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? How do you deal with risks in life ?
Risk is part of 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 part of 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 quickly, 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…