James d. Gwartney

ELEMENT 4.11
Take steps that will reduce risk when making housing, education, and other investment
decisions.

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you will have to pay mortgage insurance, also called lenders mortgage insurance or mortgage
indemnity insurance, which increases your monthly payment. Mortgage insurance protects the
lender from losses that occur when a person defaults on payments. It is common in countries
including the United Kingdom., Denmark, and Australia. Different countries have different
rules about this, so be sure you know what you might have to pay.
(125)
Also, do not use a
mortgage with a low initial “teaser interest rate” to purchase your home. These rates are
followed by sharply escalating interest rates, which will substantially increase your monthly
mortgage payment after the initial period has expired. And, as mentioned previously in
Element 4.4, don’t borrow in a currency that is different from your income, because if your
income currency drops in value, you could owe a lot more money than you expected.
Fourth, just because you can afford a mortgage payment doesn’t mean you can afford
the dwelling you are considering. The mortgage is only the first and most obvious payment
made each month. Housing, however, requires other regular payments and obligations that you
need to consider. If they are not included in the mortgage, property and/or land taxes must be
paid. Homeowner’s insurance is required. The roof may leak one day, the hot water heater, the
air conditioning unit or plumbing system may need repair, or any number of other items may
result in maintenance costs. These are all regular expenses you can expect as a homeowner.
You need to factor them into your monthly budget when examining whether home ownership
makes sense for you.
Lastly, as you build up equity in your home, do not give in to the temptation to take out
another mortgage or borrow against your equity in order to increase your current consumption.
Housing prices go down as well as up. After the housing crisis of 2008–2009 in the United
States, many people were “upside down” or “under water” with their housing. That is, the
appraised value of their home was less than the outstanding mortgage. Some people incurred
huge losses when they sold their home. Others simply couldn’t afford to sell at a loss and kept
the home, hoping for a market rebound. Still others went through the painful process of
bankruptcy or foreclosure. Thus, safety dictates that it is important to maintain a sizeable
equity in your home.
Living by the guidelines presented above will encourage you to live within your means,
economize on housing, and minimize the risks involved in housing decisions. Now, let’s turn

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to investments in education.
For many people, postsecondary education—that is, education beyond secondary
school—provides an attractive investment opportunity because it can lead to a higher salary. It
is not, however, for everyone. Going to university or college is costly. If a student incurs the
time and money cost of going to university for a couple of years, then drops out without a
diploma, the investment is unlikely to be a profitable one. The biggest risk for a student
considering postsecondary education is the possibility of a negative return on his or her
investment. This would occur if the higher earnings achieved from the education are less than
the costs involved in obtaining the education. Even if tuition is subsidized (or fully paid) by the
government, living expenses often exceed any grants to students and no one will reimburse the
income lost from working less while in school.
According to the Statistical Office Of The European Communities (Eurostat), the
median annual earnings in 2016 for workers holding tertiary education were over €10,000
higher than for those who had only a lower secondary education (in Croatia the difference is
€4,000; in Romania, €3,000; in Poland, €4,000).
(126)
 But there is substantial variation in the
earnings of university graduates. The actual earnings after graduation depend on many factors,
including the skills acquired, university major, and the overall demand and supply conditions
of a particular labor market. According to PayScale.com, which has compiled the world’s
largest database of salary profiles, the university majors with the highest earnings potential
include engineering, actuarial, and applied mathematics, computer science, physics, statistics,
economics, and management information systems. Majors with low earnings potential include
child and family studies, education, social work, exercise science, athletic training, music, and
culinary arts.
(127)
 When choosing a field of study, it is important to look beyond earnings you
see around you. You will have 40 or more years to work. What occupations will be in demand
20 years from now? You also need to think about whether you might decide to move
somewhere else. Will the credentials you earned in your home country be recognized where
you end up? An economist trained in Russia can get a job at a Canadian university (if she is
good enough), but a physician may have to undergo many additional years of training before
she can practice.
It is risky to borrow a large sum of money to finance an education expected to result in

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low future earnings. As we indicated in Part 4, Elements 1 and 2, it is important to choose a
work activity that you enjoy. Your choice, however, needs to be well informed. Search for and
discover the expected earnings in the occupations for which you are training. We want you to
make informed choices that will lead to the largest possible return on your educational
investment—including the personal satisfaction you derive from the employment.
Let’s consider why students sometimes choose educational options that result in
negative returns. First, many students have unrealistic expectations about future income. With
inflated expectations, they may be willing to pay more for their education than what their
future income can support. You should investigate resources to keep informed of current and
predicted future labor market conditions and earnings potential. You need to search for the
handbooks or statistics for your country and those to which you might possibly migrate, which
provide information on main occupations, including their requirements, job outlook and
growth prospects, and median pay. Having realistic expectations about future income is a vital
ingredient in making better decisions about postsecondary education. In the context of possible
migration, it is also important to start at an early age learning useful languages. Do you want
your options to include English-speaking countries or French-speaking ones? Might you find
your credentials more easily accepted in Russia?
Second, many students underestimate the cost of education. The total cost of education
includes the direct cost of tuition, books, fees, and room and board, but don’t forget about
opportunity costs. Going to school, even part-time, means giving up current income from a job.
Make sure to properly account for the total cost of education.
Third, students overuse debt. Some view the money provided in a student loan as “free
money” and borrow too much. Many young people are ill prepared to judge how difficult it
will be to squeeze the funds for repayment of student loans out of their monthly budget after
graduation. Assuming a 3 percent interest rate, you will pay €138 per month for fifteen years
to repay €20,000 in loans. You will pay €276 per month to repay €40,000. Will your future
earnings be sufficient to make the monthly payment on your loans taken to finance education,
within the context of your overall budget? Think seriously about this issue prior to taking out a
loan.
We are not saying that you should never borrow to finance education. There are times

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when this option makes sense. We are aware that education is financed in many different ways
in different countries and that, in the past at least, tuition forms a higher fraction of costs in the
United States than in many other countries. This is rapidly changing in transition countries,
however, with the rise of private universities and the shift in many countries away from direct
government funding to tuition-based finance of universities. College education is often a good
investment, but like all investments it should be examined carefully.
To further minimize education risks, students and their parents can pursue other options
to finance education. As a general guideline, develop a financial plan that has debt as the last
option. Parents, relatives, and friends can start their own savings plans or consider the relative
benefits of long-term saving in different forms in financial institutions.
Scholarships and grants are also available. They are particularly attractive because they
do not have to be repaid. The United States’ Cultural Centers, the offices of the British
Council, or the Institut Français are good places to start investigating opportunities abroad.
Make time to search for them. Each will have a specific set of instructions, eligibility
requirements, and deadlines. Factor all of these options into your decision to invest in
education and choose a path that makes sense for you given market considerations.
While housing and education are likely to be the largest investments you’ll make, other
investment opportunities will emerge. There are precautions to take when considering which
ones to seize. It is important to recognize that when making investments, you are vulnerable;
you must think about whether your interests are aligned with the party offering the investment.
Whenever you are offered something that seems to be an extremely attractive proposition, it
pays to step back and carefully examine the motives behind why this proposition is being
presented to you. Borrowers looking for money to finance a project will initially turn to low-
cost sources such as bank loans. Finding individual investors like you and promising a high
rate of return makes no sense if financing is available from bank lenders and other investment
specialists. High potential returns on any investment inevitably come with high risk; that is,
there is a high probability of failure. If banks and professional investors are not interested in
the investment, you should ask yourself, “Why should I be?”
The interests of those selling investment alternatives are often substantially different
than yours. While you want to earn an attractive return, they are likely to be primarily

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interested in the commission on the sale or earnings derived from management fees or a high
salary related to the business venture. Put bluntly, their primary interest is served by getting
their hands on your money. They do not necessarily seek to defraud you. They may well
believe that the investment is a genuine opportunity with substantial earning potential. But no
matter how nice they are, how well you know them, or how much it appears that they want to
help you, their interests are different from yours. Moreover, once they have your money, you
will be in a weak position to alter the situation.
How can you tell beforehand whether an investment is a wise one? There is no “silver
bullet” that can assure positive results from all investment decisions. But there are things you
can do that will help you avoid investment disasters costing you tens of thousands of dollars
(or the equivalent in your local currency). The following six guidelines are particularly
important.
1. If it looks too good to be true, it probably is. This is an old cliché, but a valid one.
Some investment marketers may be willing to do just about anything to obtain your
money because, once they do, they are in charge and you are vulnerable.
2. Deal only with parties that have a reputation to protect. Established companies with a
solid reputation will be reluctant to direct their clients into unsound investments. For
example, an initial public stock offering by an upstart brokerage firm with which only a
few are familiar is far more likely to result in loss than the offering of an established
firm with a substantial reputation on the line.
3. Never purchase an investment solicited by telephone or e-mail. Such marketing is a
technique used by those looking to prey on those individuals who are easy targets. Do
not let yourself be a victim of scams. Never share personal information with people you
do not explicitly trust. Your social security number, date of birth, cell phone number,
and postal address should be carefully guarded.
4. Do not allow yourself to be forced into a quick decision. Take time to develop an
investment strategy. Never let yourself be pressured into a hasty decision.
5. Do not allow friendship to influence an investment decision. Numerous people have
been directed into bad investments by their friends. If you want to keep a person as

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your friend, invest your money with an objective third party.
6. If high-pressure marketing is involved, grab your checkbook and run. Attractive
investments are sold without the use of high-pressure marketing techniques. If you
already have a substantial portfolio, there may be a place in it for high-risk investments,
including “junk” bonds
(?)
and precious metals. But those investments must come from
funds that you can afford to lose. If you are looking for a sound way to build wealth,
most of your funds should be in more routine lower-risk investments helping you
establish a well-diversified portfolio.