Twenty-five 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 cant 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 so 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.
If all we had to do was complex math problems, financial projections would be much easier. But we are dealing with something much deeper than math here. We are dealing with money.
And money is the medium of exchange between human beings. Its that human being part that really makes things interesting. Human beings often dont fit nicely in a mathematical equation.
Yes, unanticipated circumstances can wreck havoc on the best financial plan.
But human nature, in all its many expressions, is usually responsible for most of the damage done to financial plans.
So it's inconveniently true that 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. Its also about corralling human nature.
Thats the part that has a nasty habit of messing up the math.