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. I sometimes drove them for 5 months after that. My mechanic told me to get rid of cars when necessary. He refused 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. If you have driven it too much, you face extensive punitive fees. It is worse if you have dinged it once or twice. 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
If you can write off your lease payments, you can claim a CCA deduction on a purchased vehicle. If leasing is a worse deal than buying (which it almost always is) then yes, you will recover a portion of that “worse deal” through lower taxes, but you will still be out more money in total.
I suppose if we’re talking luxury cars, where there’s a cap on the purchase price that can be claimed for CCA purposes, then leasing may make more sense, but even then it’s necessary to actually run the numbers on a case-by-case basis, since the gap has to be sigificant before you’ll actually save money just from the tax deduction.
As for options – if there is not a minimum hold time requirement for exercising them, then the best approach is to exercise and sell immediately. It’s a huge risk to exercise and then hold the options, because if the stock goes down you end up paying taxes – as employment income – on a lot of money that you never saw.
@Neil
Very true about the options, I know a few folks who have been burned by holding stocks bought in Options (and a large number of folks got burned not even knowing they were doing that). Getting taxed on money you never got really does suck!
I think you’re right that leasing can only make sense if you can write off the payments on your taxes. In the every day sense of the word “risk”, leasing is risky because of the higher costs over the long term. However, in the financial sense of the word “risk”, leasing isn’t particularly risky compared to buying a car because it is almost guaranteed to be a worse deal 🙂
@MJM
So in this case substitute BAD for Risk 😉