Dire Straights, Steve Miller, Notorious B.I.G, and The Lion King via James Earl Jones. You gotta like it.
The science of our universe applies to more than our physical world.
Money In Motion
Newton’s first law of motion - inertia: An object at rest remains at rest, and an object in motion remains in motion at constant speed and in a straight line unless acted on by an unbalanced force.
Remaining inert with your money is mentally quite easy and the preferred path for most. Money evokes strong emotions. Doing nothing has low mental taxation until it doesn’t. Prince died with no estate plan. Not having an estate plan was “easy”. Settling the estate at his death - given an estate value of $156 million and likely estate tax cost of $50-$60M - was probably pretty hard.
Newton’s second law of motion - force: The acceleration of an object depends on the mass of the object and the amount of force applied.
Properly putting your earning power and accumulated wealth to work takes a certain amount of force, with some of the work being:
Defining your desired outcomes and financial purpose.
Opening accounts.
Transferring cash and other investments.
Putting automatic saving rules in place.
Properly allocating across multiple invest classes.
Managing embedded gains.
Selecting specific investments.
Tax efficiently locating assets.
Tax-loss harvesting.
Creating spending and savings plans.
Checking your progress and making changes as needed.
Even if you are a three-fund Boglehead, there is a mass of mental and physical work to do.
The third law - action and reaction: Whenever one object exerts a force on another object, the second object exerts an equal and opposite on the first.
Then you have to keep your money in motion, continuing to work for you, and at some point move what’s left at your death to the right place, bringing us to Newton’s third law, that of action and reaction. Creating an estate plan can involve a number of decisions in itself. How much, and to whom? Charities? Concern about corrupting the children? Who is the executor? Who is the trustee? Who holds powers of attorney? Who backs up each of these people? Should we use a corporate trustee because we cannot trust anyone or because we have multi-generational wealth and are hoping to find an institution like a bank that is long-lived? Each of these decisions can have knock-on effects.
Are there other science principles we can apply to our money? Most certainly.
Money Is A Gas
Anyone who has walked into a kitchen where bread was baking has experienced the fact that gases expand to fill their containers, as the air in the kitchen becomes filled with wonderful odors. Unfortunately the same thing happens when someone breaks open a rotten egg (or, when you own French bulldogs, ed.) and the characteristic odor of hydrogen sulfide (H2S) rapidly diffuses through the room. Because gases expand to fill their containers, it is safe to assume that the volume of a gas is equal to the volume of its container.
Gases have some interesting properties as relates to personal finance. Gas volume is variable. Yes, many liquids expand and contract somewhat when heated or cooled, as do many solids. Gases, though, are in a world of their own - just like your money. And yes, money can stink things up.
Similarly, spending expands to fill income. It is safe to assume that your amount of spending, without a container, expands infinitely, just like a gas, often with disastrous results. Rare is the person whose ( I’m a finance guy, so I think in inflation-adjusted terms) spending habits remain constant in the face of increasing income. There tends to be more rapid and at times explosive expansion with rapidly expanding income, such as when you graduate from college, where you have likely had little or no income and extremely low expenses. Suddenly, you have maybe $50,000-$150,000 of income (or more or less, and of course you have to allow for taxes, but definitely way more than you had). You feel like you cannot spend it all. The following year you are wondering where it went. Then, maybe later in your career, you get a $20,000 raise, a $100,000 bonus, perhaps much more. Then you have the same result the following year. It, like, disappeared. But it’s all good, because I will change my behavior next year. Uh, take a look at inertia, there, son.
There is, virtually, no amount of money that cannot be spent. Read Vanderbilt: The Rise and Fall of An American Dynasty. The amount spent during their lifetimes is astounding. I would like to say it is unusual. It is not.
Hence our advice - put a container, in the form of automatic savings, around your spending.
The pressure of a gas becomes larger as more gas is added to the container.
Another similarity is that mo’ money equal mo’ problems. What happens when we have more money? Pressure is exerted on its container. We are presented with all manner of “opportunities”. Friends. Family. Private equity/businesses/franchises. According to the Investment Company Institute, there are 137,892 mutual and exchange-traded investment funds. There are roughly 56,000 more funds now than in 2008, which means, on average, the creation of over 3,700 new funds annually. For 15 consecutive years. How do you sort through all of that? There can be awful pressure when faced with an essentially infinite number of potential decisions. No wonder we feel stress with our money, especially as we accumulate more. When we face severe money pressure, the container fractures and our money escapes, expanding now into a much larger container and beyond our control.
Also of note: the pressure of a gas exerts force in all directions. The pressure of money can take may directions:
How you are perceived.
What lifestyle choices you can make.
Who you meet.
Who is attracted to you.
What you choose to worry about.
What is expected of you.
All of these pressures tend to be associated with having more (or less) money.
Money Is Energy
Where do we want to be with our money? We are seeking equilibrium. We would like things to be unmoving, having no money decisions to make. Stable temperature, with nothing (particles or dollars) to get excited about. When something heats up, we want to have enough money to flow to the hot spot, creating equal temperature everywhere. No heated family members, the bills get paid, and we can live the way we want to live with no worries.
One of the bigger issues with financial equilibrium is that we flighty, distracted humans tend to have a hard time defining it. What is our financial purpose and vision? What is enough? What is funded contentment? These are questions that many of either cannot answer at the moment or avoid answering for all the reasons noted above. These answer are different for everyone. We get asked every day (we being financial planners): “How much should I be spending on housing, or vacations, or the kids’ school? Should I gift now or later? Can we afford Johns Hopkins?” As a former reformed business and technology consultant I hate to give the “it depends” answer. However, it really does. That is why we build scenarios in our modeling software - so that we can help you find your equilibrium.
If you are out of equilibrium, how do you get back?
Even if it’s for one year only, define your vision. You can always redefine it next year. Your vision provides guard rails and a baseline for decision mindfulness.
Be mindful that you are not your thoughts. Revisit why you established a plan when your thinking goes awry.
Determine your savings plan. See if it is reasonable given your cashflow and spending needs. You need a spending plan, too. Adjust either, or both, until your cashflow is equal to savings plus spending.
Implement.
Revise when there is change. That means change in your income, change in your net worth (say, from inheritance, or maybe from a substantial investment gain or loss), or change in your vision.
Employ a professional, or team of professionals, if you are (warning, talking my book - because I know this works):
Dealing with amounts large enough to make you nervous or feeling you might need a second opinion.
Not the kind of person who wants to do this type of work.
Wanting to focus on your personal highest and best use.
You are having trouble defining your funded contentment and/or enough.
Have a complex family or situation that could benefit from outside advice/mediation/facilitation or where you feel incompetent in the given situation.
Sundry:
Bad Company was my writing companion today:
A good laugh here, an old one that has been updated by the (hated) autocorrect