3 Mistakes Around Financial Miscalculations – Episode 143

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Everybody welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we’ve got president of Partners for Prosperity, bestselling financial author and our co-host, Kim Butler with us today. And today we’re going to be exploring some more financial myths. In particular, today we’re going to be talking about finding miscalculations. And this is amazing because it’s one of those subjects where you can make numbers literally do anything that you want them to do, whether or not it’s actually accurate.

[00:56] I know that sounds crazy, but Kim, you can probably explain it. Yeah. Well, this needs to fall behind the famous quote from Mark Twain where he says, statistics can lie and liars use statistics. And the typical comeback, if you share that in a group, is somebody will immediately raise their hand and say, did you know that 97% of statistics are made up on the spot? Yes, exactly. So this is a biggie and this is something that has taken me really an amazingly long time to get my arms around because I’m not super mathematically oriented myself and my skill in helping people with their finances is more about telling the story than it is about crunching the numbers. Nevertheless, in all of the work that I’ve done, I’ve certainly learned how to crunch

[01:47] the numbers. And of course, since I’m now married to somebody whose life revolves around numbers, the creator of Truth Concepts software, Todd Lingford, and I’ve attended literally probably not hundreds yet, but on my way to hundreds of his training programs, I am starting to see three big issues that people make mistakes on around the calculation of numbers for their own personal finances. So that’s what I’m interested in sharing with you all because if you’re aware of these three mistakes, you can very easily solve them and fix them and do better for your own personal finances so you don’t make the mistakes yourself. Super. Well, let’s dive into number one, and that’s trying to make financial calculations

[02:40] with a traditional calculator. Absolutely. So I have here in my hand a little probably 99 cent Canon calculator, love Canon, nothing wrong with the brand. It has on it, of course, zero through nine, plus, minus, and multiplication and division and some memory. And that’s it. And that’s a typical calculator. Whereas if you’ll pull out your smartphone and get a financial calculator app, which By the way, you can get a truth concepts app on Android. You can get any kind of financial calculator app for free. A very, very common one is HP 12 C and new on the horizon will be an Apple’s app for or I should say an iPhone app for truth concepts as well. We’re working on getting that done. But nevertheless, a financial calculator app is going to have some special buttons

[03:44] on it, primarily future value, present value, time, rate, and I’m blanking. There’s a fifth one. I’ll come up with it in a minute. And so when you look at these financial calculators, so it’s payment is the one I missed. Present value, present value, time, rate, and payment. And I will readily admit when you look at an HP 12 C, which is sort of the standard and you can actually buy an HP 12 C app, actually it’s probably for free on your iPhone or Android phone. These are done with what’s called reverse Polish notation, and they’re very confusing and very difficult to learn. I remember when I was straight out of college, and of course this was before the internet existed, I was at a bank and we had to calculate car loan payments and

[04:38] mortgage loan payments all the time. And the bank had this convoluted way of doing it with some tables. And I was aware that these HP 12 C’s existed. And I had a really good friend that used one incessantly. He was in the real estate business and he would literally like use his thumbs like we text today. He was that quick on this HP 12 C calculator and they’re typically held horizontally anyway. And so I was determined to learn how to use this thing and I never got as fast as he was, but it enabled me to make proper calculations because if you’re trying to figure out the payment of something, or you’re trying to figure out the interest or an amortization schedule or the future value or the present value of any number,

[05:27] you absolutely must use a financial calculator. And if you try to use a regular calculator, you can think that you’re coming close, but you can be making a really big mistake because regular calculators do not enable you to make payment calculations or future value or present value calculations or calculate an interest rate. Of course, time frame also can be done longhand, but is so much easier on a financial calculator. So if you have questions about your own personal finances and you’re considering making some calculations yourself, you’re going to want to get a financial calculator. And that leads us to our second mistake. So go ahead. First of all, I’d just like to just basically so that people understand if you

[06:23] think of a $10,000 car loan at a 10% interest rate, you can easily with a financial calculator calculate your interest for year one, but in year two, you’ve paid some principal, so you no longer owe the full $10,000. So this is where the financial calculator is just in its simplest form. Just realize that the numbers are shrinking the same way as if you’re receiving money from the bank, you’re going to get interest on top of interest over time. And these are what these calculators enable you to do is to factor in so that you have correct numbers. I suppose there probably is a mathematician out there that could take a hand calculator and a board the size of a wall and actually manually do it.

[07:14] But it’s a lot easier to get the free app. So let’s jump into number two. And that leads us right into the time value of money. Yes. So this is issue number two. And you said it well, when you are looking at an account growing, there’s this thing called compounding interest or interest on interest. And that is essentially what the time value of money is. Anytime you have dollars doing anything greater than one day’s work, you have a time value of money issue. And one mistake that we see, and believe it or not, we see it from advisors as well as from clients, is that they want to add up a particular column of numbers over a period of time and not apply a time value of money interest rate or you could

[08:10] say a compounding interest rate to those numbers. And that’s incorrect. It’s mathematically wrong. You can’t just add up a column of numbers over a period of time and not apply the time value of money. And so people will want to just give you a cumulative total, your one plus your two plus your three, not a compounded total, which is your one applied to interest plus your two applied with interest plus your three applied with interest. And obviously this cannot be done on a handheld calculator. You know, you were talking about somebody with a chalkboard as big as a wall. The tables that I used to use were literal eight and a half by 11 tables on both sides and they were one dollar compounded out at 1%, one dollar

[09:00] compounded out at 2%, one dollar compounded out at 3%. Most obnoxious by hand calculations I’ve ever had to do. And so I very quickly got the software that enabled me to do that with a calculator. So remember to include time value of money, which is essentially applying an interest rate to your calculation. What interest rate? Well, that depends on what you’re talking about. So it could be as little as a savings account interest rate of like 1%. Could be a car loan interest rate, maybe of 6%, mortgage interest rate of 4%, you know, life insurance, cash value of 3%, 4%, whatever it is, you’ve got to apply an interest rate, which is literally working the time value of money equation into your calculator so that if you’re looking at anything over

[09:51] one day’s time, you’ve got the value of that time calculated. Now we look at if a lot of times we use these financial calculators to also calculate investments that have some potential of loss, particularly the stock market. And this is one of the things that amazed me is that if I had a hundred thousand dollar account and I had a 10% loss, I would have $90,000, followed by a 10% gain, I would have $9,900. Even though I had a plus 10 and a minus 10, I’m still a hundred dollars behind. Yes, that is incredible. And yet the average rate of those two things is what the mutual fund industry is allowed to talk about. And it means very, very little. We go through this example fairly thoroughly in our Busting the

[10:46] Interest Rate Lies book, if you’re interested in seeing the actual numbers play out. Super. Now the third mistake, which is our final one today, or the third miscalculation is misunderstanding or misstating timeframes. Yes. So oftentimes we know that in any financial analysis, we have to keep everything the same and change one element only. We know that. And yet I am amazed how many times we’ll forget that when we compare, for example, something like a 15-year mortgage to a 30-year mortgage. And what happens is people want to compare a 15-year mortgage over 15 years to a 30-year mortgage over 30 years, and you can’t do that. You have to compare both mortgages either over 15 years or both mortgages over 30 years or 22 years or whatever timeframe you

[11:47] want to use, but you already have a differential in this timeframe of the 15-year mortgage to the 30-year mortgage. That’s your difference. Everything else needs to be the same. And again, we have a really good example of this as well in the Busting Interest Rate Lies book, if you’re interested in that. And I would suggest if you want to track that down, the Busting Interest Rate Lies book, that you actually get the physical copy or on Kindle is fine. But the audio version is going to be challenged because there are quite a few numbers in it, and you’re welcome to listen to the bulk of the book. If you do, and you have already bought the audio and you really would like to have the physical, just email us.

[12:26] We’ll send you copies of the material in there so that you can see the calculators, because it’s so important to make sure that your timeframes are the same when you are making any kind of analysis, whether it’s two different car loans or two different mortgages or two different accounts or what have you, you’ve got to have the same timeframes. Super. And again, if you’d like to email us, that’s hello at partners, the number four, prosperity.com. Again, Kim has so generously agreed to go ahead and send you the physical book if you’ve already purchased the audio book, or maybe you’ve got a scenario on your own that you would like for us to talk about on the podcast, be glad to do that as well.

[13:12] Anything else before we wrap up, Kim? Well, just always gratitude to our listeners. We love having your questions, so please continue to send them in. We’re delighted to cover them. My favorite thing in the world to play is Q and A. So hello at partners, number four, prosperity.com. Super. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast saying thank you all. And we’ll see you again real soon. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.