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Oranges and Inflation

What do oranges and your money have in common? They are both subject to erosion from unforseen external forces.

If I gave you three oranges today and you did not add any more, how many oranges would you have one year from now?

Conventional math tells you that you would have three oranges but science would tell a different story.Those oranges would rot away within weeks, if not days.

Is your money rotting away like those oranges?

Traditional financial planners are quick to focus on how many "oranges" you will need to fund your goals like paying for college or saving for retirement.

"Planning to send your kid to college? Well, the average cost of college increases by 6% each year. Looking to retire by age 65? The average retiree needs about 70% of their pre-retirement income during their golden years."

In fact, many financial institutions have made it their business model to help you find "your number."

While financial calculations are quick, they are often shortsighted. That's because money is not math and planning is not built on averages. If that were the case, I could stick one foot in a bucket of ice and one in a blazing fire and I should feel pretty comfortable, right?

Engineers do not build bridges based on average wind speeds, temperatures or load bearings. They need to consider factors that are extreme and even unforeseen. Math cannot protect you against the unforeseen.

Financial plans cannot be reduced to a mathematical formula: Save this much, for this long, at this rate and "voila!" In the case of the oranges, math does not account for factors that will cause them to rot away like heat and humidity. It's the same with money.

Math will not account for risks such as inflation, legislation, or taxation that could "rot" your purchasing power.

Financial planning should be a process that begins with a systematic method of "protection first". Protect your oranges and your ability to add to them first. Then make sure they don't rot away.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Mike Corcione March 22, 2012 at 07:46 PM
“This is interesting, and brings a different perspective. People need to be aware of the complexity of personal finances and it’s not just about what product to buy. The financial industry has a lot of work to do in order to better educate the public when it comes to planning client money.”
Peter Marengo March 23, 2012 at 01:15 AM
There are far more complexities in personal finances than people think and one cannot just assess how well he/she is doing based on market returns or their balance sheet. It requires a comprehensive approach that factors not only internal but extraneous forces, such as taxes, inflation and lost opportunity cost.

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