My friend Justin Jackson wrote an article recently about reducing costs for his online small business [1].
Anyone familiar with start-up advice has probably been told a thousand times to not worry about costs. Focus on increasing revenue. Cutting costs is a losing battle.
Although this is usually sound advice, Jackson did something unusual: He actually opened a spreadsheet and did the math. And, unlikely the generic advice, he actually found controlling costs was a reasonably good business strategy for him to pursue at that time.
Look, I love heuristics and rules of thumb. It’s often helpful to have a standardized answer that will be true in most cases which you can just run with.
However, there’s often a tendency to overuse such pieces of generic advice. People begin to treat them as fundamental laws of the universe, rather than the helpful shortcuts which they are.
That’s why actually doing the math is such an underrated strategy.
It may only take twenty minutes to pull up a spreadsheet and see how one approach compares with another, but the answer you get will be far more accurate than if you had skipped the work and just stuck with prevailing assumptions.
Where Should You Actually Do The Math?
Here’s some places where you should definitely do the math, and yet few people do:
- Buying a house versus renting. Renters are throwing away money. Mortgage debt is slavery. The truth is, all the fascinating variety of takes aren’t nearly as valuable as actually doing the math. You can even use a calculator like this one [2] which does the work for you.
- Exercising or cutting calories to lose weight. How many calories do you burn at the gym? How many could you reasonably cut on a diet?
- Going to grad school. What are reasonable graduation salaries? How much more money do people make on average? These are all statistics you can find. Then add up the amount of money you would be spending to attend (including the opportunity costs of missing work). Which is greater?
- How much money should you put away in savings? Compare how different savings rates, at different expected levels of investment return, would differ when you’re 40, 50 or 60, if you continue them for those lengths of time?
These are just scratching the surface, but they all have a common theme. They are all questions people debate endlessly. They all depend on a few assumptions, but most of which can be reasonably researched to get an approximate figure. They could be answered, largely, by simply doing the math.
How to Actually Do The Math
Doing the math is important. But most people aren’t very good at math (which might explain why this approach is uncommon).
Consider the 2003 National Assessment of Adult Literacy, which includes a measure of “quantitative literacy” or the ability to do basic math. According to this report a majority of Americans were unable to “calculate the total cost of ordering office supplies, using a page from an office supplies catalog.” In most cases, actually doing the math is harder than this.
The quick answer is that you should learn to do math, before you can do *the* math in your life. However, wading through years of math classes is probably unnecessary for most of these questions, so there’s a simpler answer:
- If your problem involves comparing two things that happen at the same time, then just add up the two effects and see which is bigger. The key to successful math will be estimating things properly and not forgetting about hidden factors.
- Example: counting calories reduced from exercising or dieting.
- If your problem involves comparing two things, especially money, that happen in different points in time, you need to discount things that happen later.
- To do this, you just need the interest rate. This could be the amount your investments earn, loans you need to pay, or if you want to get fancy, a discount rate that also incorporates the risk of different options.
- Put one plus the interest rate in one column of your Excel spreadsheet, and multiply it against the value in the next column, one row up. Output this to the value of the column one over. If you drag this down, you’ll automatically get how a value will grow over time. (A quick check, if you do this with a 10% interest rate, your columns should have 1.1, 1.21, 1.331, 1.4641 and so on)
- You can do the reverse of this by taking something in the future, dividing it by one over one-plus-the-interest-rate and going backwards in time. This can help you figure out how much something with a lot more later, can be worth compared to something right now.
- If this explanation is a bit confusing, you can go into more depth here to calculate the time value of money [3].
- You can also use this for non-monetary things that happen at different times, but the interest rate will be less obvious there, so be careful.
- If your problem involves comparing things which aren’t directly comparable, say the benefit of enjoying your job more versus earning more money, you can convert one to the other by imagining a trade-off point for each. Say you’d go with Job A over B, only if it paid $20,000 more per year, then that’s the value of the non-monetary benefits of Job B.
You Can’t Always Do the Math, But You Should Calculate More
Actually running the numbers won’t always work. The situation might be ambiguous. The factors which would come together into a formula may not be clear-cut and you may not be sure where to go with them. The world is nebulous, so sometimes there’s no correct math to do for a given situation.
However, the amount of situations where a better, if not the definitive answer, can be reached by doing the math is far, far larger than most people actually practice it.
Doing the math also enforces a kind of discipline on your thinking. It forces you to not rush to assume the answers to questions without actually going out into the world and checking it first. This kind of discipline can lead to better decision-making, even if you don’t end up going the way your numbers point.
When in doubt, do the math. Make this your mantra, and you’ll make far fewer mistakes.