Newton’s Law of Finance

Understanding Newton’s Law of Finance in Investing

Wait a darn second, Isaac Newton had a law of finance?  Well, not technically, but his third law of motion was more profound than he even knew.  Let me explain, shall I?  Let’s revisit high school science for a moment.  Isaac Newton infamously said that every action has an equal and opposite reaction.  I won’t get into the science of things, mostly because I was a terrible science student.  But at the highest level in science, every action there is a reaction of equal amounts.

Newton’s Law of Finance teaches us that financial decisions can have far-reaching consequences, similar to physical actions governed by the laws of motion.

Now, how do the two F’s (Finance and “Fhysics”) merge when it comes to your personal finances?  I’d argue the same statement holds completely true when it comes to finances, that every action/decision has an equal and opposite reaction.

Equal Reactions

Let me explain.  You and your spouse really want a beach house and realize things are tight.  Well, by making that purchase, there are equal reactions you have to be cognizant of.  For instance, maybe you can’t pay for your children’s college, or rather, can get that beach home but may have to work 5 extra years on the back end to afford it.  Conversely, perhaps you want to retire super early and realize that the reaction is that you’ll have to give up some of the current pleasures that you seek, such as vacations or eating out, in favor of saving more. 

I tell clients this tidbit of information all the time.  It goes with the saying You can have anything you want, but not everything you want.  The reality is that there aren’t many limitations when it comes to your finances and goals.  However, there are certainly tradeoffs.  You want to pay for all your children’s college and can’t save as much money as you’d like today for retirement?  Work longer.  You want a very conservative investment portfolio that will limit the returns and volatility?  Save more money than you think you need.  You want to retire early and travel the world?  Forget about that big house and be OK in a more affordable living environment.

Compromise

You see, every action in finance has an equal and opposite reaction.  Dollars are fungible, but they are not duplicative.  Meaning you can split a dollar only so many ways, but you can’t recreate that same dollar.  $100 can be spent only in one place at the end of the day, not on 5 different $100 purchases.  It is very basic in understanding, but the philosophy isn’t always intuitive.  As humans, we want everything it is not natural to have to want to compromise.  That said, the reality is that you have to find a way to compromise with yourself, your family, your spouse, and your wants/desires. 

There is no difference in your everyday life in decisions.  I’d love to relax on a weekend, casually go to the gym, read, play tennis, take a nap, and then go out to a nice dinner with my wife.  Want to know what my weekend really looks like with 3 kids, 2 dogs, and about a gazillion activities and obligations?  COMPROMISE!  If I said the most important thing in that list was, say, playing tennis, I can find a way to balance that in there; however, if I wanted to do it all and attend all my familial obligations, it would be virtually impossible.

Priorities and Goals

What do I recommend?  I recommend understanding what your and your spouse’s priorities are with your lifetime goals.  Give some real thought to them all, such as paying for kids’ college, the type of houses and expenses you need to make you happy, when you want to retire, how you want to help your children out, and the list goes on.  Once you have curated that list, start with understanding what of that list is most to least important to you, and what can be compromised.

From there, you’ll be in a great situation to model out what it all looks like and start to understand what moves the needle.  You can also further understand the sacrifices and what it would take to help you achieve each and every goal.  This should set the stage, over a nice bottle of wine, for you to think and discuss what tradeoffs you are willing and able to make to achieve all your life’s goals.

Remember, the good news is you can usually accomplish the most important things to you, just be realistic that they all come at a cost.  We are armed and ready to help you on your journey here at Diversified.  As always, stay wealthy, healthy, and happy.