During my schooling years math was always one of my least favorite subjects. I did not overly enjoy it and found a lot of it pointless knowing I would never be using the formulas I was learning again in my lifetime. So, it makes it surprising, even to me, that I am writing a whole article about the importance of math. Thankfully, the math I am advocating using in your financial independence journey is fairly simple.
There are many areas where I believe people lose money because they do not take the time to do some basic math about their choices. Just yesterday I was ordering some vitamins off of Amazon. I had placed the items in my cart and was getting ready to checkout when the screen popped up showing similar items people had purchased. One of the items was the exact same thing I was ordering, but in a smaller quantity. I did some quick math on price per unit (price of item/number of vitamins) and discovered the lower quantity was actually cheaper, so I replaced what was in my cart with them. My brain always says bigger is better, but being able to do some simple math allowed me to save money by showing that the lower quantity was actually cheaper.
One of the biggest areas that I believe money is wasted due to a lack of basic math is when it comes to insurance and similar products. Recently my mom and I were sitting in our insurance agents office talking about the coverage we have on our rental properties and our agent was encouraging us to upgrade to a product that would provide more coverage, but for a larger fee. I don’t remember the exact numbers, but it was something like the new plan would pay out an extra $2,000 for only an extra $85 a month. On the surface this did not sound horrid, but since it was for home insurance I knew/hoped that it was something we would never/rarely use. Knowing we would rarely use it, I did the math and realized that we would be paying the insurance company $2,000 every two years for this coverage (2000/85=23.5).
Since this was for home insurance, we would hopefully be using this coverage at most let’s say every five years. Therefore, we would end up paying the insurance company $5,000 for them to give us $2,000. That sounds a lot worse than the insurance company couching it as only $85 a month. Now, if we did not have an emergency fund from which we could draw $2,000 it would be problematic, but since we have followed FI principles we can forgo the insurance, knowing we have cash on hand to cover issues. This principle is why I have minimal car insurance and the like as well. I have the money in my emergency fund to cover a new vehicle and minor medical emergencies, so only pay to cover myself against catastrophic injuries.
Percentages are where I think it is most important to figure out the basic math. Most financial advisors charge a 1% fee for assets managed. This sounds minuscule and it is when you are just starting out investing and only have $10,000 invested (1% would be $100). What happens though when you have increased your contributions based on applying savings principles, compound interest has played its part, and you have grown your investment totals to $250,000. You are now paying your advisor $2,500. After a few more years you have been able to grow your investments to $750,000. That’s now $7,500 you are paying your advisor every year for something you could fairly easily do yourself, and remember that does not include the other fees your advisor is charging.
Mathing it up can also help with motivation. I was listening to a podcast recently where a guest said that what propelled her to pursue financial independence and pay off her debt was sitting down and figuring out the percentage of her income she was paying to debt and interest. Paying $800 a month to debt and interest does not sound too bad if you make $4,000 a month. Doing the math on this though, that is 20% of your income that you are paying to debt and interest. 20% of your income that you are losing every year. I know that would motivate me to cut expenses and such to pay off my debt as quickly as possible to recapture that 20% and have it go in my pocket and not the creditor’s.
Insurance companies, lending companies, credit card companies, grocery stores, department stores and the like know that most people hate doing math and they use that hatred to their advantage. I encourage you to start mathing it up and seeing if the proposed benefit is really as good as the company is making it sound. You may be surprised by the results.
P.S. Image by mohamed Hassan from Pixabay
