Risk Analysis vs. Pessimism

When I started paying attention to Dave Ramsey last year, my thinking on personal finances started to change. One thing I came to see differently is the no interest financing. My wife and I have used this several times. We’ll buy some new appliances at Lowes on a 12 month no-payments-no-interest deal, then sit on the balance and pay it off at the end of 12 months. My thinking on this changed suddenly after Dave Ramsey explained to a caller what the problem is: risk.

As an engineer I understand risk well enough. To put it simply, a risk is something that could happen to derail your project. It doesn’t mean that it will happen, but it could happen. It’s important to identify possible risks and then detail mitigating methods to stop those risks from causing problems. As the risk manager on my program, I deal with these closely enough. Some of my risks involve software being delivered late, hardware being delivered late, other systems not being ready for integration testing on time, etc. For each risk, mitigation methods must be maintained.

When I first explained to my wife that we hadn’t been factoring risk into our 12 month appliance buys, her initial response was that I’m thinking negative. At first, that shut me up. I’ve never really been known as “Mr. Positive Thinking”. I’m not aware of anybody would would call me an optimist. I used to be very negative and cynical. I like to think by now that my cynicism has been balanced out by some acquired wisdom and a sense of humor, but that could be my own perception. However, when it comes to finances, I believe there is a well-defined line between negative thinking and smart risk management.

My wife and I put our house back on the market last week. We’ve been trying to sell for about two years now, but we took the house down last fall for a few reasons, one of which being we were sick of showing and being jerked around. You can read about that in my archives. Now we’re back up. Many people, my wife included, keep suggesting something in an effort to be helpful. I can’t tell you how many times I’ve heard “Why don’t you just rent the house out?” I’ve always politely shot the idea down, although I’m reaching the point of needing more willpower to hold back my violent urges against people who still suggest it. Makes me want to scream “No way! You mean I’ve been on the market since June of 2007 and it never once occurred to me to rent my house out? Wow, I must be a moron. Thank you for your insightful advice. Can we talk about my career next? I don’t like New Jersey, but moving out of the state has never occurred to me either. Can you suggest it to me as I’m impervious to the obvious?”

To date, I’ve always shot down the rental idea with something like “I’m really not cut out to be a landlord.” I finally figured out why I don’t like the idea of renting, and this is my new answer (so please read this before you suggest that I rent my house out): “I am not comfortable with the level of risk involved with renting this house and then paying living expenses on another residence for my family. I have no way at present to mitigate the level of risk involved. Please drop the subject or I will be forced to retreat into sarcasm and hurt your feelings.”

All of my sarcasm aside, it’s always smart to analyze your risks in all areas of life and transactions. Believe it or not, you already do this. How many times have you bought a new car by using risk analysis? The problem is that you’re often analyzing the wrong risks. You might think “OK, financially, it might be smarter to buy a 2 year old used car, but then if I buy a new car the odds are better that it won’t have as many mechanical problems.” That’s why I say you’re analyzing the wrong risks. I’ve never had a new car. Consider risks and mitigating actions from several perspectives. In the case of a car, let’s imagine the worst case scenario: you buy a $1500 clunker, and in exactly one year, the car needs $3500 worth of work. However, is that really a greater risk than the interest you would pay and the loss of value you would take on a brand new car? Assuming the worst case, what if you just scrapped the car and bought another $1500 clunker? It seems to me that would actually be less than a $400 car payment every month. Only you can provide the answer to that risk and mitigation question though. But think about it.

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