The first section of the book discusses at length how people are often stymied at personal finance due to basic math skills. Here’s a quote, from page 7, discussing a simple math problem that involved pulling two numbers off of a list, adding them together, and figuring out what a 10% tip would be:
If you answered this question correctly, consider yourself part of an elite group, because when the U.S. Department of Education asked U.S. adults to answer it as part of a nationwide study, 42% answered correctly. Less than half of American adults were able to pick two numbers from a list, add them, then perform the most basic of all percentage calculations – simply moving the decimal point one column to the left to calculate 10 percent.
You might be surprised by this abysmal performance. But then, if you think about your last dinner with a group of friends, perhaps you won’t be. Remember that dreaded moment when the bill came, and the splitting began? Cell phones and calculators were whipped out. Shrugs swept around the table. Finally, most of you gave up and threw down $20 bills or credit cards.
Sullivan goes on to point out that a dollop of very basic math can keep people out of a lot of financial trouble.
I know from my own experience that many people out there are extremely math-phobic. When they see numbers, they shut down.
Why is this?
Some of it is in brain chemistry, I’m sure. Some people simply don’t do well in terms of numbers. On the other hand, I also believe that some of the problem comes from our educational system. I have always enjoyed math, but I had at least one elementary school teacher who was so abysmal at teaching the ideas that I just read the book on my own and asked my father for help. Many of my classmates, later on, who were confused by math recalled being baffled in this teacher’s class and always feeling lost thereafter.
The solution isn’t to just yell at everyone to learn math.
Yes, it would be great if we were all very good at such basic math, but the dream doesn’t match the reality.
Instead, I think one solution is to simply have a repertoire of very basic math techniques that help in many situations.
I’m going to point out six of them that I’ve collected over the years, intending to use them in a post like this. If one (or all) of these seem obvious or too easy to you, congratulations – you’re pretty good at math. But each one of these situations has stymied someone I know at least once, so there are certainly a lot of people who could use some tactics like these to help them out.
Please, if you have more simple tactics like these, leave them in the comments.
Figuring out a 10% tip
This is the easiest tip of all and is exactly as described above.
If you see a dollar amount with a decimal in it, slide the decimal point one place to the left and drop the right number
So, if you have a bill for $83.47, just slide the decimal one place to the left – $8.347 – and drop the right number – $8.34. There you go.
Figuring out a 20% tip
Many people want to tip more than that, so here’s how to get a 20% tip.
Use the 10% tip trick, then double the numbers starting on the left
So, if your bill is $34.28, use the 10% trick to turn it to $3.428 and then $3.42, then double each number. 3 becomes 6, 4 becomes 8, and 2 becomes 4. That leaves you $6.84 for your tip.
What if the number doubles into something in the ten spot? Double them all as before, then add on the ones going back the other way. So, let’s say you have a bill that’s $87.65. 10% of that is $8.76. 8 becomes 16, 7 becomes 14, 6 becomes 12. The easiest thing to do – since you don’t have to worry about preciseness, is to just get the first number right. $16 is the first number, and since the second number has a 1 on the front, make it $17. That’s pretty much all you need to worry about – don’t sweat the exact change on a tip.
In fact, for most efforts, this kind of approximation works just fine.
Figuring out which debt to pay first
This one is pretty easy, too.
Just call each place holding a debt and ask what the interest rate is and what the balance is, then list them in order according to one or the other.
That’s it. There’s no worrying about it. Listing them by interest rate (biggest first) is very slightly faster for paying off everything, but listing them by balance (smallest first) will allow you to pay off individual debts quicker.
Figuring out how to split a bill evenly
The best solution is to, of course, ask for separate checks for everyone. If that doesn’t work, you’re usually stuck spltting up the bill evenly. Here’s how you do it.
Everyone should pay an equal amount on the bill with at least one person paying cash.
Then request change in small bills and when the change comes, split the change as evenly among all the payers.
So, let’s say the bill is $55.82 and there are five of you. Everyone chips in either $15 or $20 and requests change in small bills. When the money comes back, figure out a tip from that – if you’re paying 20%, use the 20% tip trick above and pay $11. If everyone chipped in $15, you would have $8 and some change in single bills to split among you. Give $1 to the two people who bought the most expensive stuff and $2 to the other three who bought less expensive stuff. Walk away, happy.
Figuring out which size is a better deal
The key is to use the price per unit measurement.
Go to the store and study the price per pound or price per ounce on the shelf sticker – most stores have it. Make sure the two units are the same. If they are, whichever one has the lowest price per unit is the best deal (assuming you can use it all before it goes bad).
Just ignore the sticker price. What matters really is the price per use of it, and if you can pay less per use, you come out on top.
Figuring out if you can afford a house payment or rent
All you really need to know here is your annual income and the 10% trick and the 20% trick. Take your annual income, use the 10% tip trick on it, then use the 20% tip trick on that, then compare that to your rent or monthly payment. If your amount is higher, you’re probably safe to rent or buy. If it’s not, then you should avoid it.
This is actually really sound – it comes up very close to the 28% of your monthly income that has been recommended for years for people to use to determine if they can afford to rent. All this trick does is make the math a bit easier.
Here’s an example. Let’s say you made $40,000 a year and wanted to rent an apartment that cost $1,400 a month. Can you swing it? The 10% rule on your income takes it down to $4,000, then the 20% rule on that takes you to $800. You probably shouldn’t be swinging it on your own. However, if you have a roommate to split it fifty-fifty with, your monthly rent is only $700 a month, which is less than the $800 you calculated. That would be a much safer move.
This little trick would have saved an awful lot of people from signing bad mortgages in the last decade.