DEFINITION of 'Back-Of-The-Envelope Calculation'

A back-of-the-envelope calculation is an informal mathematical computation, often performed on a scrap of paper such as an envelope. A back-of-the-envelope calculation uses estimated or rounded numbers to quickly develop a ballpark figure. The result should be more accurate than a guess, as it involves putting thought to paper, but it will be less accurate than a formal calculation performed using precise numbers and a spreadsheet or calculator.

BREAKING DOWN 'Back-Of-The-Envelope Calculation'

A back-of-the-envelope calculation might be used to determine whether further research and more detailed calculations are warranted. In the STEM disciplines (science, technology, engineering, math) such calculations are commonplace for those who suddenly become inspired by an idea or want to perform a quick exercise to estimate a number.

At the 2017 World Government Summit, Elon Musk explained how aliens from outer space could reach Earth: "I'll give you some back-of-the-envelope calculations. Any advanced alien civilization that was all interested in populating the galaxy, even without exceeding the speed of light, if you're only moving at about 10 or 20 percent the speed of light, you could populate the entire galaxy in, let's say, 10 million years, maybe 20 million, max." For mundane thinkers sitting at a coffee shop who just want to estimate the number of cars that pass through a bridge toll booth, the number of customers that visit a fast-casual restaurant during lunch hour, or earnings per share of a company in five years, back-of-the-envelope calculations are as useful in framing these quantitative concepts as Mr. Musk predicting the chances of aliens invading our skies. Inspired scribbling on the back of an envelope throughout history has led to great discoveries by great men and women — and it helps ordinary people with business ideas or investors with trading ideas get a start.

RELATED TERMS
  1. Calculation Agent

    A calculation agent is an entity that determines the price of ...
  2. Interim Earnings Per Share

    Interim Earnings Per Share is a measure of earnings calculated ...
  3. Resident Alien

    A resident alien is a foreign born, non-U.S. citizen who is currently ...
  4. Primary Insurance Amount - PIA

    Primary insurance amount is a calculation, used with the Average ...
  5. Historic Pricing

    Historic pricing is a method for calculating the value of an ...
  6. Percentage Change

    Percentage change is a simple mathematical concept that represents ...
Related Articles
  1. Retirement

    11 Social Security Calculators Worth Your Time

    The safest Social Security calculators to use when figuring benefits are on the official website. The best are the ones that access your actual record.
  2. Insurance

    4 Mortgage Calculators that Include Taxes and Insurance

    Discover four websites that offer mortgage calculators that include property taxes and homeowners insurance cost along with other financial features.
  3. Financial Advisor

    How To Calculate The Tax You Owe

    Learn the basic information you need to calculate the taxes you'll owe the government this tax season.
  4. Investing

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  5. Investing

    Earnings Per Share Explained

    Earnings per share is one of the most carefully followed metrics in investing. We show you why this ratio matters and how to calculate it.
  6. Personal Finance

    A Recipe to Calculate How Much You Spend Each Month

    Here's an easier way to determine how much you spend each month.
  7. Personal Finance

    5 Ways to Boost Your Savings This Year

    Here's how to review your financial situation and how to make smart moves for the next year.
  8. Investing

    End Times: Ways Elon Musk Believes the World Could End

    A study found that our universe is not an elaborate computer simulation vulnerable to being unplugged on a whim. Doesn't mean we can relax though …
  9. Financial Advisor

    How To Calculate Return On Investment (ROI)

    Return on investment allows an investor to evaluate the performance of an investment and compare it to others in his or her portfolio. Find out how to calculate ROI and how to use to your advantage. ...
RELATED FAQS
  1. Calculate your portfolio's investment returns

    Learn the basic principles underlying the data and calculations used to perform personal rates of return on investment portfolios. Read Answer >>
  2. How do you calculate the percentage gain or loss on an investment?

    Calculating the percentage gain of an investment is quite easy. Here is what you need to know to determine the gain or loss. Read Answer >>
  3. How do I calculate production costs in Excel?

    Find out about ways to use Excel to simplify production cost calculation and some sources of good templates and tips for ... Read Answer >>
  4. What is the formula for calculating earnings per share?

    Learn how to calculate earnings per share and why it's an important gauge in determining a stock’s value and a company's ... Read Answer >>
Trading Center