Financial Miscalculation Mistakes To Avoid – Episode 459

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[00:00] Welcome to the Prosperity Podcast. Hello, Prosperity Thinkers, welcome to the podcast. Today, we’re going to be talking about three mistakes around financial miscalculations. And no, we’re not going to be breaking out computers and all kinds of tables and things that are confusing. We’re actually going to get to the principles of these pieces. How about that, Kim? That sounds great. And I’m sure that’s way better for a podcast. We don’t need calculators, tables, computers, slide rules, et cetera, coming out. Exactly. And you know what’s nice about that is when we put ourselves in the seat of you as a listener, you are listening to this podcast because you’re trying to become better at a more prosperous life, meaning that could be finances, that could be the way that

[00:55] your attitude, the people that you are spending time with. And right now you’re choosing to spend time with us. We’re very grateful for that. Well said. Yes. So first, let’s talk about this, which is as far as calculators go in financial calculations, oftentimes people don’t have the right tools, meaning they’re using typical or traditional calculator, and they’re not able to get the answers that they want. So let’s start on that foundational piece. Absolutely. And I think it’s so easy to make this mistake because financial calculators are just not out in the marketplace, nor do people know how to use them. So a financial calculator is something that has time value of money calculations on it.

[01:45] So think like present value and future value. And it does have interest rate and time on it also. And these are thankfully actually now available as apps on your phone. You can mostly get them for free and you can have a financial calculator on your phone. And thankfully, you can have a fairly easy to use one. But the old standard that I was taught in my first years right out of college is something called an HP 12 C and it was a horizontal calculator. People that were really good at it actually used it like a gaming console, like holding it with their hands and using it with their thumbs. And it made calculations like a car payment, a mortgage payment, how much was interest versus how much was principal, the present value of something.

[02:45] Like if you were looking at inflation and you wanted to say, okay, my mortgage payment is 2000 a month now today, but in 30 years, even though I’m going to write a check for $2,000, it’s actually going to feel like whatever the number is, maybe $1,200 based on a 4% inflation. That’s a present value calculation, or you could have something that’s future value, like, okay, if I put away a thousand dollars every single month and it earns 4%, what is that going to be in 30 years? That’s a future value calculation. And believe me, I used to get confused between those two all the time. And then as I said, there’s payments, like figuring out car payments, mortgage payments, that kind of thing. So these are financial calculators.

[03:34] And what happens is we want to use a regular calculator that does not have these financial functions to try to figure out this information and it causes us to make mistakes. And so it’s just a note to self. If you’re dealing with anything that has time associated with it, one day, one month, one year, do not use a regular calculator. You’re going to get wrong information. And so you need to go to the web or call somebody like myself or grab the truth concepts app, my husband’s company, truth concepts. They have a time value and future value, present value, money, financial calculator, that’s an app where you can just get any financial calculator app on your phone, iPhone, Android. They’re available.

[04:25] If you’re interested in making those kinds of calculations, you’ll want to have a financial calculator. I actually don’t recommend the HP 12 C because it requires reverse Polish notation, which is as bad as it sounds, and you don’t need that. But if you get just a regular financial calculator, you can learn how to get calculations that are correct, that have to do with the time value of money and interest rates and timeframes that only financial calculators can do. Yeah. So let’s go into time value of money because that’s one of the pieces that we’ll see most people don’t account for because one, they’re just looking at simple math or whatever that could be. I’m going to argue that a lot of people are just guessing, you know,

[05:09] for example, use the inflation example of 4%, you know, five years ago, we wouldn’t have estimated that our inflation would be much higher than that. So go into time value of money for a bit. Yeah. So time value of money is interesting and it’s not just about inflation, it’s literally about anything that is longer than a day. And so if you think about mortgages and car payments and trying to save for retirement, trying to save up to buy a home and your down payment, any of those types of things that are going to affect money longer than one day must have time value of money incorporated in the discussion. And it is most often in the form of an interest rate. And so as an example, if you have a series of payments, maybe there are

[06:00] just monthly payments into a savings account, you can’t just add up month one plus month two plus month three. You have to impact those series of payments with the time value of money, which again is most often an interest rate because it’s not a cumulative number plus one plus two plus three month one, two and three added together. That’s not correct. It’s month one’s payment at interest or at the time value of money or at the 2% that you get in your savings account or the 4% that you get in your life insurance policy or the 10% that you might be getting in some investment for three months. And then of course, the second payment is only for two months. And then the third payment is for one month.

[06:49] So that is called compounding those numbers. You can’t just cumulate them. So accumulation, but cumulating means month one plus month two plus month three. Compounding means month one at interest plus month two at interest plus month three at interest. And it is that at interest number, whatever number you pick that is causing for the time value of money to be applied to the three payments. And for the calculation to be proper so that at the end of the game, the cumulative number is going to be say $3,000, 1,000, 2,000, 3,000. Whereas the compound number might be $3,200. Now, clearly in my simple example, it was very minor, but think about happens if you get not three months, but 360 months, like for mortgage payments

[07:47] or for a car loan that might be 48 or 70 months or for savings for retirement, which should be 60 or 70 years of saving money. Obviously the time value of money, the longer the time, the bigger the impact. And it’s such an easy thing to just completely leave out of the discussion or the calculation, which renders that calculation categorically wrong. Definitely does. And I would say that most people, depending on the financial intelligence, and I’m using that word very loosely, most people in their lives only really think about this in terms of their mortgage, like, Hey, should I do a 15 year or a 30 year mortgage, or should I take out a car loan that’s five years or four or six years, something like that.

[08:39] Would you say that’s probably in most common situations? It is because it’s very difficult for us human beings to look at time. Let’s go backwards because it’s easier that way and look at something like the seatbelt laws. When your parents drove you around as a baby, you were not in a car seat. You were not in a seatbelt. In fact, you were probably standing in the front of the car and nobody thought anything of that. Well, clearly if you did that with a child today, I mean, you’d be pulled over and put in jail. And so you can’t say, Oh my gosh, your parents were horrible. No, they were dealing in a different time. And so that’s maybe a helpful example to demonstrate how easy it is for us to not take time into consideration.

[09:32] Now you’ve brought up a third area here. So we basically are hitting three very common mistakes. And, you know, it’s so funny. People need financial education. People need financial literacy. You know, you said the word kind of carefully financial information or knowledge. And they’re taught how to trade the stock market as financial education. Well, yes, that can be valuable. And these three things that you and I are talking about, I cannot tell you how many people come to me with wrong information from their financial people that have given them information because the people in personal finance make these mistakes too. I used to make these mistakes. And this third one is really interesting and it does relate to the

[10:17] 15-year versus 30-year mortgage. And it’s where people will try to compare a 15-year mortgage over 15 years to a 30-year mortgage over 30 years. And if you go back to the hard sciences, you know, physics, chemistry, biology, any of those types of things, when you go into the lab to do an experiment, the very first thing that you are taught is you can only have one variable, and then as you move through the experiment, you can only change one variable. You can’t have two variables, nor can you change two. You will lose the integrity of the experiment. Well, in the mortgage comparison, you can’t compare a 15-year mortgage over 15 years to a 30-year mortgage over 30 years. You have two variables.

[11:06] You can compare a 15-year mortgage over 15 years to a 30-year mortgage over 15 years. Or you can compare a 15-year mortgage over 30 years to a 30-year mortgage over 30 years. And then you get accurate comparisons. And it’s why in our society, so many people making the mistake of thinking that the 15-year mortgage is cheaper, it’s because they only did part of the comparison. And so if you want to dig into this, we have a book called Busting the Interest Rate Lies, and it goes over this 15 to 30-year mortgage comparison over 30 years, where both of them with the exact same interest rates, and see, that’s the other thing, people want to actually add in a third element of differential with a different interest rate.

[11:57] And that’s all fine after you’ve made the initial comparison over the same timeframes with the same interest rates. So this book does that. Yeah. You know, what you’re saying reminds me actually of a conversation we had in the car as a family. And now you may, our listeners may be thinking, you guys have the weirdest conversations in the car. And my kids were asking about retirement programs because they’ve been around some of our friends that have recently retired and that are going through this phase and they’re like, well, dad, why would people work and then not really understand their finances and then have a certain age or certain number to hit, and it’s so clearly stated in what you just mentioned, because they’re not comparing

[12:45] the right things together. And, and there’s two pieces to this puzzle that I see. One is that it’s taking hard work to first understand the principles of it. And then two, the second piece is that once you do that hard work and understand it, then you have to be willing to understand that truth and work with that truth. And that’s why people conflate. They add those different variables. And the key word you mentioned is they’re out of integrity. Yeah, without even knowing it or sometimes knowing it and choosing to ignore it, which I will admit I did when I first learned that I had been looking at the mortgage incorrectly. It took me a year to even get my mind around that. Well, during that year, I kept telling my clients the same thing.

[13:37] I had always been telling them, which was pre-paying a mortgage was a good idea because I came from the banking industry, banks teach their people these things, which then teach their clients these things. So I remember really fighting the information and having to have somebody prove it to me over and over and over and over and over before I finally got to see it. So it’s an easy mistake. That is absolutely easy. So what we’ll do is we’ll add in a reference to that book in the show notes so that any of you can listen to it on audio, you can read it, or you can get a physical copy. So digital is the Kindle physical copy. You can go through it. And then next is by listening to episodes like this.

[14:19] It really helps you additionally. There is a newsletter that goes along that trains you and helps you understand pieces of the prosperity thinking world. So go to prosperity thinkers.com. If you haven’t signed up for the newsletter, go and do that. And all of us are different learners on the website that you guys have. There are audio versions of podcasts, audio versions of books. What else would we say that will help people demystify this? Well, I think figuring out how you learn best first is super valuable because we also have a YouTube channel and some people prefer to watch. And so most people learn either by watching, learning, sorry, most people learn best either by watching, listening, or reading.

[15:07] I know for myself, I prefer reading, but a lot of people really enjoy listening, which is why the podcasts are so beneficial. And then others prefer to watch. So the YouTube channel is there. And I have a challenge for our listeners. There is a small group of people that learn best by doing. And so I have been on the hunt for years, trying to find a physical object that would communicate how life insurance works, is your emergency opportunity fund, how the ideas of compound interest grow, and a variety of other financial topics, which are not usually done in the realm of learning by doing. I mean, you have the obvious like, well, when I move money from here to here, but there’s that time again, right?

[15:57] Like we need to be able to somehow show that. So I know there’s games out there like Robert Kiyosaki’s cashflow game. And there’s other things like that, but I’m looking for a single item that would be so cool to be representative of the prosperity thinker lens, the whole life insurance is the emergency opportunity and the other aspects of the teachings and the principles that we put forth in some kind of physical form. Ooh, I like that. You, you’re crowdsourcing ideas. That’s, that is a prosperous way to look at it. Well, wonderful. And if they, if you, as a listener, think of that, send an email to hello at prosperity thinkers.com. And thank you for listening to this podcast and investing in your future.

[16:52] Thank you for listening to the prosperity podcast to take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.