Lending Club Blog

Balancing Demographics

Demographics may provide insight into an increased probability of an event’s occurrence, but they do not guarantee that it will happen. The prevalence of the use of demographics in financial planning should be balanced with an understanding of their limits.

Demographics are information about people’s lifestyles, habits, population movements, spending, age, social grade, employment, etc. Your financial status and lifestyle put you into many different groups. While averages within the group are useful to know, they don’t allow us to predict any one member’s situation.

An example of demographic use in financial planning is that people who are married live five years longer, on average, than those who are not. Such information is important from a financial planning perspective when calculating how much money you’ll need to retire. If the marriage trend always held true, a single person with the diagnosis of a few months to live might consider getting married to extend his or her life. Obviously that would not have the desired effect. It’s not that being married makes any one person live longer, just that married people as a group tend to live longer.

Knowing the averages associated with the groups to which you belong is important, but the information should be used as a single data point for planning purposes. Personalized information about yourself should make up the bulk of the data you use. When planning for retirement, making assumptions about borrowing money, predicting the expected returns on your investments, and items of that nature, your personal situation will prove much more influential than any demographics could ever hope to be.

Monday, June 2nd, 2008 at 6:37 am

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