False Sense of Precision



Raise your hand if you're the analytical type and love a good spreadsheet. *I'm looking at you, engineers.* Ya, me too. An idea pops up and the first instinct is to open our favorite spreadsheet software. Budgeting, buying or selling a home, planning a wedding, analyzing heaps of data. What problem can't be solved by Excel (or Google Sheets), amiright?!


Plugging numbers into a spreadsheet can be comforting. For example, one can fairly quickly grab bank feed data, dump it into Excel or link it a budget software, and commence number crunching. With Excel's ability to hold 17,179,869,184 cells worth of data, we need to be mindful of its limitations as related to financial planning.


False Sense of Precision

Financial planning is really an exercise in making our best guesses about the future. Sure, they might be sophisticated guesses, but they're guesses nonetheless. For example, we can calculate out an expected balance in a retirement account using expected market returns, expected contributions, and time horizon and finally spit out a balance and even run a Monte Carlo analysis showing the likelihood of success or failure. Our best guesses might work in the pristine vacuum of a spreadsheet but real life is never that clean. It doesn't mean we don't try, though.


Focus on Accuracy Over Precision

To quote Carveth Read: "It is better to be vaguely right than exactly wrong." We can spend a lot of time and energy trying to come up the best way to model an investment, say buying a rental property, or combing through reams of budget data to ensure that this $2.14 expense was appropriately recorded (be still my accountant's heart). It's not that this stuff isn't important. But are you aiming at the right target?


Financial planning isn't physics. We often don't need to be exactly right today. Spending a bit more time today making sure we aim in the right direction can save a lot of time and heartburn later. Monitor progress and adjust along the way.

Ready to work with someone to help you be less wrong tomorrow? Get in touch!


Disclaimer:

The above is for general information only. Consult with competent investment, tax, or legal counsel to best understand your unique circumstances before implementing any strategy. There is no assurance that working with a financial professional will improve investment results. All information above is subject to change. Read our firm's disclaimer here: https://www.windingtrailfinancial.com/disclaimer.


[1] https://www.dictionary.com/browse/accuracy

[2] https://www.dictionary.com/browse/precision

[3] https://www.logicallyfallacious.com/logicalfallacies/Fake-Precision

[4] https://en.wikipedia.org/wiki/Monte_Carlo_method

[5] https://en.wikipedia.org/wiki/Carveth_Read

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