Using Economic Reasoning for Better Personal Financial Decisions
April is Financial Literacy Month—when we celebrate the importance of equipping people with the knowledge and skills they need to make sound financial decisions. While those skills are most often practiced by adults, there is a movement to teach the content at the high school level. In fact, 39 states now require a personal finance course (PDF) for high school graduation, with four states adding the requirement since 2024.
This trend reflects a growing recognition that financial literacy matters. But it raises the question: What is at the base of good financial decisions? The answer lies in economic decision-making.
Financial Literacy Needs an Economic Foundation
At its core, personal finance is about making decisions, and economics provides the framework for making those decisions. For example, when deciding how much to spend, save or invest, people must weigh costs and benefits, consider trade-offs and think about the future value of their money. Economic thinking moves students beyond memorizing rules (“save 10%,” “avoid debt”) toward a more nuanced and flexible understanding of why those rules matter, how to use them wisely and when exceptions might make sense. That same reasoning applies to newer financial tools such as “Buy Now, Pay Later” (BNPL), where the key question is not just whether a purchase is affordable today, but what trade-offs and future obligations it creates.
A new video introduces “Buy Now, Pay Later” and helps students think about the trade-offs involved in spreading payments over time.
Narrator: Have you ever encountered a ‘Buy Now, Pay Later’ option when shopping online?
What exactly is Buy Now, Pay Later? Buy Now, Pay Later, or BNPL for short, is a type of short-term financing plan. Instead of paying the full price upfront, you split the cost into smaller payments, usually four. Sometimes it’s interest-free, but only if you pay on time.
For example, those $200 headphones would be $50 today, then three more payments of $50 every two weeks.
Why do people like Buy Now, Pay Later?
BNPL plans feel flexible.
- Smaller payments make big purchases feel affordable.
- There’s no interest, if you pay on time.
- It’s easy to set up online.
- For someone without a credit card, it might seem like a good alternative.
But what’s the catch?
Here are the downsides:
- Missed payments could result in late fees, and sometimes damage to your credit score.
- Multiple BNPL plans can be hard to track.
- The “small payments” trick your brain—$25 here, $40 there, and suddenly your budget’s busted.
If Buy Now, Pay Later companies are not charging you interest, how do they make money?
- They charge stores a fee for offering BNPL at checkout.
- If you miss a payment, they add late fees.
- Some plans add interest if you don’t pay by the deadline.
Let’s look at two Buy Now, Pay Later scenarios.
- Maya buys sneakers for $120 using BNPL. She pays every installment on time—no fees, no stress.
- Jordan buys a $500 gaming console with BNPL. He misses payments, racks up fees and owes more than the original price.
To summarize, let’s take a look at the pros and cons of Buy Now, Pay Later.
Pros:
- You get what you want right away.
- It breaks the cost into smaller chunks, making it easier to budget.
- If you pay on time, many plans don't charge interest, so it can cost the same as paying up front.
- It’s helpful in emergencies.
Cons:
- It may lead to overspending.
- Not all BNPL plans actually help build credit, even if you pay on time.
- Miss a payment, and you could face late fees or even damage your credit score.
- Multiple accounts making it easy to lose track.
Let’s go over some tips for using Buy Now, Pay Later wisely.
- Use BNPL plans for must-haves, not impulse buys.
- Ask yourself, ‘Would I still buy this if I had to pay full price right now?’
- Stick to a budget and include the BNPL plan in it.
- Track payment dates with phone reminders.
- Avoid juggling more than one BNPL plan at a time.
So next time you see ‘Pay in 4’ at checkout, stop and think. BNPL can be helpful if you’re careful, but it’s not free money. The choices you make today can shape your financial future.
Stay informed. Make money choices that work for YOU.
Check out more economics and personal finance resources at FederalReserveEducation.org.
A Simple Tool: The PACED Decision-Making Model
One powerful way to bring economic reasoning into personal finance is through the PACED decision-making model. It provides a clear structure for making thoughtful, informed choices.
PACED stands for:
- P — State the Problem: What decision are you trying to make?
- A — List the Alternatives: What are your options?
- C — Identify Criteria: What matters most in this decision?
- E — Evaluate: the Alternative: How does each option measure up?
- D — Make a Decision: What is the best choice based on your evaluation?
Bringing PACED to Life
Imagine a college student using the PACED decision-making model to figure out what to do with a credit card balance. The problem is clear: Should she pay the balance in full or carry it month to month? She considers two alternatives, paying in full or making the minimum payment. Then she thinks through the criteria that matter most: total cost, her current financial needs, whether she’ll have the future income needed to pay the extra debt.
As she evaluates the options, the trade-offs come into focus. Carrying a balance offers short-term flexibility but means paying a high interest rate on the borrowed funds. Paying in full requires more discipline now but avoids interest.
In the end, the student chooses to pay the balance in full, an outcome that reflects both careful decision-making and a core economic insight: Every choice involves an opportunity cost.
From Framework to Habit
The real value of PACED is not just in a single decision, it’s adding structure and clarity to the decision-making process. When students regularly apply economic reasoning:
- They become more intentional in their choices.
- They better understand trade-offs and incentives.
- They are more likely to make decisions that align with their own long-term goals.
In short, the PACED model doesn’t tell people what to choose, it improves how they choose.
Teach Economics along with Personal Finance
As more states adopt personal finance requirements, there is a valuable opportunity to ensure that these courses are taught with a foundation of economic reasoning—after all, personal finance and economics are complements, not substitutes. Financial literacy is about decision-making. And good decision-making is, at its core, economic thinking in action.
Learning about PACED in the Classroom
Federal Reserve Education offers easy-to-use resources for teaching the PACED decision-making model and related content in the classroom. Assignments with the videos in this post are examples.
The PACED decision model is used to choose a pet in this video, which provides an overview of the decision-making process.
Narrator: Choices are a fact of life. We make them every day. But when you have an important decision to make, how can you be sure you are making a good one? You could just leave it to fate or procrastinate until the decision is made for you. But if you want to make a more reasoned choice, you could try a decision-making process. A good one to consider is the five-step model called P-A-C-E-D, ‘PACED.’
‘P’ is for problem. We all have them, but sometimes we spend more time worrying about our problems than actually trying to fix them. Take Sarah; every day she comes home from work to an empty apartment. She feels lonely. Something is missing. And then it hits her. She needs a pet. But Sarah has no idea what kind of pet to get.
‘A’ is for alternatives. Sarah looks online. There are so many options. Ferrets and finches, hamsters, horses, and look, here’s a pet alligator. She doesn't think an alligator would be very good company, though. Sarah has always wanted a dog, or maybe an iguana. A cat is a possibility, and a parrot might be fun. But what are the most important considerations when choosing a pet?
‘C’ is for criteria. Sarah makes a list. She doesn't want a pet that’s too big. It can’t be too noisy because she has neighbors. It needs to be adaptable to apartment living. She doesn’t have a lot of money to spend either. Most of all, Sarah wants a pet she can love, and that will love her back.
Now it’s time to evaluate; that’s the ‘E’. Sarah made this grid. Dogs come in all shapes and sizes. But it might bark a lot. That’s a minus. And would it really be fair to keep a dog in her small apartment? A rescue dog might be low cost, but the vet bills could be high. On the other hand, a dog is a great companion, a big plus. The parrot, probably expensive, but OK in an apartment. Noisy? Good company? Sarah’s not sure. An iguana ... hmm, small and quiet, maybe, but not super cuddly. How about the cat? Small, fairly quiet, and cats do adapt to their surroundings. If Sarah goes to the animal shelter, the cost will be minimal, all pluses. Most importantly, Sarah likes cats a lot. Yes, a cat fits all Sarah’s criteria and may just be the pet she’s looking for.
Sarah makes a decision. She goes straight to the animal shelter. They always have lots of kittens waiting for someone just like Sarah to come along. Suddenly, Sarah feels happy about the way she made her choice.
The PACED decision-making process really worked, and she’s looking forward to getting to know this little guy better. She even has a name picked out for him, Dexter. ‘D’ for Dexter, a perfect choice.
Here are two other examples:
- This infographic and lesson introduce the PACED decision-making model to help a person make a rational choice.
- In this lesson, students learn about and apply the five-step PACED decision-making process through a series of activities, including a taste test.
This blog explains everyday economics and the Fed, while also spotlighting St. Louis Fed people and programs. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
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