Meaning of Ballpark Figure
A ballpark figure is a rough estimate given to understand the value of something which can help in taking important decisions. It is considered a logical measurement that accounts for a margin of error.
For example, if one asks, “how many people does the baseball stadium fit?” You may not know an exact answer but using a ballpark estimation, you can say 10,000. One logically would not answer 10 or 10 million. But a good ballpark guess is around 10,000 leaving enough margin for error while still giving a reasonable estimate.
- A ballpark figure is a reasonable guess about the value of something.
- In finance, ballpark figures are estimates and not accurate representations of the value of an investment, retirement fund, real estate property, software development projects and the like.
- They are useful in preliminary discussions when considering diverse investment proposals to give a rough estimate on how fruitful will the investment be.
- It is important to be wary of financial professionals using ballpark figures as they can exaggerate the value of an investment to benefit its sale.
How Does Ballpark Figure Work?
To understand the meaning of a ballpark figure, consider this situation. Suppose you have called a contractor to renovate your home. You want to know roughly how much this renovation would cost. So, you ask the contractor for a ballpark figure or a ballpark estimate. The contractor may say that the total renovation may cost around $10,000. The $10,000 is a ballpark estimate.
When someone can’t tell you exactly how much something will cost, they can guess and give you a ballpark figure which was $10,000 in the above case. The estimate helps in giving an idea of the range of finance one could expect in a project. It is used commonly in everyday life as a reference point. It helps people decide whether or not they are willing to spend $10,000 on renovations.
Ballpark figures can be found in real estates, stock markets, retirement fund estimates, return on investment estimates, etc. Brokers and advisers use ballpark estimates as they allow for more leeway and less liability during investment discussions. Future performance on investments is never guaranteed, so ballpark estimates are used to give an overall expectation of performance without the need to assume finite responsibility.
For example, an adviser could say “The S&P overall rate of return has been around 8% since 1957, so we shouldn’t assume too far below or above 8% for this given investment”. It gives the client a general expectation that they will receive, for example, greater than 2% but not necessarily 15% of a rate of return on their principal. It’s a given range of expectations.
That being said, it is important to note that many brokers and advisors are guilty of inflating the estimate numbers to attract clients. The actual return might not be anywhere close to the estimated amount. As such, caution should be exercised and the numbers should be crossed checked from the people who are holding genuine knowledge, experience and objectivity in the matter.
How to Estimate a Ballpark Figure?
There is a simple mathematical way to get a ballpark estimate. The steps are mentioned below.
The estimation of a ballpark figure requires a mathematical understanding. If two double-digit numbers are given, we will need to do some rounding off to account for all the variability that may cause the actual value to rise or fall below the ballpark estimate.
- You will need to round off the unit place digit. If the unit place number is in the range of 1,2,3,4 – the rounding off will involve estimating a lower amount. For example, for 22, since the unit digit is 2, the rounding off will be 20. For 33, the rounding off will be 30.
- If the unit place digit is in the range of 5,6,7,8,9, we will need to increase the estimation. For example, 48 will be estimated as 50, 88 as 90.
Usually, a sum or a subtraction of two sets of values is provided to make an estimate. Using the above estimation formula, we calculate a ballpark estimate by subtracting if the values require to be subtracted and vice-versa.
This is a more mathematical solution to estimation. In finance, the numbers are far more vast and require spreadsheets, software applications or calculators to calculate and estimate a ballpark figure. For example, several online calculators do a ballpark estimation for the estimation of retirement savings or how much amount you will need post-retirement for a comfortable life,
You will need details such as current salary, age, years remaining in service, details on any retirement savings done to date and the like. Then comes variable factors such as probable rate of return, saving rate, etc. A study tried to understand the credibility of the ballpark estimate based worksheets to estimate the amount for retirement savings.
The study suggested that the spreadsheets are useful, but consumers needed to follow caution as several assumptions underlying these estimates cannot be ignored. Similarly, different methodologies are used in finance to make ballpark estimates. Another example is to ascertain the time it will take to reach a certain amount on investments. Analysts normally use the Rule of 72 formula for estimating the return on investment.
Example with Calculations
Let us make a ballpark estimate using the above formula.
- Say two numbers are given, 32 and 46. The problem requires us to subtract them to make an estimate.
- Then using the formula of the estimate, 32 will become 30 as the unit digit is amongst 1,2,3,4. While 46 will become 50 as the unit digit is in the range 5,6,7,8,9.
- After subtracting 50-30 = 20.
- The actual difference between 46-32 = 14, while the ballpark estimate is 20 which is close to 14.
- Hence, the ballpark estimate is 20.
Let us take another example to estimate how long will it take for an investment to double using the Rule of 72.
Where T = Time taken by an investment to double its worth and r = the interest rate in decimal form
The rule of 72 gives a simple estimate as compared to a complicated and detailed computation process using spreadsheets which is time-consuming.
Let us assume the annual interest rate to be 4% and the principal investment to be 100 USD.
- T = 72/ r
- T = 72/ .04
- T = 1800, remove the zeroes to adjust for the decimal values.
- T = 18 years
By using the Rule of 72, we can safely estimate that an investment of 100 dollars will take around 18 years to double at the interest rate of 4%. This is the way an adviser or a banker would explain it to a client. It is also useful as a means of providing numbers during a conversation that is very much theoretical. As such, estimating a ballpark figure helps throw light on a project’s profitability, which helps in taking crucial decisions.
This has been a guide to the Ballpark figure and its meaning. Here, we discuss how does ballpark figures work and how to estimate it along with the key takeaways. You may learn more about financing from the following articles –