5 Reasons Online Calculators Don’t Add up

Photo (cc) by 401(K) 2012

Bankrate.com is a company that generates millions in revenue every year, so it’s a good bet they’ve done the research to find out exactly what people want to see on their website.

And what occupies some of the most valuable (upper left corner) real estate on the Bankrate home page ? Financial calculators. And not just a few, 12 different categories of calculators.

This tells me that those interested in personal finance really like calculators. Who can blame them? Finding a quick yes or no to life’s complex money questions is compelling stuff. But while one-minute solutions to all your financial dilemmas may sound attractive, in many cases the answers may not be as clear-cut as the word “calculator” might lead you to believe.

Here are five reasons I’ve grown to hate not all, but some, financial calculators.

1. They suggest people are simpler than they are.

As a CPA for more than 30 years, I appreciate more than most folks the appeal of reducing problems down to a single number. Unfortunately, life doesn’t often lend itself to that sort of linear thinking and finite conclusions.

From websites that promise to find your perfect mate to stockbrokers that offer to find your perfect investment mix, the process of inputting facts and outputting specific conclusions ignores something critical to many questions: how you feel.

An investment-mix calculator can tell you exactly how much of your savings to put into stocks, bonds, and cash, but few offer the ability to input how freaked out you’ll feel if stocks fall 50 percent, like they did in 2008 and 2009.

A lease-vs.-purchase car calculator has no input for the frustration of not being able to customize your car if you lease it, and you can’t explain how satisfying it is to live mortgage-free to a rent-vs.-own home calculator.

2. They suggest life is more complicated than it is.

Several years ago, I wrote a book called Money Made Simple. In it, I suggested a simple way to figure out how much of your long-term savings to invest in stocks: subtract your age from 100 and put the resulting percentage into stocks – then divide what’s left equally between bonds and cash. So if you’re 20, you’d have up to 80 percent in stocks. If you’re 80, you’d have 20 percent. But I also suggested modifying these percentages depending on how you felt about risk and basically just do what makes you comfortable.

Then I compared this ridiculously simple technique to the results provided by a relatively complex calculator from a financial website. Here’s what the calculator wanted us to input:

  • How much money we have now in various types of investments.
  • Our tax bracket.
  • How much of our savings we intend to spend within two years.
  • How much we intend to spend within 10 years.
  • How much we intend to leave to our heirs.
  • Years to retirement.
  • How much of our savings is in tax-deferred accounts.
  • How much equity we have in our home.
  • How many dependents we have.
  • Our volatility tolerance.
  • Our economic outlook.
  • Our inflation forecast.

Most people probably wouldn’t have even completed this calculator, since many couldn’t begin to provide all that information. But for those who did, below is how the calculator compared to my simple method. For both cases, I used a 35-year-old – for the rest of the calculator inputs, I tried to choose middle-of-the-road answers.

  • Simple, take-your-age-from-100 method: stocks – 65 percent, bonds – 17.5 percent, cash – 17.5 percent
  • Wizard-of-Oz calculator method: stocks – 64 percent, bonds – 18 percent, cash – 18 percent

Why would someone make a calculator so complex? Simple – because its creator wants you to think that they’re smart and you’re not. And why would they want you to think that? If they’re in the business of peddling financial products, to make money from you, of course.

3. They ask you to know the unknowable.

As in the silly calculator above, in order to provide a specific answer to your question, many online calculators insist that you first provide specific predictions for future events that nobody can possibly know. And the output will vary radically depending on your input.

Just last week I wrote an article for MSN Money called Which is better – Renting or owning a home?. In that article, I discussed a calculator offered by the New York Times that asked you to tell it the exact percentage that house values, rents, and property taxes, among other things, would increase or decrease four years into the future. My response? If you know that, you should be talking on CNBC, not filling out online calculators.

4. They’re often used to sell stuff.

The most notorious in this category: how much life insurance you need. These calculators are often sponsored by sites that sell life insurance, and coincidentally often suggest purchasing tons of it. They typically don’t include money your heirs might receive from Social Security survivor benefits, and they nearly always assume that you “need” to leave a nest-egg large enough to support your spouse and kids indefinitely on the interest alone.

For my own safety, one of my strategies in the various marriages I’ve had is to remain worth more alive than dead – a concern I’ve never seen addressed by any insurance salesman or online calculator.

5. They give you a false sense of security.

As I said in the opening paragraphs above, calculators are comforting because they provide specific numbers to specific problems. When you’re using a “real” calculator – the kind that multiplies 165 times the square root of 37 – you get the right answer every time. That’s it – there’s no argument.

But when you start including the need to forecast the unforecastable or account for human emotions with a sliding pointer, the result you get may sway you into a stupid course of action due to the inaccuracy of your inputs. The calculator is always right when it answers a math question. But too many calculators are sending the wrong message by declaring a certain answer to an uncertain world.

Should you shy away from online calculators?

Absolutely not. They’re useful – especially when it comes to math. But consider adopting a couple of rules. First, the longer the time period under consideration and the more predictions you’re required to make, the less useful the calculator. And those offered by people trying to sell you something? Don’t bother – do a little research and do the calculations yourself.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Ways to Save Money Without Trying
7 Ways to Save Money Without Trying

Saving money doesn’t always mean drudgery and sacrifice. These tools make it easy — sometimes even fun.

5 Medicare Mistakes to Avoid for a Healthy Retirement
5 Medicare Mistakes to Avoid for a Healthy Retirement

Medicare can be confusing. Beware these missteps — which can hike your costs.

7 Gadgets Under $60 That Can Boost Your Health
7 Gadgets Under $60 That Can Boost Your Health

These Amazon finds can help ease foot aches, boost energy and even protect your heart.

5 Countries Where You Can Retire on $2,000 a Month or Less
5 Countries Where You Can Retire on $2,000 a Month or Less

These tips on retiring overseas come from someone who’s been helping American expats for decades.

19 Purchases That Buyers Almost Always Regret
19 Purchases That Buyers Almost Always Regret

Think twice before buying these things.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

21 Items to Cut From Your Budget That You Won’t Even Miss
21 Items to Cut From Your Budget That You Won’t Even Miss

Start off the new year by implementing these small-but-smart savings strategies. They’ll soon add up.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

5 States Lowering Taxes This Year — and 2 Raising Them
5 States Lowering Taxes This Year — and 2 Raising Them

State personal income tax rates, brackets and deductions just changed in these places.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.