Bridget Sullivan Mermel CFP(R) CPA
Money, Math and When to Use a Calculator: Tips on Spending Intentionally
Updated: Apr 1, 2021
When we’re thinking about spending money, we make better decisions if we do the math.
Yet, we resist. Maybe we were traumatized in our 6th grade math class. Maybe we can’t do math in our heads. Maybe we just don’t want to think that hard.
But doing the math helps us make better decisions.
The salespeople have done the math. They may speak in fractions, decimals, and monthly subscription services because that helps them sell more. That doesn’t mean all salespeople are bad or trying to deceive you. These are just good examples of when it pays to do the math.
Join Bridget Sullivan Mermel CFP® CPA and John Scherer CFP® as they talk through where it especially pays off to do the math and where it makes sense to just let it go.
FTFP Math Class
John: It turns out that your sixth grade math teacher WAS right. Math is going to help you all throughout your life. And we're going to tell you how it can help you in your financial planning on this episode of Friends Talk Financial Planning.
Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. This is Friends Talk Financial Planning.
And, John, what we want to talk today is about how math and your attitude toward math matters with how you do with money. So, John, why don't you talk about just different examples of when math might impact how you make decisions?
John: Yeah, it's funny, Bridget, that a lot of financial planning doesn't involve math. It's about how you act, and how you feel, and how you think. And sometimes people will say, "I'm no good at math...and financial planning and investments." So really, a lot of times, I'm telling people the opposite. Like, "Okay, math doesn't."
But there are some places where math really does make a difference, and one of them...We just had a friend that sold a house. And so we were talking about the commissions that real estate agents make on things. And it's interesting that they provide a valuable service. And I don't begrudge them for what they make. But when you use percentages, that's one of the things that can really trip people up. And to put things in dollar terms or numbers, I think, is really useful.
So as an example, on the realtor side of things, when you list with a realtor, typically you pay a 6% commission is pretty common around here. And so if you have a $300,000 house, they take 6%. And you get the rest. That sounds like it's reasonable. But when you think about what the dollars are for that 6% of $300,000. I can do math in my head pretty quickly. That's $18,000.
And you go, "Oh, that's a big number." And it's not right or wrong, but 6% sounds like a lot less than $18,000. And so, as you think about what goes on with that and what decisions that get made, that's one of the places where people can sometimes overlook the easy things.
I guess one of the things I always tell people is that percentages can be deceiving, and doing the math on things from that perspective is -- and we joked about sixth grade math -- it is just, "What is the percentage?" And Go, "Oh, put it in dollar terms. What does that mean?" So that's an example of one of the things that...where math does play a part and can help you make intentional decisions and maybe better decisions about your financial life.
Do you talk about that at all with clients as far as, whether it's percentages, or where does math play a part in your practice as you advise clients?
Bridget: Sure. Of course.
You know, this whole thing reminds me, sixth grade seventh grade reminds me of something that happened to me. So when I was a kid, I was in seventh grade, I remember this very clearly. This exotic new thing came out, and they had one at our library. Or it was called the IMC, I think, at the time, which I don't know what those that meant. But anyway, it was basically the library for our middle school.
And I went to the library to check it out. And it was a handheld calculator. And I was like, "Wow, this is so cool." I told my dad, and he's like, "Wow, I've tried one of those," and he said, "What'd you add on it?" And I told him, and he's like, "Well, next time, try adding something that you know what the answer is, instead of something that you don't know what the answer is?" Because he wanted me to actually check.
Because the thing is that people think, like you just did, "What's 6% times 300,000?" And some days, I'm better at that than other days, frankly. And I think a lot of people are. Some days I want to go there, activate that part of my brain. Other days I don't want to activate that brain part of my brain.
But if I'm making decisions, I have a calculator. I do a lot of math on a calculator that I could do on my head if I wanted to work that part of my brain. So I'm glad that I can do math in my head. And sometimes I actually work on doing math in my head just to keep that part sharp. But I don't feel like I have to do math in my head. And so I will use a calculator for the most basic, basic calculations.
So I just want to make sure that people understand that that's fine! I have in my life done plenty of math in my head. I took a large...When I took the CPA test, you couldn't use a calculator.
John: Holy man!
Bridget: So, Yeah, you had to do math. But that's okay. So I think with the realtor example, another example we could get into is, what are your thoughts there, John?
John: Well, as I'm thinking about this, what a great point you made about it. I do things in my head, pretty clearly. But it's not about that. It's about: it's worth doing, right? There's some math that's worth doing.
John: And going into a situation where you go, "Okay, the person on the other end of the transaction probably has already done this math." And you're coming in as the buyer. And you go, "I haven't done this." It's worthwhile.
One thing that I think about is, in our world of financial planning and how you pay for it, most people in our world just charge a percentage of assets, whatever investment you have with them. And, well, what is that percentage? It's 1%. Or it's never 75 basis points, because 75 is big, it's three quarters of 1%. They're the same thing. But boy, three quarters of 1%, that's a little bit. Well if you can multiply that times your million dollar investment, that's $7,500, right?
And so again looking at things in dollars when it comes to your financial transactions and how you deal with your financial advisor, that is one of the other big things. It's "What are the dollars that you're talking about?" Don't talk in percentages only.
And then one other thing that's interesting as we're just talking here, Bridget, and that popped into my head was: so much of our world today is on subscriptions, and I'm thinking about my cell phone bill, right? Most people have a cell phone, and it's not a one-time thing.
You pay on a monthly basis for that service. And somebody might think, "Oh $75 a month for my cell phone, whatever the number is, that's reasonable on a monthly basis." But really what that costs you is $75 a month. And again, get out your calculator, right? That's $900 a year. And how long do you keep your phone for? Or how long do you keep your cable bill? You pay for that, and it's a five-year investment. Okay, $900, and again on your calculator. Five years. That's $4500 over the next five years.
And it's not right or wrong. It's not like, "Geez, don't pay that!" It's, "Don't think about it in these bite-size pieces, percentages or monthly." That's $900 a year of investment. It's $5,000 every five years. Reasonable, but then...
Again, it's not right or wrong, but it's making intentional decisions. For me, it's "Oh yeah, here's what the dollars are. Here's what I'm paying for it, and I'm choosing to do that." As opposed to, "Man, I didn't realize." $75 a month, and then suddenly it adds up, and you've got...it's a big number, and looking at it in arrears. Look at it in advance, and say, "Oh yeah, I want to spend $4500 over the next five years on my cell phone." Perfectly reasonable choice.
So that's one of the things, when I talk about putting it...at the end of the day, it's putting it in dollars and looking at dollars in chunks of "What do you spend per year for your different things that you have in your life?" That really helps you to make intentional decisions and not go in blindly on things.
Bridget: And I really like your point that whoever is selling this to you has done the math. John: Right.
Bridget: They know what the math is. And so most people know, "Okay, what is the best sales tactic?" If they said "We're going to sell you this chance to listen to music for $150 a year," you're going to be less likely to buy it than $13 a month.
John: That's exactly right. I was just thinking that same thing. Nobody ever says, "You're here for a cell phone. It's $1,000 a year." No, it's $75 a month, right? Same thing!
Bridget: Yeah, I spend money on these things, and I enjoy them. But when you're buying something that is monthly, I look at it again, like you said, over five years, because I think that most people keep the stuff for five years. They don't get rid of it, especially if it's a monthly service, for some reason.
So, now to wrap it up, I think what we're encouraging people to do is to look at the math, especially when you're making big decisions. Look at your math and look at, perhaps, the salesperson's math, too, so that you know what other people's incentives are when they're giving you specific advice.
And there's nothing wrong...that doesn't mean don't work with the salesperson. Absolutely there's nothing wrong with having them making money off of what they're telling you to do. But make sure you understand exactly what that is.
John: And my two takeaways would be an addition -- and well said on that, Bridget -- so two things to beware of is: percentages can be sneaky. Put it in numbers. Put it in dollars. And monthly can be sneaky. Put it in annual terms. If you do those two things, you can make a lot smarter decisions, a lot more intentional decisions.
And then the other, and the third takeaway is, as with every episode, make sure you hit that "subscribe" button. That helps us to rise in the rankings and helps other people find this advice and our show. So if you want to help other people, hit "subscribe."
And also, the topics that Bridget and I talk about on Friends Talk Financial Planning are some of the core concepts of the Alliance of Comprehensive Planners. acplanners.org. Look there for an advisor in your area.
So with that, Bridget, 'til next time!
Bridget: Thanks, John!
At Sullivan Mermel, Inc. we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.