Two Big Decisions. One Financial Foundation.
Week 12 Interactive Lesson | Chapters 13 and 14 | FINC 3501 | University of West Georgia
This week the book puts two very different decisions side by side. One household is deciding whether to buy a house. Three people are deciding whether to grow a business. Both decisions turn on the same question: what are you willing to put at risk, and what must survive no matter what happens?
Work through the cards in order. Several ask you to commit an answer before the explanation appears. That is deliberate: committing first is how you find out what you actually think.
Start With Your Own Instinct
Before either chapter, make a call.
Which would you rather be?
In one or two sentences, why?
There is no graded answer here. Hold on to what you wrote. Chapter 13 gives you the arithmetic to test it, and by the end of this lesson you may want to revise it. Noticing that you changed your mind, and being able to say which number changed it, is the skill.
If you chose the third option, name the condition now. "It depends" is only an answer when you can finish the sentence.
Chapter 13: The Foundation Fund
Noah and Madison get engaged, and then they do something most couples do not. They give their down payment savings a name, a target, and a schedule.
The plan runs five years, because that is how long it takes on the income they actually have:
| Period | Monthly saving | Months | Saved |
|---|---|---|---|
| Years 1 to 3, Madison in law school | $800 | 36 | $28,800 |
| Years 4 and 5, both working | $1,800 | 24 | $43,200 |
| Total | 60 | $72,000 |
The target was $45,000 for the down payment. They end up with $72,000, which covers closing costs, moving, and furnishings as well.
Notice what the plan is not. It is not "save more." It is a named account, a dollar figure, a monthly amount that changes when their income changes, and a date. Every part of that is checkable, which is why it works.
The Payment Is Not the Cost
Noah and Madison look at a $225,000 house with $45,000 down. That is a $180,000 loan at 6.5 percent over 30 years, and the lender quotes them a mortgage payment of $1,138 a month.
Predict before you look. Once taxes and insurance are added, what will the real monthly housing cost be? Do not scroll ahead.
The $1,138 payment is exact for a $180,000 loan at 6.5 percent over 360 months. Every figure on this card is as stated in Chapter 13.
Run It Yourself
Chapter 13's rule is that total housing cost stays under 28 percent of gross monthly income. Put in your own numbers, or Noah and Madison's, and see where the line falls.
Principal and interest only. Excludes PMI, HOA dues, maintenance, and utilities. Chapter 13 puts PMI at $900 to $1,800 a year when the down payment is under 20 percent.
The Reality Check
Here is where Chapter 13 stops being encouraging and starts being useful.
During the three years Madison is in law school, the household lives on Noah's $45,000, which is $3,750 a month gross. The 28 percent rule gives them:
$1,050 is less than the mortgage payment alone. Not less than the total cost. Less than the payment.
So the answer is not "stretch a little." The answer is that this house is not affordable on this income, and the decision is to wait until Madison is working. Once both incomes arrive at roughly $100,000 combined, the same house costs 23 percent of gross and sits well inside the rule. Nothing about the house changed. The income did.
Fifteen Years or Thirty
Same $180,000 loan. The 15-year option carries a lower rate, 6.0 percent instead of 6.5.
| Term | Rate | Payment | Total housing |
|---|---|---|---|
| 30 years | 6.5% | $1,138 | $1,513 |
| 15 years | 6.0% | $1,519 | $1,894 |
Alex asks the right question in the chapter: the payment only goes up $381, but the term is cut in half. How?
Because on the 30-year loan most of the early payment is interest, not principal. Shortening the term redirects money from the lender to the balance. Here is what that looks like over the whole loan:
Driven by the loan amount on the previous card. Change the loan or either rate below and the chart redraws.
Now try something. Set both rates to 6 percent and watch the comparison change.
Chapter 13 compares a 30-year at 6.5 percent against a 15-year at 6.0 percent, which moves two things at once: the term and the rate. That is realistic, because shorter loans usually do carry lower rates. But it means the chapter's interest saving is partly a rate saving. Hold the rate equal and you isolate what the term alone is worth. The gap shrinks, and the gap between those two gaps is the rate.
The trade-off is real either way. $381 more a month is $381 less of breathing room. A 15-year mortgage you cannot sustain is worse than a 30-year one you can. This is the same question as card 2, in a different costume.
What a Credit Score Is Worth
Chapter 13 prices it. Same $180,000 loan, same 30-year term, three different borrowers:
| Credit score | Rate | Monthly payment |
|---|---|---|
| 700 | 6.5% | $1,138 |
| 780 | 6.0% | $1,079 |
Using only the two payments above: over a full 30-year term, how much does the 780 borrower save?
An 80-point difference in a credit score, on one loan, for the same house.
What the Calculator Leaves Out
Card 5's calculator gives you principal, interest, taxes, and insurance. A real owner pays more than that.
Commit your list: name at least three costs of owning a home that a mortgage payment calculator does not include. Do not look ahead first.
Costs a payment calculator leaves out:
- PMI when the down payment is under 20 percent. Chapter 13 puts it at $900 to $1,800 a year.
- Maintenance and repairs. Roofs, water heaters, HVAC. A common planning figure is 1 to 2 percent of the home's value a year.
- HOA dues, where they apply. Chapter 13's 28 percent rule includes these.
- Utilities, which are usually higher than in an apartment.
- Closing costs at purchase, and agent commission plus closing costs at sale.
- Furnishing and moving, which is why the $72,000 plan beating the $45,000 target mattered.
- Opportunity cost of the down payment, which is no longer invested.
- Illiquidity. You cannot sell a bedroom in a bad month.
Compare that to your list. The point is not the count. It is that every one of these is predictable, and none of them appear in the number a lender shows you first.
Chapter 14: Three People, Three Opportunities
Chapter 13 was one household and one decision. Chapter 14 is three people who each have a genuine chance to earn more, and each of whom would have to reach into something stable to take it.
- Berkeley is offered an expansion that requires equipment he would have to finance, with family property exposed.
- Ella has a boutique that wants twenty scarves a month at $25 each, which is $500. She has to buy about $300 of materials now and waits sixty days to be paid.
- Alex has a tutoring business that earns well twice a year, around FAFSA season and again when acceptance letters arrive, and almost nothing the rest of the year.
The chapter's title is its first lesson: Never Accept Just Two Choices. Derek presents the equipment loan as the only path to growth. It is not.
Decide before you read on. All three opportunities are genuinely good. Which person is in the most dangerous position right now?
One sentence: what makes that one worse than the other two?
There is a defensible case for each, and the reasoning is what matters.
Berkeley has the largest number attached, and family property is exposed. But his decision is still ahead of him. He can say no, and nothing bad has happened yet.
Ella is the one most would miss. Her opportunity is profitable and she still cannot survive it as offered, because the money leaves before it arrives. A danger that comes from timing rather than from size is the hardest kind to see, and the next card is about exactly that.
Alex has the most predictable problem. He knows when the lean months come, which means he can plan for them. Predictable is not the same as safe, but it is far better than surprising.
If you picked Berkeley on size alone, notice what that reasoning does: it ranks risk by the size of the number. Hold that thought for Assignment 5.
Berkeley's numbers are the subject of Assignment 5. This lesson works the underlying skills on Ella's and Alex's situations instead, so that the assignment is your own work.
Three Numbers People Confuse
Ella's boutique order is a clean way to see three figures that are not the same thing. Her numbers, from the chapter: twenty scarves at $25, materials about $300.
Three different questions get three different answers:
- Is the order worth taking? Look at contribution. $200 on $500 of revenue.
- Will she be fine next month? Look at cash flow. She is $300 down with nothing arriving for two months.
- Is the business profitable? Neither figure answers that. Contribution is not profit. Profit also has to carry rent, equipment, her own labour, and tax.
The narrator's line in Chapter 14 is the one to remember: you can be profitable on paper while being broke in reality, if the timing is off.
Rule of thumb worth keeping: any figure described as a gain should tell you what was subtracted from it. If you cannot say what came out, you do not yet know what the figure means.
Put It on a Calendar
Ella also sells online, and she needs that income every month to pay rent. She cannot stop online sales to fill the wholesale order.
She has $200 of cash available today. The order needs $300 of materials now and pays $500 in sixty days. Which of these actually solves her problem?
Income That Arrives in Bursts
Alex has earned about $300 so far, six students at $50 each. The problem is not the amount. It is the shape.
Demand concentrates in late November, when FAFSA opens, and again in March. Some months he makes $200 to $300, other months zero.
Chapter 14 offers an answer through Judy, whose daughter is an artist: save a percentage of every sale rather than a fixed amount every month. Twenty percent of a $20 scarf and twenty percent of a $2,000 commission are both twenty percent. A fixed monthly target fails in a zero month; a percentage never does.
That reframing is worth more than it looks. A budget built on an average month is a budget that breaks in every month that is not average.
Commit your answer: you have irregular income and a fixed rent. Name one thing you would do differently from someone on a salary, and say what it protects.
The financially defensible answer is to size your fixed obligations to a bad month, not an average one. Everything else follows from it.
Here is why it beats the alternatives. Saving a percentage of each sale, which is Judy's answer and a good one, protects your saving from a zero month. It does nothing about your rent. If your fixed costs assume an average month, a zero month is a shortfall no savings rule prevents, and you will cover it by borrowing or by raiding the savings you just protected. Sizing the obligations is the only move that works before the bad month rather than during it.
So the order is: fixed costs sized to a bad month first, percentage-based saving second, a larger buffer than a salaried person would hold third, and business cash kept separate from personal cash so a slow month reads as a slow month and not as a crisis.
When this conclusion changes. If the income is irregular but guaranteed, a signed contract paying in quarterly lumps, say, then the problem is timing and not uncertainty, and a credit line bridging known gaps is cheaper than permanently shrinking your life to fit the worst month. The test is whether the low month is predictable in timing, in amount, or in neither. Alex's is predictable in timing. Ella's is predictable in both. A commission-based salesperson's is predictable in neither, and that person needs the largest buffer of the three.
Compare that to what you wrote. If you named a protection rather than a mechanism, push it one step further: what does it protect you from having to do?
Refuse the Binary
Derek offers one path: borrow for the equipment. The class generates five more. Each is a real option with a real cost.
| Alternative | What it costs or gives up |
|---|---|
| Stay at current scale, prove the volume, expand later | Delays the income, risks the opportunity going elsewhere |
| Lease the equipment instead of buying | Higher cost over time, lower commitment, easier exit |
| Have the buyer supply the equipment, repaid per sale | Thinner margin per unit, aligns the buyer's interest, less upfront risk |
| Keep renting production space by the hour at a volume rate | Thinner margin, no debt, caps how large you can get |
| Test the full volume on the current setup for one month first | Costs a month, and buys information nothing else can |
Commit your choice. Pick one of the five and defend it in two or three sentences. Your defence must name what the choice costs, not only what it avoids.
There is no single right answer, and the chapter does not give one. What separates a strong answer from a weak one is whether it names the cost.
The narrator's framing is worth holding on to. The goal is to increase income sustainably without destroying the financial foundation. The equipment is a tool toward that, not the goal. Any option judged against the goal rather than against Derek's offer is being judged correctly.
One caution the chapter also raises: generating an alternative and talking yourself into a risk you cannot carry both start with refusing the offer as given. They end in very different places. Discussion 11 asks you to tell them apart.
Why Analysts Check
Numbers reach you from vendors, brokers, clients, prospectuses, textbooks, and professors. Some of them disagree with each other. That is not unusual and it is not anyone's bad faith. It is the normal condition of working with other people's figures.
The analyst's job has three parts, in order:
- Find the disagreement. This requires recomputing, not re-reading. A figure you have only read is a figure you have not checked.
- State it precisely. Which figure, from which source, differs from which other figure, by how much.
- Say which one the decision should rest on, and why. Sometimes the honest answer is that the available information cannot settle it. That is a finding, not a failure.
Assignment 5 puts you in exactly this position. Chapters 8 and 14 describe the same business at two points in time, and they do not state the same assumptions. The assignment tells you so up front. You will not be penalized for noticing it, and reconciling it is part of what is graded.
What the assignment will not do is tell you which figures differ or in which direction. Finding that is the work. Nothing in this lesson gives it away, and a classmate who tells you is not doing you a favour.
The habit matters more than this one assignment. A professional who reports a number without checking it has not done the job, however authoritative the source looked.
One Question Before You Commit
Chapter 13 and Chapter 14 are the same decision wearing different clothes. A mortgage and a business loan both ask you to trade present stability for future gain, and both are sold to you as a payment rather than as a cost.
Here is the question the two chapters together recommend asking, before signing anything:
Berkeley's honest answer was no, and that answer was more useful to him than any projection. Noah and Madison's answer was no as well, for three years, and so they waited. Waiting was the sophisticated move, not the timid one.
This week
- Discussion 11, original post due Friday November 6, two replies due Sunday November 8. It asks where your line is, not what the numbers are.
- Assignment 5, due Sunday November 8. It asks what the numbers are, and whether they agree.
Last commit. Go back to what you wrote on card 2. Did it change? Write one sentence on what changed it, or on why it held.
Saved in this browser only. Nothing here is submitted to CourseDen. Bring the thought to Discussion 11 instead.