What’s Wrong With Online Financial Calculators

There are hundreds of websites and thousands of online financial calculators to help you calculate the cost and cash flows of different financial situations.  From how much your mortgage & debt payments should be, to how much you need to save for retirement, to how to pay off your credit cards… there are even financial calculators to help you plan your savings for a vacation or when to quit your job and travel the world!

While these calculators can be useful for quick research, they will not help you avoid making bad financial decisions. Our brains are hardwired to make bad decisions, so no matter what the results of a digital calculator tell us, our biases tend to hold us back.

Let’s examine the usefulness and concerns of some of these calculators and how to avoid their pitfalls.

The Usefulness of Free Online Financial Calculators

Websites like SmartAsset, Bankrate, and Nerdwallet spend a lot of time creating their calculators based on variables like:

  • Time – over what period of time you need to pay back a loan, or over what period of time you plan to save money
  • Interest rates – the amount of money you charge or earn; usually expressed as an annual percentage
  • Principal – the amount of money you borrowed, or the funds you are looking to invest

Online tools are oftentimes faster to use than building out your own functions in Excel, which would require you looking up the formulas, setting up the spreadsheet, and typing in the conditions.

These calculators can be very useful for giving you a general sense of how much your expected mortgage payment could be, or how much you should save each month for retirement if you want to have one million dollars by the time you turn 65. But the truth is, your financial life is not as simple as just a few variables in a spreadsheet, and therein lies the problem.

Problems with Online Financial Calculators

Things happen, that is the third guarantee in life; besides death and taxes (FYI working with a financial advisor may help reduce your taxes!).

It’s these additional variables that most online tools struggle with. For example, a calculator may tell you the maximum amount you can afford to pay each month on your mortgage, but it usually won’t factor in how much that interest payment can be deducted from your itemized taxes.  To understand your unique situation, the calculator would need additional information like your age, income, tax laws, and whether or not it’s your first or fifth property.

Things can get even more complicated when you factor in location because varying cities and states have different laws. A generic calculator designed by a company in California may cover the rules in San Francisco, it may give you decent results for Los Angeles too… but for a person living in Texas or New York, the formula could end up being way off (especially after closing costs & other fees!).

Here is a real example from CNN Money, showing that mortgage rates in Rhode Island are at 3.4% vs 4.1% in Nebraska:

“Over 30 years, that seemingly tiny 0.7 percentage-point difference means that a $200,000, 30-year loan would eventually cost $28,800 more in Nebraska than it would in Rhode Island.”

Using an online tool can give you the wrong insight. However, even if it is accurate, at the end of the day an online tool is not accountable for helping you execute on your plan. This is why so many people hire an accredited financial advisor to develop a more rigorous financial plan and help them to stick to the plan.

Working With a Financial Advisor

When an advisor gets to know you on a more personal level and has years of experience doing financial planning across many client scenarios, they will be able to provide you with more actionable information than an anonymous online form.  If you’re curious to learn more about how a financial plan works, take a look at the definitive guide to financial planning. 

Your financial advisor will, of course, understand the impact of your location on the payments, but they will also take into account, well, your whole account.  They will know about your retirement and college savings goals, they will account for your salary and the fact that your partner is planning to stay at home with the kids in a few years, as well as any dividends or coupons from your investable assets.  

By looking at your total portfolio, and not just the interest rate and a couple of other basic variables, a real human financial advisor will be able to guide you to make the right financial decisions in a way that an online calculator cannot.  In fact, people who work with an advisor are twice more likely to reach their financial goals, so that little extra nudge could be exactly what you need to overcome your biases.

Ready to Get Started?

Real financial planning should pay off today, and in 10 years' time.