Protect yourself, and your bank account, by hedging
- B.J. Yoder: Young Money
- September 2, 2022
- 676
The word hedging is mostly associated with landscaping and gambling, but why should we think about it in our everyday financial life?
It is defined as “protecting oneself against loss on (a bet or investment) by making balancing or compensating transactions.” Talk to any experienced gambler, and they might bet on the opposite team they had originally bet on to hopefully even out a bad bet they have already made. We can protect ourselves with hedging by making decisions that will help us in the long term and don’t feel good for the short term or make us happy for the long term.
One thing I see especially right now is vehicles. I would love nothing more than to drive a truck instead of my Chevy Cruze, but with the way vehicle prices and gas prices are right now, buying one when I don’t absolutely need it would be foolish. A lot of people bought a truck when gas was in the $2-$2.50 range, and everything was fine. Now that gas is in the high $4 range and even cresting $5, driving a truck when you don’t need to is hurting your personal bottom line.
Even that new truck feel wears off after about a month, and then you’re stuck with expensive tires, repairs and a monthly gas bill you never thought would be that high. Make sure you can afford an expensive truck or vehicle in the long run before you buy it because it will feel good in the short term but could come back to bite you down the road.
The next thing is toys — boats, side by sides, four-wheelers, anything with a motor that has the potential to go fast. Talking with one guy, he was regretting buying his boat because, as much as he liked fishing, the money pit this thing has become was eating him up. Of course, flying on the lake at 50-70 mph makes any man forget about how much gas was put in the tank momentarily, but the storage, maintenance and gas weighs on a person who only thought of the boat costing them just the sticker price.
With hedging, I want you to think of the full picture when you buy something. By full picture I want you to know everything the one purchase entails, like the above mention about a vehicle, maintenance, gas, storage, et cetera.
I must think about when I wanted to get into hunting. I thought all it took was a bow and about five arrows. I was sorely mistaken on this because I didn’t see the full picture. It took licenses and tags (not expensive) and other equipment such as deer urine, tree stands, gas and time to get to the hunting land. Then if you shoot a deer, the butcher processing fee will pop up. I jumped into the water before checking the temperature, so to speak, and as a kid straight out of college, this activity weighed on my budget because I was not making a lot of money.
We talked about the full picture and hedging, but what are some other ways to “hedge your bet” in real life? The first is to be mindful of every large purchase. There’s a pastor who speaks about how he and his wife will consult a trusted group for every purchase they make over a certain dollar amount. I thought that seemed a little out there, but now I see their point.
Also, talk to people who own a truck, boat, et cetera, before you purchase one. They can give you the real life take on it, not the fantasy version everyone has before they make a fun purchase. Hedging will come in handy in your finances, and it doesn’t have to apply to just gambling. Your future self will thank you.
Holmes County native BJ Yoder is an insurance agent by day and a finance enthusiast by night. This column is for informational purposes only. He can be emailed at benjamin.john.yoder@gmail.com.