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How Financial Planning Calculators Work


How to Use Them (Wisely)
A financial planning calculator will only be as accurate as the information it's given.
A financial planning calculator will only be as accurate as the information it's given.
Photo courtesy of Chatanooga.gov

An online financial-planning calculator is a useful tool, but it's not foolproof. It's not even close.

A program based on hypotheticals is not always going to be accurate. It could assume a certain rate of inflation that turns out to be way off. Or it could place too much weight on an estimated life expectancy that is really only correct 50 percent of the time [source: Today's Seniors].

That's the biggest risk factor in relying too heavily on these tools: They're necessarily based on assumptions (and often on only partial data, to simplify the process). The built-in criteria they're using, which you may not always be aware of, may or may not prove accurate in the long (or short) run.

Another significant problem with this type of user-guided financial tool is the "user" part. The more accurate calculators are more intricate in their calculations, and they require a fair amount of data input. Some of this data may actually require some understanding on the part of the user -- understanding that user may or may not possess. So user error can play into the equation, too.

Ultimately, the smartest use of an online financial-planning calculator is as a jumping off point. It can establish a guideline for your finances, which you then take to a certified accountant or financial planner for expert advice in confirming the calculator's output (and your own data input).

Or, if you're dead set against paying for a human second opinion, at least get a second and third automated opinion. If several calculators return the same approximate result, you can probably move forward with some degree of confidence that your information is sound.

For more information on financial planning and related topics, look over the links on the next page.