Risks in Life (Part I)
On Sunday NFL Coach Bill Belichick (of the New England Patriots) took a calculated risk and instead of punting on a 4th down late in the game he tried to make the 1st down. This in itself is not that risky a play in Football, however there were circumstances around this choice that made the decision very risky:
- His team was leading at the time by 6 points (more than a field goal, less than a converted touchdown)
- The ball was on the Patriots 28 yard line
- There was 2:08 left in the game
- His team needed to get 2 yards on the play (not a small amount).
If he punts the ball to his opponent he leaves the game in the hands of his defense, and his opponents most likely have to cover over 80 yards to score (and must score a touchdown not just a field goal).
The risk (in my opinion) was far too high for the decision made, and in hindsight the decision was proven wrong, as his team failed to get first down and left their opponents only 28 yards to score a game winning touchdown (which they did), but it is easy to second guess that kind of decision after it has been proven wrong (i.e. Monday Morning Quarterback club, which I am a charter member)
So What?
So what does this have to do with Personal Finance you might well ask?
Do you take into consideration all the risks that are part of your financial decisions? Do you look before you leap, or do you just roll the dice and let the fates take care of things for you?
Risk is involved in all decisions, and you can paralyze yourself worrying about risks, especially in personal finance, but with larger financial decisions it is imperative to think about what you are about to do, and what risks are involved in the decision.
Let me run through a few personal experiences with major decisions and risk.
Example 1: Lock In or Float?
With folks buying their first home, the question always arises, should you lock in your interest rate, or should you go with a lower but floating interest rate? Back when I was looking at houses for the first time, I locked in at 11% thinking I was getting a great deal (given interest rates had been at 18% previously), so I locked in for 5 years. The decision was made because we could afford the payments at that rate and didn’t want any surprise increases in our budget.
The decision was wrong in hindsight because interest rates dropped to much lower rates after that, but I don’t view that as a wrong decision, more a conservative decision.
I now live on a floating interest rate loan vehicle, because I can withstand a sudden sharp interest rate increase.
The risk here is, can I withstand catastrophic interest rate increases?
Tomorrow: More examples…
Related Articles
- Risks in Life (Finale)...
- Risks in Life (Part II)...
- Sometimes the sure thing doesn’t pay out...
- Are your Taxes Done?...
- The Library and Video Games?...
Related posts brought to you by Yet Another Related Posts Plugin.
November 17th, 2009 at 11:10 AM
Hmm..yes I too locked in at about 10 3/4 I believe, but that was before they went up to 18% so I was smiling. My smiles were short-lived as rates fell, as you noted, within the life of the contract. However the good thing is…you can always renegotiate (for a fee of course) but as long as you are whittlin” the monster down…its all good.
The gamble BellyCheck took was enjoyable to watch…I despise the character..he’s a cheat…whatever he gets..he deserves…I am glad Manning made him pay!
Go “Skins (yes I am a Leaf fan too…many, many years of cheering for the “rebuilders”)
Wanna make money…bet against those two teams!!
November 17th, 2009 at 11:28 PM
I bought into an open with variable rate mortgage years ago and it gave me the flexibility to pay down on the principal of my home and without any limitations. Throughout the process however, I was worried about a spike in rates and how it could dramatically affect my bi-weekly payments. Regardless, I made my #1 goal to be paying off my home. Investing was secondary because I knew that I could pump more into investments while I was mortgage free.
November 19th, 2009 at 5:40 PM
[...] Canadian Financial Stuff believes that Bill Belichick did not take a prudent risk when the Football coach decided that the Pats will go for a fourth down on their 28 yard line when trailing the Colts by 6 points with 2:08 left on the clock. He warns against taking risks in finances, just as in football, when the downside is too great. [...]
November 23rd, 2009 at 2:11 AM
[...] Posts: Risks in Life I and Risks in Life [...]
November 23rd, 2009 at 3:04 AM
[...] Personal Finance Blog chats about risks in life and in [...]
November 23rd, 2009 at 8:03 AM
[...] Cajun Man from Canadian Personal Finance presents Risks in Life. What does Bill Belichick coach of the Patriots have to do with Personal Finance? [...]