Whether we like it or not, numbers play a huge role in our lives. And one number rules them all! – Averages. We use averages everyday and everywhere, anchoring our expectations and taking comfort that if it’s good enough for the average person, then it’s good enough for us. If you’re well above average, more often than not – the scissors comes out to cut you down.

The trouble with averages is that it’s not always reliable enough to be an anchor. Furthermore, making key financial decisions on stats that have been bantered around as “averages” may be fraught with danger. Let me show you.

Comparing loans and interest rates

Loans come with a multitude of disclaimers, and tucked away in the T&Cs is typically the line:

The comparison rates are calculated on an average loan size of $150,000 over 25 years.

For background, the comparison rate tries to calculate the true rate of interest on a loan inclusive of fees, loan amount, interest and time. Now you’re probably thinking – “Gee I wish my loan was this small”.

And you’re right, this is a poorly chosen proxy of the average loan size (which by the way the real rate is currently north of $500,000). At first I thought this was an anchor adopted by vendors to confuse us. Until I found out that it actually has its roots in Government legislation. Outdated Government legislation.

Now, loan size and loan length directly affects the comparison rate calculation between one loan and another. So you with your unique circumstances will need to generate your own comparison rates when you shop for your loan.

Let’s look at comparing two loans of different comparison rates against different loan amounts of $300,000 and $500,000. Whilst Loan A seems more attractive at the prescribed ‘average’ comparison rate, for higher (and frankly more realistic) loan amounts, Loan B becomes the better choice.

Making retirement decisions

Another example here is to do with retirement age. The average age for retirement for people over 45 is tipped to be 53.8 years. So does this mean alarm bells for everyone aged 45+ that they’ve got less than 8 years to save up?

The reality is that the average stat here is filled with variation. Disparity between certain occupations can range up to 10 years (comparing sales workers to professionals in the education industry) and lifestyles requirements following retirement will be informed by existing salary. All these conditions make stressing for hitting that 8 year target less necessary and potentially unwarranted.

Regardless, we still see that a majority of Australians accrue nearly 50% of their superannuation in their last decade of employment. Is that another case of “average stat leading individual decision” or simply “individual decisions averaged”? In any case, this illustrates the importance of decision making in the final decade run-up to retirement.

A final word on using averages

I wanted this post to serve as a caveat emptor for using averages when making big decisions. Particularly for decisions on topics where you have both sweeping averages and unique personal data – like finance.

That said, consulting averages for a totally alien area (i.e. recommended caloric intake for the first time dieter) may still be a great idea to get a ballpark view. But questions should always be asked to refine the assumptions behind the data to suit you – the individual. Always supplement and customise with personal differences where possible.