Personal Finance Isn’t Math
Have you ever seen someone run down the numbers on a personal finance issue and the math is 100% behind their point, but there’s no way you’d ever follow their advice? I know I have. How about a few examples?
Recently, I read an article on why parents should view childcare as an investment, not an expense. From a mathematical perspective, it’s a great point. Sure, childcare might eat a large portion of one parent’s salary for 5-10 years, but that cost will come to an end, and you’ll have 5-10 years more experience and salary growth in your field, plus no resume gap. Those who write off paying for childcare as “not worth it” will significantly reduce their lifetime earnings by stunting their career as well as forgoing income during their time at home.
I applaud the math, but nowhere does this author consider that some families view raising young children as a real job worthy of full-time attention. And that the reduced lifetime earnings are considered no problem compared with the privilege of being able to raise their kids full time. The math is unequivocal: women should return to work after maternity leave. The numbers are something to consider. But so is the personal side of personal finance, which in this example is about our relationship with the little humans we bring into this world.
Take another hot personal finance debate: should you pay off your mortgage early or invest extra income? Mathematically, you’re likely on average to grow your wealth at a rate of 7-8% compounding interest in the stock market. Over 30 years that can mean tens of thousands more in investments, depending on your property value. Meanwhile, paying down debt only saves you around 4% in interest these days.
However, some people prefer the feeling of freedom and flexibility that comes with being debt free. Others find it ethically preferable to repay their debts as soon as they are able to. Notice, emotions, values, and ethics have little to do with math. They have nothing to do with profitability. But these aren’t small factors for many.
Or how about an example I personally can’t comprehend: buying a new car. Everyone knows purchasing a brand new vehicle means major instant depreciation, yet lots of people do it every day. To them the feelings of peace of mind, safety, or convenience that comes with a new car and a warranty outweigh the thousands they’re losing in the transaction.
If we only look at the math, we can easily become a Scrooge. But if we only consider our emotions, we’ll probably end up broke.
So what does it mean that personal finance is not math? It means you need to look at the math, but also at your feelings and values. Most of us tend to make decisions more logically/mathematically or more emotionally/values-based. Know thyself: which one to you tend toward? Temper it by analyzing the other factors at play.
If you tend to choose based on numbers, consider the human side. Who will be affected by your choice? What might be the long-term implications of those effects? What are you feelings and values about the question at hand? What might you regret later?
If you tend to make choices more on feelings, values, or simply what those around you are doing, run the numbers. Do the math. Use online calculators—there are plenty for almost every personal finance question you could ask. Write down your feelings, your pros and cons, and try to analyze the a bit more objectively with the math in view.
As you read personal finance advice, ask yourself: is this argument more based on objective or subjective arguments? Is it more math or emotion/values? What would the other “side” add to the debate? This is important to think about both for those articles we agree with wholeheartedly, and those we disagree with.
If you are ever asked for personal finance advice, consider where the person is coming from. What is their real hang up? Maybe they aren’t asking you to solve a math problem.
I suspect that more of us don’t look at the math enough, but those who are all about the math tend to gain prominent voices in the personal finance community. We’d all be better off if we acknowledged and considered both in our decisions surrounding money. Try to be a voice of both in real life and online discussions about this wily thing we call personal finance that involves math, but isn’t synonymous with it.
Which side do you tend toward? How do you integrate both factors into your financial decisions?