Money is not mostly about math

By Byron Moore, posted November 15th, 2013

Question:  I've always made financial plans every few years. Looking back, none of them have ever worked out like I planned. So why plan? 

Answer:  I think you know why, but I'll take the bait.

Twenty years ago, Bob Castiglione told me, "Money is not math, and math is not money." At the time I just scratched my head (till all my hair fell out), but I finally figured out what he meant.

The advent of personal computers thirty years ago enabled those of us in the fledgling financial planning community to crunch numbers to our hearts' content. Thus enabled to calculate the numerical nuances of infinite financial possibilities, financial planners began producing elaborate projections of potential financial futures.

I can't prove it, but I theorize that is when my financial planning brethren first convinced the public they could (somehow) predict the future.

News flash - they can't. We can't.

We can tell you what will happen in the future if you'll just provide us with a few details: like what interest rates, tax rates, market returns, inflation rates and a hundred other details will be. Short of knowing those things (for certain), our numerical precision is not too precise.

Unexpected and unknowable future circumstances dramatically affect our financial futures.

But so does another significant factor - human nature.

More than a few folks who made elaborate plans to save, save, save have discovered that once they have a few coins in their pocket (or bank account), human nature shows up. Economists call this "the propensity to consume."

Your grandfather used to call it money burning a hole in your pocket.

Unanticipated circumstances can wreck havoc on the best financial plan.

But human nature, in all its many forms, is usually responsible for most of the damage done to financial plans.

So...you are correct - financial projections are not particularly effective at telling the future.

But they can tell you very clearly what you should be doing today.

So an effective financial plan is not just about crunching the numbers. It's also about corralling human nature.

That's the part that has a nasty habit of messing up the math.

Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.