Yesterday, we discussed the topic of Risk and its importance in key financial decisions in your life. Today we continue on with more examples from my life about Risk. How did risk play a part in my decision process?
Example 2: Exercise Options or Not?
When I worked at Nortel, I had stock options. There was always the question whether I should exercise the options or hold them in case the stock went up. Luckily for me, they were never worth more than $389.67. Yes I remember the exact amount, and no I didn’t exercise them.
Many people I worked with had the same decision to make but with MUCH larger valuations on their options. They didn’t “pull the trigger” either. I do know a few folks who said, “Give me my money”, every time their options came up. They didn’t care about whether the stock might go up, they simply wanted their money. Those folks (in hindsight) are the ones who did the best in the options game.
Risks are high in options, and luckily it’s a game I won’t play anymore.
Example 3: Buy or Lease a Car?
Many of my friends have leased cars, but I never thought for me it was a good deal. I have owned used cars most of my life. I did buy a GM product new, which luckily, I had an extended warranty. Typically I have driven my cars until they were dead (or 5 months after that), or until my mechanic told me I had to get rid of it (he did refuse to fix a Honda Accord I owned that was in very bad shape).
My view of a car is purely functional, it is not a part of my masculinity or of my prestige, so having a new car is nice, but not an essential variable for me.
Leasing usually means you can afford “more” car than you can afford. However, after 3 years you own nothing (and if you have driven it too much, or worse dinged it once or twice, you are hit with extensive punitive fees). You can simply walk away from the lease, or you can buy your car at that point. However, the money you paid in the lease hasn’t gone towards the car really, you are simply delivering the current value of the car.
Is there risk here? If you BUY a lemon (i.e. a car that is just overrun with defects and issues), you are going to have a problem getting rid of it. It will cost a lot to maintain since you can walk away from it if you lease the car (typically the lease and warranty periods are about the same time frame).
I’ll continue to buy cars, unless I get a job where leasing might make sense (i.e. you can write off the value of the lease as a percentage of how much it is used for your job/business).
Tomorrow: Final examples and an epilogue