## Tuesday, November 1, 2011

### What If again?

We are continuing today on the theme of yesterday's blog post entitled What If? The answers to What If? questions in the future are called scenarios. Or forecasts. Or prophecies. Or predictions. Math is what you use to calculate future numbers, based on current assumptions.

FUTURE TENSE
What if I buy this car instead of that one?  What if I take this job paid in tips as a waiter here, instead of that job with a salary over there, and take the extra earnings and buy a house?

It used to be popular to forecast your career earnings, estimate your home's appreciation, and predict that by year 20XX you would be able to move to a bigger house, put your kids through college, or retire. I can tell you from personal experience that my predictions seldom worked out the way I expected, no matter which scenario I used; no matter how "hot" the California real estate market was; no matter how sophisticated the mathematics.

For personal financial forecasting I have used a company called Financial Engines. Their software looks at your assets and works through thousands of scenarios. It comes up with some predictions and suggestions to assist you in retirement planning. Here's one report I got recently:

On most What If? scenarios, you can do the math yourself, using what you learned in elementary school. For example:

I was talking with a pal about sales commissions. If he was able to make a modest improvement to a client's future business, his company could charge a small fraction of that amount for his services. His calculations went like this:

If my client A increases his sales by \$32 million and we charge 1.75% of that, and my employer keeps 75% of the fee, I would get the other 25% of the fee. How much do I get to keep?

Scenario 1 \$32,000,000 x .0175 = \$560,000 x .25 = \$140,000

If A makes \$22.5 million instead, we charge 1.5% and I get to keep 20%, how much is that?

Scenario 2 \$22,500,000 x .0150 = \$337,500 x .20 = \$67,500

My friend liked both of those numbers (he liked the larger one better!) while I was thinking back to 1575 AD when this statement first appeared in English:

"Counte not thy chickens that unhatched be."