Too many of these are from people who didn't run the numbers
I wrote last week about calculating the value of your time when it comes to whether or not you should haggle. The point wasn’t that haggling is good or bad, only that you should make an informed decision as opposed to a guess. I want to expand on that a bit and apply it to other parts of life.
Not all decisions in life require a lot of thinking. For example, I chose the Mexican place I went to lunch at without doing a giant pro and con list. The big things though, especially when it comes to money, those should definitely be informed decisions. Which brings me to the question I mentioned in the heading, is it better to rent or buy?
Renting While Owning
I own a townhouse in the Silicon Valley, which I’m currently renting out. At the same time, Julie and I are renting the house we live in. People often ask me why we didn’t buy a house when we got married, especially since we own one already. I try to tell them that it didn’t make sense for us to do so at the time and that it still doesn’t but all I get back is “you’re just throwing away money on rent”. One person even told us “rent prices might go up where as I always know the value of my house” and this after the past three years in which house prices have gone down 30 to 80% depending on your area.
So does it make more sense to rent or to buy? I don’t know, it depends. Where do you live? How long do you plan to live there? What do you think interest rates will be in 5 years? There are a few variables here but it’s not really a complicated equation. In fact, a simple Google search for “Rent Vs. Buy spreadsheet” will give you a number of premade templates to work from. You can put in your numbers and see the outcome. You can even try out multiple scenarios, something you should always do, to see what would happen in another downturn, an upturn, a crash, hyper inflation and so on. At the end of the day, you’ll be making an informed decision rather than a wildass guess.
Why Bother?
Because wildass guesses are how we got into this mess in the first place folks. Instead of actually running the numbers and seeing the result, people would just jump on an opportunity. They’d say “well, housing seems hot, we should buy a house” without seeing if they could afford the payments and without running a what if scenario on what will happen if housing prices fall. At some point, we all went a little crazy and forgot that money is a numbers game and that numbers are easy to work out.
Two More Examples
When I went to grad school I didn’t do my homework. I shelled out 160k (not counting travel expenses) for an education that may or may not for itself. I should have run a variety of scenarios to see what I could expect as a raise, a promotion, alternative education and so on. That would have told me if the 160k upfront cost was worth the expect returns I thought I was going to make later on. I didn’t and that was my bad. If I had, I don’t think I would have gone to grad school.
When I recently quit my job I knew better. I had the option of exercising my stock options. I knew the exercise price and I also knew how much money the investors already put in the company. So I ran scenarios. I looked at a number of possibilities and their likelihood and then made a decision. It’s that simple. Rather than making an emotion based wild ass guess (which would have been fine if we were talking about a 5 dollar lunch) I weighed the odds, ran the numbers and came up with an informed decision (which is the way to go when you’re talking about tens of thousands of dollars in stock).
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Always do your homework and always run the numbers. It’s not that hard and you’ll end up with much better decisions.
