Making Good Personal Finance Decisions Essay

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  • Subject: Finance
  • Type: Essay
  • Paper: #18292281
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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
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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…
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