How Much Is Optionality Worth To You?

D Sharon Pruitt
Photo by D Sharon Pruitt

When we first graduate, we have little-to-no options since we know nothing. We're a cost center that does what we are told and likes it. We develop skills that provide us more options over time. We look for better opportunities or ask for raises with more skills. Sometimes we get complacent and just stick with a company for way too long like a bad boyfriend or girlfriend.

Eventually we stop being so parsimonious with our money because our financial nut grows to the point where we can afford luxuries otherwise foreign to us in the past. The luxuries I'm willing to pay up for now are convenience, time, and less stress. I used to be OK waiting at the DMV for 3-4 hours to register a used car. No more. I used to be fine waiting 45 minutes for a bus instead of taking a cab. But no more. Waiting in line for hours to get cheaper event tickets was no big thang. Now I am more than happy to pay a premium to get access to nice seats.

I think most of us who really care about our finances have a strong frugal side. Savings is in our DNA. We know that so long as we always spend less than we earn, we'll eventually reach an amazing financial place. But due to the confluence of old age, awareness, and more money, we eventually change our spending habits.


I come to you a little bruised by the comments left in my post about leasing a carThe general feedback is that I'm foolish for leasing Rhino instead of buying him or buying a used car. Spending money on a car for most of us is bad for our finances because it is an expense. Mass produced cars will never appreciate, unlike homes, which at least have a chance. Therefore, we should try and minimize our car expenses as much as possible.

Conventional wisdom says leasing is the most expensive car-owning option. Based on my research for Rhino, that is indeed the case by $1,091 more over three years than if I paid $20,100 in cash for him. Let's exclude the $1,400 I could earn risk free at 2.2% a year from the $20,100. The real cost is paying $8,700 for the depreciation after three years and NOT buying Rhino for $12,800 at the end. This is where reader Ricky makes a great point, so thank you for highlighting.

I'm about 75% certain I will buy Rhino in three years given I owned Moose for almost 10 years. It's been less than a month and I find myself grinning from ear-to-ear every time I zip around town. It feels wonderful to get 30mph+ a gallon, charge my phone, and listen to Pandora. You never know how good or bad you'll feel until AFTER buying a big ticket item like a home or a car. This is why I tend to be conservative because I hate feeling stupid with my money decisions.

Let's not talk about the fact that I didn't spend $24,000 – $45,000 more for an alternative vehicle and review why I'm not 100% certain of purchasing Rhino in three years.

Why I paid a $1,091 premium to lease:

1) I'm unsure about my family size or needs. If I have triplets, I will need and want a bigger car, for example.

2) I'm unsure about my permanent residence in SF after the third year. There's no way in hell I'm moving within 3 years given I just bought my house and am doing some remodeling. The reality is that I've made a promise to not move for 5 years since moving is such a PITA and selling a home is costly. But, I've always played around with the idea of writing from my place in Lake Tahoe.

3) I'm unsure about work after three years. I took two years off from Corporate America to do my own thing, and it was wonderful. I'm nine months into a great consulting gig that could easily turn into 1-3 years. Hopefully I'll still have plenty of enthusiasm after three years, but one never knows what other opportunities may arise. Maybe Financial Samurai grows massive and takes a lot of time away. Maybe the company I'm consulting for gets acquired two years from now. I want to have the option to fly to Australia and consult for six months if I ever get the call. Being mobile is one of the best reasons for running an internet business.

As I review my three reasons, I've come to realize that these three reasons probably resonate with many of you. Life is always changing. We should hope for the best, but always prepare for bad times.

The value I pegged at the option of not having to go through the hassle of selling Rhino in three years is $2,000, or double the premium I paid to lease. I just don't want to haggle with flakers on Craigslist anymore, or deal with third-party sellers even though selling a Fit with low miles in San Francisco will probably be pretty straightforward.


Money is about never having to feel restrained from doing something you want to do. We have this inherent desire to not do as we are told ever since we were kids. We go through a lot of this friction during work. When work is over, we relish the time to ourselves. This is why vacations feel a little more awesome when we continuously work hard. Being on permanent vacation starts feeling numb based on my experience of traveling for over 10 weeks a year in 2012 and 2013 while not having to answer to anybody.

The more money you have, the less you want to be tied down. We are all at different stages of our financial journey so it's hard to truly understand how each person views money. I've written about frugality many times in the past, and although I couldn't bring myself to pony up $44,000 to buy the Jeep Grand Cherokee, I did pay up to keep my options open in the future.

Manage your optionality with ease: Money buys optionality, but money can also disappear from underneath your feet if not properly managed. One of the best ways to keep track of your wealth is by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances.

Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month. The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! There is no better financial tool online that has helped me more to achieve financial freedom.

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Personal Capital sample retirement planner calculator. Are you on track? Click to find out.

Related: Reflecting On Two Years Of Freedom From Work

43 thoughts on “How Much Is Optionality Worth To You?”

  1. I’ve learned this lesson quite a bit lately. I used to be so gung-ho and get things done today, but I’ve learned multiple lessons financially that sometimes its actually best to wait until the very last second to make a decision. Our office moved from the city to the suburbs and I was anxious to get our sign up on the building. The cost was $20,000 and I scheduled the estimates and had it all ready to go with the plans all set. At the last second we were offered another building at a better rate in a better location. I almost put a sign up on the wrong building because I was so anxious to let people know we were going to be in the area. Due diligence is better than jumping the gun. As a former reporter we always had issues with accuracy versus being the first on the air. It used to be so crucial to be 100% accurate and now new directors are more concerned with being first with breaking news. Take your time and do things the right way. Then you don’t have to live or worry about regrets.

    1. Great advice Lance. I hear you on “being first” and accuracy. I like to be very thorough as I, too, have rushed into many, MANY mistakes. Things will usually be there tomorrow. No need to rush.

  2. I don’t associate optionality with the decision to purchase or lease a car, except for the fact that I think purchasing a car gives you far more optionality.

  3. That’s true the more money you have the less you want to be tied down and yet when you have more money it often comes with more responsibilities towards other people.

  4. Sam,

    I have done a short term lease before (three years). I don’t necessarily consider it a bad thing if it meets your needs.

    The nice thing about short leases is that the car will usually remain under warranty during the lease term. In general, a lease provides you with a “predictable” fixed cost for your automobile transportation. You won’t have to be concerned about an unexpected $2500 break down destroying your monthly budget. That can be very beneficial to many folks.

    And also, you will always be driving the latest in safety technology.

    1. That’s exactly it. At 14 years old with 5 red warning lights on Moose’s dashboard, he was becoming a liability. The probability of paying $1,000 to fix was very high.

  5. Sam, I read your blog because it’s not about getting rich by pinching pennies. Your attitude is quite refreshing. While I’m frugal (still no smartphone…but the iPhone 6 and Apple Watch are very, very tempting), I have no desire to make my own soap, separate two-ply toilet paper, live in low COL area, or ride a bike everywhere. Like you, I’m at the point where I value time more than money, and since I can afford to buy time, I’m going to do so. Frankly, I’d rather focus on increasing my income than finding ever more “imaginative” (i.e., sometimes unhygienic) ways to cut my expenses because with the latter, there is a hard limit.

  6. Whenever you go against conventional wisdom, you will get naysayers. First, I doubt if they understand your explanation.

    I leased my my wife’s car because I am downsizing to one car in three years. Secondly, the differential between no interest financing and a lease was even less for me. Third, I went with leasing because it provided a lower payment. Last, My money is working for me in the market vs. tied up in a depreciating asset.

  7. I find trying to put a monetary value on these sorts of ‘life’ options is hugely difficult – the old ‘Black Scholes’ formula doesn’t really work here! I suppose we implicitly place value on these options through our decision making. If I’m buying an option to work 3 days a week (which I have been thinking about), I’m paying 40% of my salary for that option, plus all the future opportunity costs of that money, so if I go ahead with it, that’s the value I’m placing on it!

    I just don’t think we’re very good at estimating all the inputs into our option pricing calculations, especially when it’s all forward looking. But as they say in the asset valuation world, it’s definitely more of an ‘art’ than a science!

  8. Sam

    I was one of the “surprised” posts when you leased. But the reality is– you leased a very low priced car and do not have much into it. The consequence of the “error” is miniscule. So much so that, in hindsight, it is not an error at all.

    Personal finance is, well… personal. And you made a personal decision, well within the lines, to make your life a bit easier, based on what you see in your future.

    I think its fine. If we all bought the cheapest possible thing and took the most frugal path each and every time….. we would be robots– not people. And life would be dull.

    The way we beat you up was a bit overboard. I guess that what you get for holding yourself out there with the name “Financial Samurai.” We expect our heros to have super powers… and typically that means not leasing a car.

    Just stay clear of investments with high fees, borrowing from your 401K, running up credit card debt, prioritizing wants over needs, and having a negative net worth. Do those things and I will have no mercy.

    Enjoy the car. I repeat… no error at all !

  9. Good point on optionality. With your car choice, you got immediate but restrained gratification, you stay liquid and you didn’t have to commit to anything for the long-term.

    Optionality is exactly why I’m renting my primary residence right now, even though I could use the mortgage deduction, and I could afford to buy a nicer place than I can afford to rent. However, I’m living in a new city and I’m still very much in the honeymoon phase of my life here. I had a few rough years and those are now behind me and I value my freedom and mobility and the feeling that ‘anything is possible’. The only problem, as you said, is that moving is a PITA and it’s expensive. But that’s part of the price of optionality!

  10. The Alchemist

    Sam, you wrote “Money is about never having to feel restrained from doing something you don’t want to do.” I think you meant to say, “Money is about never having to feel restrained from doing something you WANT to do.”

    And I agree a thousand percent with that idea! Once you’ve done the hard work of saving and scrimping and making your money, one of the greatest values of that money is its ability to save you hassle. Anyone whose overall financial plan is in solid shape has earned the right to occasionally choose convenience or luxury over frugality and perfect prudence. My god, how pale and cold life would be if we could never cease being frugal, if we were endlessly compelled to make the frugal choice rather than the fun (or just simpler) choice in every single instance!

    I admit to still having a hard time with this myself. I’m hardwired to save like a miser, largely because of the insane cost of living here in the BA. And yet, there are still things where I just can’t be bothered to do the extra little thing that might save a buck here or there, because it’s just too damned inconvenient. Life is just too short.

    If anyone has earned the right to take the convenient path over the financially prudent “high road” once in a while, you certainly have. Leasing Rhino has bought you the optionality you crave. I say, “Perfect!” You are in a position to afford optionality, it in no way compromises your financial well-being. Heck, when it comes to cars, optionality is INVALUABLE, because the things are a huge expense, and you never really know until you’ve had one for a couple of weeks if you’ll be really happy with it.

    I suspect the criticism you received emerged because folks expect your posts to always point out the smartest financial choices from a strict hard numbers perspective. In this case, the hard numbers may blankly indicate that leasing is the suboptimal choice. However, that’s not the entire story; the hard numbers fail to take into account the value you place upon flexibility. And if someone isn’t in a position, either financially or mentally, to value flexibility as much, they may discount it and simply see your choice as financially unsound.

    Bottom line: Even if leasing Rhino was a HORRIBLE financial choice (which it isn’t— possibly “suboptimal”, but not horrible), you are in a position where you can afford the occasional financial clunker. No worries!

    All of that said, I understand your reluctance to get too comfortable with making suboptimal financial choices—what a slippery slope that might become, for someone with a reasonably hefty net worth! When you’ve spent your whole life being financially disciplined, making the occasional cavalier financial choice must feel like tasting the forbidden fruit…. you never know just how addictive it might turn out to be!

    Enjoy Rhino!

    1. Thanks for the correction! I need to run things through you again like the good old days! :)

      It’s really no big deal about the feedback. I like it and everybody was cordial. The feedback has allowed me to segway into this post about optionality.

      Gotta cut the savings hard wire once in a while!

      Btw, it seems like the RE market is slowing finally. Maybe there’s a 3-6 month window for you.

  11. I hear ya on the value of optionality. I’m in the process of looking for a new job and am coming to realize that I may have to take a salary cut in order to do what I really want. But if it means a lot less stress, being around happier people, being happier myself, and doing work that I enjoy all around, that has a lot of value. Sometimes taking a financial hit is well worth it for a better lifestyle!

  12. Sam,

    I believe many of your readers view your site as a ‘how to become FI’ guide, which may explain some of the negative comments on your decision to lease a new car.

    I mean, let’s face it. For most anyone on the road to FI, buying a new car, let alone leasing it, is a suboptimal idea. And in some cases, a TERRIBLE idea.

    That blanket statement however no longer applies to you.

    On my road to FI I was frugal in most every way. Now that I’m 45 and retired, I carefully run each expenditure through a cost/benefit analysis and decide where my priorities are .

    This is EXACTLY what you have done (and explained in your post), and I applaud you for it.

    For me, I cut my own lawn, manage my own rent houses, drive a used car, and clean my own house. But I play a lot of golf, travel extensively, happily outsource all car repairs and maintenance, and have cable. Some people would consider the first four items overly frugal, and some would consider the latter four items wasteful. Due to my current financial situation and years of savings, I’ve ‘earned’ the luxury of making those choices. As have you with the car decision!

    Nothing to be ashamed of! Enjoy the new ride. You’ve certainly deserved it, and more importantly you can easily ‘afford’ the luxury~

    May your decision serve as motivation for those on the road to FI

    1. Golf! Now that’s a luxury I wish I could afford. It costs $8,000 to join Olympic Club and still $100 in green fees!

      One day. One day :) hope you are enjoying your retirement!

      1. Well, that is one area where Texas probably has the edge over California. I found a gated golf course / lake community (Hideaway Lake), about 1,400 homes surrounding 27 holes of golf and three lakes.

        I bought a 3/2/2 for $120K on the course, $4,500 in upfront initiation fees (paid by seller), $200 in total dues per month which includes all the golf you can play (it also covers the cost of security, swimming pool, stocking of lakes, road maintenance, tennis courts, parks, playgrounds, clubhouse, restaurant, city property taxes, and the other expenses that come with maintaining a community this size). If any readers live in East Texas and play golf 3-5 times a week it’s a no brainer.

        Speaking of, if you ever start exploring rent houses in the Dallas area feel free to reach out. I can refer some wholesalers, realtors, property managers, etc and tell you what areas I’d suggest you stay away from.

        Keep up the good work~

  13. I know that you said to exclude the money you could earn on the $20,100 with your decision to lease instead of buying outright, but I think that’s a very important point too. The economics actually might be in favor of leasing rather than owning so long as you invest the $20,100.

    1. I definitely think including the risk free calculation is part of the leasing decision.

      I was just saying “let’s exclude for the sake of argument” to BOOST my argument since i did mention it. Just a writing style I was deploying.

  14. Man, I wanna go to a happy hour with the code word ‘samurai’! Why is my life not that cool at the moment.

    Here’s to FINCON ’15 which I’m definitely going to!

    And I agree, money is about options. I think money should always be considered by I don’t think it should be the primary reason for doing (or not doing) anything. That’s what money means to me.

  15. Everyone has their money priorities.

    It makes people feel good to judge someone for a decision they think is bad. Ignore it Sam :)

    1. Thanks. Can’t ignore as it’s fun for me to write about these things. I was just getting tired given I responded to so many comments with pretty decent detail so I figure id just write a post.

  16. Sam, I hear you and understand where you are coming from. This is precisely why I prefer owning Vanguard REIT over owing rental RE. No evictions, vacancies, phone calls in the night, repairs, etc.

  17. Closer we become to realizing our goals of financial freedom the more likely you are to add in benefits of your hard work. Unless the ultimate goal is to see how much wealth you can save ( mine is not). Eventually priorities will change. At 38 my wife and I have been blessed financially through hard work and savings. Our priorities are changing drastically as we are 2-3 yrs from financial freedom.

  18. When I bought a used car a couple years ago I was surprised by the lack of savings! There was no a big difference between one and two year old cars and new cars. I guess the certified warranties and lack of used cars caused this. I ended up buying a used Audi S4 from a California dealer site unseen and had it shipped to colorado. The car was certified meaning it had a much better warranty than new and was 12k less than any similar car in colorado.

    As far as trading time for money; I focus on creating money, not being frugal. I still save money where I can and even though I bought a lambo, I’ve never bought a new car.

    When we spend all our time being frugal we don’t leave time to plan and think about making more money. Plus it creates a mindset that everything we own should be cheap and that could get into our heads that we are cheap and not worth our true Value. I truly believe we should save money when it is easy and convenient or on big purchases. But we should also not be afraid to spend money on things we love or that make us happy.

    1. I have noticed that some used cars have really held their value over the past 5 model years, making it difficult for used cars buyers like ourselves to get good deals. Funny how the used car market can fade up and down as well.

      The Fit holds its value like a champ in a city like SF.

  19. Don’t take our feelings on leases too personally. My views change and there are scenarios were a lease can be the right move. You are the only one that has to be OK with your decision. You are, so we are all full of crap. :-)

    For 15 years I was a “used car” guy. Have the least amount into your cars possible. Now that we have progressed through many stages toward financial independence, I am turning into a new car/no hassle guy. No more clunkers with squeaks, rattles, rust and repair bills.

    I will pay for simplicity. I will pay for quality. I will pay to have more time. I will pay to have more flexibility.

    Options, like you say are very good.

    1. No worries Wade! Nothing personal. It’s different feedback that inspires me to write.

      I sometimes wonder whether I’ll run out of things to say, but the community just keeps me going. So, thanks!

  20. Sam –

    A couple comments:

    1. I disagree with your very first point (to an extent). I think when we graduate, for most of us, we will never have as many options as we do then. No family obligations, freedom to live anywhere, have not (hopefully) let lifestyle inflation take hold, etc. Anyway, I get your point though.

    2. The biggest negative impact on personal finances with car buying is simply buying more car than you should, which is obviously different for each person. There is nothing wrong with leasing a new car every 3 years if your finances allow for it. By choosing an economical fit over a more expensive range rover, you already made the biggest favorable decision for your finances.

    I think many argue for buying used over new simply to justify their desire for wanting a better car. What is the better financial decision, buying a used luxury car or buying new economy car. A lot of people will praise the former decision and say that is smart, but immediately dismiss the latter because the buyer could have bought used. But from a pure financial cost, the latter has used less financial resources.

    1. Great perspective on point # 1! Funny I didn’t look at it that way at all, but totally see it.

      My thinking is that we’ve spent the last 4-5 years studying all this time, that most can’t wait to prove themselves to the world. The faster we can establish ourselves, the faster we can get the heck out!

      I see a real danger period in one’a early to mid 20s for vagabonding too much. There needs to be a balance or you’ll get permanently left behind.

  21. From recent posts sounds like Mr. FS’s new consulting revenue is leading to an upsize in lifestyle! ;) As a consumer of financial bloggers I’m looking for tips and encouragement on saving, frugality and building my nest egg. Personally, I can understand the convenience tradeoffs, but both my wife and I are still working full time in demanding jobs and raising kids.

    When I kick-off our early retirement in a few years, I’ll be more than happy to stand in line once every 10 years to register a used car and save tens of thousands of dollars.

    1. First a leased Honda Fit, next Moët at the clubs and a new pair of alligator Gucci loafers!

      Get back to me once you’ve entered your early retirement phase for a couple years and let me know if you still feel the same way.

      1. LOL. You’re easily my favorite internet personality. 1 part Mr. Money Moustache, one part Ramit Sethi. I appreciate the way you balance frugality with understanding the relationship of money and freedom.

      2. You bet! Thanks for all the advice and encouragement to those of us walking the road less travelled.

  22. I think it’s all about maximizing perceived value.

    For me, being insanely frugal provides mental freedom to do other things. I’m happy to trade some time for money (home repairs, mending clothes, cooking from scratch) because I place a high value on not needing money.

    You place a high value on maximizing your free time.

    Neither of us is wrong, and both of us would probably go a little nuts in each other’s shoes. We both have plans and goals, and are making rational choices in that direction.

    And that’s what separates us from average people. Most people don’t have goals, and aren’t rationally choosing to move in any direction. They lease without thinking about it and without having a plan. You gave it considerable thought and have a plan that fits with your goals.

  23. Money gives you options and time… or the option to create time.

    At my stage in life; I’m still willing to queue up for an hour or take a longer route in order to save the money, however I expect as my time on this earth shortens i’ll begin to prefer the time savings instead.

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