“I do not think much of a man who is not wiser today than he was yesterday.”
Stubborn as a mule. That’s how the saying goes, and I’m often that mule. Stubbornness at times can be a strength when it’s a result of deeply held convictions. More often than not though, stubbornness is a weakness. People find themselves falling in love with a conclusion and over time they forget to go back and review the supporting evidence for that conclusion. The longer a position is held the more cemented our stance becomes.
Lately, I’ve found myself explaining financial planning to clients this way – for each financial decision you have to make you need to put all the potential options on the table and weigh them against one another. Each option has its own costs and benefits, and there are trade-offs based on which option you choose. I try to emphasize that ALL options need to be at least reviewed and considered. Life is full of taboo topics and subjects that you know are common hot buttons in conversation. In finance, these topics might be things like debt or insurance, or cryptocurrency. To combat stubbornness, even our “hot button” options need to be discussed when relevant to a particular financial decision you are wrestling with.
The Haves and Have Nots
Here’s a topic I used to be stubborn about – buying vs. renting a home. I’ve always had a bit of a contrarian bent and during one season of life when all my friends were anxious to buy homes, I promoted the idea of renting as being a financially superior decision. I had watched a presentation from Salman Khan, founder of Khan Academy, where he did a side by side comparison on buying vs. renting and I used Sal’s reasoning from this video as my primary defense.
I wasn’t the only one wrestling with this debate. You could get lost in hours of reading through online discussion boards dedicated to this very topic. It seems that there are many people ready to viscously defend each side. Before we get too far, let me clear up with you the correct answer on whether it’s best to rent or buy? … It depends. This answer has become my go-to for so many financial dilemmas and although it might be a frustrating answer for some, it’s the right answer. “It depends” is the launch point for reviewing all options available to you, navigating through your own financial particulars, and concluding what option fits you best. And guess what, that answer will change over time, as your life circumstances change.
As a single guy, renting was most likely better than buying, but this shouldn’t have been a conclusion I was openly promoting to others. Yes, a contrarian thought can spark some good discussion, but again all financial decisions should be weighed against one’s own situation. These types of financial decisions are not one size fits all.
Renting made more sense for me at the time because I didn’t need much space as a single guy. This meant that the monthly expense for renting a small place or even having roommates was a small bill to foot. Typically when you buy, you buy a little bit more home than you need, something you plan to grow into. When renting, you just get what you need now, which means the potential cost difference can be quite significant. Renting also allows you to defer maintenance expenses to your landlord and allows the flexibility to move and change locations more seamlessly than a homeowner.
Eventually, I did become a homeowner though. Life changed and I had to go back to the financial planning decision table to weigh out my options. That flexibility of being able to move and change my environment every few years became much less desirable. My friends and I joked that my whole life fits into one Tupperware box back then and it did. When I started a family the same former benefit of not being locked in became a negative. Now my family was at the mercy of the landlord and could be subjected to move not based on our preferences. Not to mention that my one box grew into many boxes and made relocating much more of an undertaking. Consistency and stability all of the sudden became very important. As our family grew, the size of the house we needed to rent grew too, and eventually, my first mortgage became less than my former rent payment.
I also realized a truth that I never considered or factored in before. I now had the ability to fix or lock-in my monthly housing expense for a long period via a mortgage. So, in reality, even if a rent payment was lower at the start but one assumes that expense inflates a couple of percents each year, it might not be too long before that growing expense (rent) exceeds the fixed expense of a mortgage. I never considered before what a great hedge on inflation a mortgage was.
Mind your Mind
Life changed and so did my mind. It’s ok to change your mind. You should welcome it. I hope you know that today’s discussion was about much more than buying vs. renting, it was about the importance of always re-weighing our financial decisions. Our discussion was about being careful not to rely on yesterday’s conclusions for tomorrow’s planning. What worked then, might not be suitable later. Again, planning is all about throwing all the options out on the table, letting our preconceived notions fly out the window, and concluding what solution best fits our objectives.
And that’s all I have for you today. Those are my Thoughts On Money and I’ll be back next week with more. Please email me at email@example.com with any questions or comments.
This is TOM signing off….