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When In Doubt, Go With the Known
Lets say you're a lower-income person and you own a crappy car worth $3000. Let's also say you still owe $6000 on its loan. Also, it needs about $2000 worth of repairs to make it decently driveable. This presents you with two bad choices: 1. Put $2K into a crappy car you're already $3K in the hole for (the $3K value of the car minus the $6K car loan). 2. Put $2K into the car and then sell it for between $3K and $4K. Keep making payments on the old car loan you couldn't completely pay off and get a new car loan and a new car, for also around $3K. Which is the best choice? Your emotions are likely going to want option 2. You hate your crappy car and want a new car. Your current car has been nothing but trouble, and perhaps a new car (albeit one of equally low value) will be better than your current car. You also don't see the point in dropping $2000 of your hard-earned cash into a car that's a piece of crap and has been nothing but trouble. Sadly, your emotions are wrong. The best option is option 1, even though, yes, it sucks to sink money into your current bad investment. Why? Because option 2 incurs to major negatives that option 1 does not: 1. It trades known for unknown. Your current car sucks, but it's still a known quantity. You know (pretty much) how bad it is and are likely not due for any huge surprises. A new, equally crappy car will introduce all kinds of unknowns into the situation. Known is always better than unknown when all other factors are equal. 2. It increases the complexity of your current circumstances. Instead of one car loan, you will now have two. Two car loans are way worse than one car loan, even if the total amount owed is the same. Why? Because anything of increased complexity will require more of your time to manage and raise the odds of future problems occurring. This is why have having one loan for $3000 at 4% interest is always better than having two loans at 4% interest at $1500 each. This above scenario applies all across your business and time management life. When making tough decisions, always remember that known is better than unknown, and increased complexity is usually a bad thing, assuming all other factors are equal.
This article was originally published on October 13, 2014