Making Good Personal Finance Decisions

Personal Finance: Making Good Decisions
Financial decisions can have lifelong implications. Before taking this class, although I had a basic understanding of how financial problems could be calculated as equations, I did not necessarily know how to make optimal decisions in the real world. Making good financial decisions requires making an intelligent risk versus reward analysis. All decisions require an economic sacrifice or have an opportunity cost. The money diverted to a college education, for example, could be used for investment, and the time invested in college could be diverted to full-time work. Not all economic actors will have the same fears and hopes and each person may have different comfort levels with economic uncertainty, but all decisions should be made in an intelligent way.
Example One: Renting or Buying a Home
The dream of home ownership has long been lauded as the highest goal of every American. But many people have begun to question that dream in recent years. Regardless, it is important to view that dream realistically, in terms of one’s real financial situation and goals, versus simply accept what people have said in the past. Commonsense wisdom about economics is not always true. Taking this class gave me the tools to more critically calculate my financial position in regards to my housing situation in the future. For example, if remaining in an area more than 6 years, it is generally cheaper to own a home rather than rent, based upon weighing the costs of monthly living expenses versus property taxes (“Rent versus Buy,” 2018). In general, the longer someone lives in a home, the greater the financial benefits of remaining in the home. But that is assuming a buyer can get a fixed rate mortgage, with a stable and predictable monthly payment, as well as assumes that property taxes do not increase astronomically. And that is also assuming a relatively stable position for a new college graduate, which may be unlikely. There is great flexibility in renting, even if one must make an investment of a security deposit (which is recoverable and usually smaller than a down payment on a home).
Other factors to consider include the cost of rent in the area. In some areas, renting is almost as prohibitively costly as a mortgage, and it might be better to accept a longer commute to work than either renting or buying in the area. Of course, wear and tear on one’s vehicle, gas, and the investment of time in commuting must be a consideration. In some areas, houses may simply be too prohibitively costly to purchase, and the decision to rent is virtually made for the person already. Buying—presuming that one has enough money for a down payment and the ability to make stable mortgage payments--is usually a preferable course, but the costs of upkeep of that particular house, the risk of being unable to sell the house in the event of a desired move, and also the stresses and worries about repairing the home are considerable downsides.
Of course, there are also intangible aspects of home ownership that may factor into a financial decision, such as the ability to make alterations to the exterior. People are also able to improve the house and potentially sell it for a profit as a result of those improvements, in addition to the benefits of resale if the area increases in value. On the other hand, homes can rapidly lose value if the area experiences a downturn or an unexpected event like a hurricane makes people leery about purchasing a home in the area. Buying a home is never a sure investment and buyers should have an emotional investment in the home versus assuming it will automatically yield economic benefits.
Cars: Leasing or Buying
In the case of a vehicle, there are more direct and clear-cut benefits in terms of buying versus leasing. Buying a car is generally more financially beneficial. The attractions of getting a new car every year without the inconvenience of having to sell the old vehicle makes many people attracted to the idea of leasing a vehicle. But leases often contain many hidden costs, including the financial responsibility for any nicks or dents to a car that an owner might accept as natural wear and tear. A lease vehicle is supposed to be returned in virtually new condition, which is why dealerships place limits on the amount of miles that can be put on a particular car over the course of the lease agreement. For a driver using the car as his or her primary means of transportation, particularly a driver with a commute, a lease may prove unfeasible (Pinola, 2011).
But an even better option may be to purchase a used car and not to buy a new car and require car payments at all. The main, practical reason that people choose to purchase a new car is that it will presumably have less car maintenance problems. But a newer car is likely to be almost equally maintenance-free. As soon as a car leaves the lot of a new car dealership, it begins to lose value, and it is unlikely that the buyer will be able to recoup his or her investment upon selling it. Thus, neither leasing nor purchasing a high-price vehicle would be the more financially advantageous option.
College: Is it a Worthwhile Investment?
One reason to keep car payments and rent or mortgage payments at a minimum for many twentysomethings is the fact that so many people in this age group have student loans. The fact that student loans can be so prohibitive have caused many young people to reconsider going to college in general. Again, applying practical financial analysis to this decision can provide some insight. According to Forbes magazine, “costs associated with tuition, fees, housing, books and more, have risen meteorically – the cost of tuition and room and board alone has nearly tripled in the last 40 years, from around $16,000 in 1975 (adjusted for inflation) to around $44,000 today” (Levin, 2016, p.1). Although college graduates as a group make more money than non-college graduates, there is considerable variation in the comparison between these two groups. Certain majors such as engineers often make vastly larger salaries than liberal arts graduates and individuals with technical degrees such as electricians may make more money than individuals with degrees from four-year institutions.
Financial analysis would suggest making a decision in favor of embarking upon a career path that will result in minimal student loan debt; overall the evidence is tipped in the favor of college. “The most lucrative major is petroleum engineering, with a median mid-career salary of $168,000…The worst degree for ROI is early childhood education, yielding just $38,000 after a decade of experience in the field” (Levin, 2016, p.1). Of course, some prospective students may be more interested in the altruistic field of special education than petroleum engineering; regardless, when they select a school and evaluate their package of financial aid, they must have a realistic view of their likely future salaries. Even if a student goes to a higher-end, elite institution with a likely return on their investment, as noted by Levin (2016), there is a concern that the graduate is putting “too many eggs in one basket,” given that if the graduate loses his or her job due to a rapid downturn in their particular industry, this means that they will be faced with very high debt and minimal resources to pay off their debts in the long term (p.1).
Conclusion
Making investment decisions can be extremely challenging. Emotional factors inevitably affect logical decisions. But this is not a bad thing to acknowledge, since few people make a decision about what career to pursue, what to drive, and where to live, based purely on practical concerns. Still, decisions should be made with open eyes about their likely consequences. Even if someone makes a financially risky decision like selecting an unprofitable major, they should attempt to temper that risk by going to a less pricey college and selecting a less costly vehicle to drive.

Reference
Levin, T. (2016). A degree is a risky investment but you’re still better off going to college.
Forbes. Retrieved from: https://www.forbes.com/sites/timlevin/2016/07/06/a-degree-is- a-risky-investment-but-youre-still-better-off-going-to-college/#43c4bd1018e3
Pinola, M. (2011). When is leasing a car better than buying? Life Hacker. Retrieved from:
https://lifehacker.com/5858640/should-i-buy-or-lease-a-car
Rent versus buy: What’s best for you? (2018). Nerd Wallet. Retrieved from: https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator