gain or loss from any given decision. Basically, add up the perceived benefits and compare them to the costs. If the benefits outweigh the costs, then it's a go--and vice versa.

For example: You're off to college and need to choose a major. You love anthropology, but know anthropologists only make about $57,000 per year on average and there are only about 5,000 jobs in the field (costs). On the other hand, anthropology classes cover linguistics, social patterns and cultural customs--all topics you're interested in--and you'll have a much clearer understanding of why your friends act the way they do (benefits).

As a civil engineering student, you'll have lots of math-intensive classes--not your strong point--responsibility for the safety of those who use the structures and roads you build after graduation and, to top it all off, you don't necessarily love engineering (costs). However, civil engineering jobs pay about $100,000 per year, and there are 261,360 jobs in the field (benefits).

From here, add up the costs for each one, compare them to the benefits, and choose a major. That, my friends, is a cost-benefit analysis.

Applying the previous example to car shopping can help you decide whether buying a used car is worth it in the long run. Is lower initial price worth the higher potential for repair costs? Boom! Cost-benefit analysis.

More commonly, cost-benefit analyses are used by businesses to evaluate decisions involving money or other assets. These analyses first evaluate measurable (tangible) costs and benefits, such as outright cost, manpower, and potential revenue. They also evaluate non-measurable (intangible) costs and benefits, such as customer satisfaction, brand recognition, employee morale, and potential for exposure.

Whether you're deciding which college to go to, or are a small-business owner deciding if a new espresso machine is worth the money, a cost-benefit analysis can help you make any type of decision.

Sources:

bls.gov; wordnetweb.princeton.edu; investopedia.com; ftc.gov; edmunds.com; cars.com; autos.aol.com; mindtools.com; sjsu.edu; npr.org