Personal Finance = Math + Philosophy

2023.12.04 Financial Math

Imagine a pond. In this pond is a patch of lily pads. Every day the patch doubles in size. It takes 100 days for the patch to blanket half of the pond. How many more days will it take to cover the entire surface?

Time after time when this question is posed in a survey or questionnaire, the most common answer given is “100 more days.” The correct answer is 1 more day. This common mistake is a good example of why finance can feel counterintuitive.

Personal Finance is a combination of math and philosophy. Let’s address the math side first: As in the lily pad example, ratios and percentages are counterintuitive, but they are crucial to understanding your own personal financial situation. What percent of your income is being deferred into your 401k? Are your housing expenses at most 30% of your take-home pay? What’s a reasonable percentage of your income to devote towards a vacation this year? To answer these questions, we need to be able to reference some type of record and some may require more extensive records than others. This is where keeping track of your expenses is important. This also where philosophy comes in.

Whether we admit it or not, we all practice philosophy - some are just a lot more deliberate about it than others. It is your philosophy that will determine most of the outcomes in your life. Some things are out of our control, but most are within it. Philosophies can vary from person to person, but one component must be present: discipline. Without discipline, philosophy is just an abstract idea with no real-world ramifications.

One philosophy that I have adapted over the years is to always make important things urgent. President Eisenhower once remarked while in office that he had two types of problems: the important and the urgent. The important ones are rarely urgent, and the urgent ones are rarely important, he quipped. In personal finance there are many non-urgent important concepts. For example, whether you start contributing to your 401k today or next year will not likely make or break your retirement plans. But by waiting you increase the odds of waiting even longer – it’s just human nature. Saving $20 per week seems like an easy thing to do (think of all the frivolous things we spend $20 a week on). But there is a major problem with things that are easy to do: they are also easy not to do. This is where philosophy and discipline are so important. We must convince ourselves that there is no such thing as an important non-urgent problem. If it is important to us, then it must be urgent.

In my experience there really is no reliable correlation between those who are good at math and those who are good at philosophy. It is very common for one person to be good at one and not the other. But what is even more common is the misconception that math is more important than philosophy when it comes to personal finance. That is simply false. Identifying what is important to you and acting on it with a sense of urgency is more than half the battle.