Understanding the Financial Consequences of Math Misunderstandings

After relocating to the USA in 2005, I quickly observed that many Americans struggle with mathematics. Their skills in both numeracy and literacy seem to be lacking. I frequently come across posts on social media where individuals have difficulty grasping concepts that appear straightforward to me, particularly when it comes to understanding percentages.

This issue isn't exclusive to the United States. During my time in England, my first wife and I were avid teddy bear collectors, often visiting a shop in Wellingborough owned by a charming couple, Gerry and Margaret. We formed a friendship with them, as we shared membership in a teddy bear club in Stratford-upon-Avon.

On one of our visits, I noticed a sign that read, "Sale — We Pay The VAT."

Understanding VAT

For those unfamiliar, VAT, or Value-Added Tax, functions similarly to sales tax in the United States. Introduced in 1973, the VAT rate has varied; during the incident I'm recounting, it was set at 17.5%.

Returning to the sale sign, I realized Gerry had omitted a crucial detail: a "17.5% Discount." He mistakenly believed that deducting 17.5% from the sale price equated to the VAT included in the total price. In the UK, product prices typically encompass VAT, so if an item is priced at £100, it would be labeled at £117.50, including a £17.50 VAT.

However, if the price is shown as £100, one should not simply calculate 17.5% of that to find the VAT. Doing so results in an inflated VAT figure.

The Correct Method for VAT Calculation

This might seem daunting, but simple algebra can clarify the correct VAT amount. Let’s assume the VAT rate is 10% and the displayed price is £110. To ascertain the VAT portion, dividing the total (£110) by 1.10 yields the correct amount.

Why divide by 1.10? Because the VAT rate as a decimal is 0.10, and adding one gives you 1.10. Dividing £110 by 1.10 results in a VAT amount of £10, indicating the product cost is £100. Verifying this involves calculating 10% of £100, which equals £10, and summing that with the product cost gives you £110, as expected.

A Personal Anecdote of Miscalculation

Reflecting back, my mother, who assisted my father with his business accounts, made the same mistake. She would separate fuel costs from VAT on receipts, but like Gerry, she calculated the VAT incorrectly by applying the current percentage to the total amount.

Neither my father nor I noticed this until they received a notification from Customs & Excise, indicating they had overclaimed VAT. They had to sift through years of receipts to correct the error and refund the excess amount. Although Customs could have pursued charges against my father, they simply required the return of the funds.

The Everyday Necessity of Math Skills

Despite many believing that math, including algebra, isn’t relevant to daily life, the reality is that it is essential. Miscalculations, as demonstrated by Gerry and my mother, can lead to both financial loss and time wasted.

The Transition to Entrepreneurship

As job security dwindles in large corporations, I took charge of my own career path. After hearing news of mass layoffs at my company, I felt unsettled about my future. Although I managed to retain my position through restructuring, it became clear that corporate environments can be volatile.

Ultimately, this realization, along with other factors, prompted my decision to leave the corporate sector in search of greater control over my professional destiny. If you're curious about the specifics of my departure and the motivations behind it, you can find more details here:

The first video titled "When not knowing Maths can cost you £2000!" illustrates the financial repercussions of poor mathematical understanding and emphasizes the importance of numeracy in everyday situations.

The second video "Do You Have to Be Rich To Study Math?" explores the accessibility of math education and the value of numeracy skills across different socioeconomic backgrounds.