On the ChooseFI Facebook group today, a member asked the audiences to pick two out of eight choices. I see a lot of two number responses with no explanation – 1 & 2, 3 & 4, etc. etc.
I personally prefer to understand others’ thought process, but I also understand the need to give my own responses.
If you read my response below, you will know this is deserving of a blog post.
In college Economics classes, I learned the importance for cost benefit analysis and utility. Cost benefit analysis allows me to see the full picture and includes the cost into equation. Utility is more of an equation of personal preference. What makes me happy may not make you happy.
Option 1 – $10K of cash is a solid choice before evaluating other options since there is no cost associated to it. And I have the freedom to use the $10K as I see fit without restriction to get maximum utility.
Option 2 – I have a mortgage in my primary residence so immediately having a free and clear brand new house would lower my monthly expenses. Since I have equity in the property, I can sell it, keep some proceeds as maintenance funds, and invest the rest.
On a utility standpoint, while it doesn’t specify I assume I also have a say in its design and the location. The restriction of never selling or moving doesn’t faze me as I have stayed in my current house for 8 years. I have friends and family in the city that I live in and I don’t expect to move for a while (never say never).
On a comparative standpoint, this is a better option to receiving 10K. But since we have only 2 options at this point, I am fine with both options.
Option 3 – I have generally done my best in avoiding injuries and illness since I was a sickly kid and had a lot of practices. However, I know it is a fact that my body will deteriorate over time. It will take longer to recover, I will get sick easier, etc. Historically the growth of medical and tuition expenses have outpaced inflation. Given the inefficiency of the market medical expenses will be likely to grow. On a cost benefit standpoint there is no cost at all. This choice only has benefit and added benefit of me not having to save for co-pays and deductibles. I will also guess that my medical expenses over my life time will far exceed 10K.
On a FI standpoint, many people don’t want to pull the retirement trigger due mainly to health insurance. Having medical expenses taken care of would definitely make me sleep better at night.
Therefore option 2 and 3 are my top two choices now.
Option 4 – I don’t live in an extravagant house so while there is no cost, the 6 months of mortgage rank relatively low. As this is lower than 10K I will not spend time further.
Option 5 – The option doesn’t appear to cover car insurance and maintenance. Therefore, while the car itself may be in the six figure, I have to budget for more expenses. I effectively would spend more money to keep the car.
I drive a 2014 Honda Civic that I bought last year. It is not flashy and does everything I want to do. I sleep soundly at night knowing that less people would want to steal it.
As a side note I also drive like a grandparent on the highway and have no utility out of a flashy car. Therefore this option actually lowest on my list. Option 2 and 3 still stand!
Option 6 – Perfect Credit Score is only marginally higher than my current score. In fact, there is probably no difference in loan terms whether I use my current credit score or the perfect score to qualify for a loan. This option is low on my list. It is not as low as a luxury car since I have to pay to maintain the luxury car.
Option 7 – Unlimited airline tickets for life is very enticing as an option. Financially, it can easily rival the cost of a house or medical expenses, especially if I no longer need a job and can travel year round. However, flight is only one part of the travel expense. In order to use the unlimited airline tickets, I need to save for the remaining costs of the trips. When I consider the additional expenses.
What makes this option less attractive to a house is that housing expense is a mandatory expense whereas traveling expense is more discretionary. I can choose to travel only a few times a year but I always need a shelter. Personally, I prefer having a home base. Too much traveling could disrupt your daily routines.
Option 8 – depending on how much I spend on grocery, this can easily equal to a new car. However, this dwarfs in comparison to a house, medical expense, or a luxury car for life. If I spend too much in grocery, my medical expenses might go up. There is a limit to how much I should spend on grocery.
Option 2 and 3 remain the top 2 options.
Thank you for reading the entire articles. As a bonus, I will give you my ranking of all of the options above!
3, 2, 1, 4, 6, 7, 5
So what is the key takeaway for you? I know this exercise is hypothetical but it is important to consider the costs and your utility on everything you choose.
This is the essence of the Financial Independence movement.
Also, luxury car sucks.
What are your two options? I can’t wait for your comments below.
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