Benefit from Inertia
By Kevin Estes
Physics!
Want to know a secret?
I ❤️ Physics!
AP Physics C
I scored 5’s on my calculus-based AP Physics exams:
Mechanics and
Electricity & Magnetism
Thanks, Mr. B!
Hobbies
A big part of why I love sailing, bicycling, and Ultimate Frisbee is the physics involved.
I’ve also spent an embarrassing amount of time watching MythBusters, Mark Rober, and Sci-Fi.
Think That’s Embarrassing?
Try misspelling the word. Thrice.
Emberassing
Embarassing
Embarrasing
The last two were after I Googled it. [sigh]
Physical Forces
Newton’s First
According to NASA, Newton’s First Law is:
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 upon by an unbalanced force."
If I could just get it started…
Static vs. Kinetic
Static friction is a force that keeps an object at rest.
Think of sliding a couch across the room. It takes a lot of effort just to get it moving! After that, it’s easier to slide.
That is:
static friction - the force on an object holding it still
>
kinetic friction - the force on the object as it’s moving
Paid Time Off
This concept applies to finance. Consider Paid Time Off (PTO).
There are a couple ways to schedule it:
Wait to see whether the upcoming week will be busy and then try to book time off
Reserve the time early and cancel if needed
Door #1 “Wait & See”
Doesn’t support travel,
Limits the people who can join in the fun,
Raises costs with last-minute bookings, and
Might not be feasible (meeting schedule, team coverage, rental availability, etc.)
Have you ever had to respond to an invite like this?
I’d love to but I have an important meeting that day.
Companies offer Paid Time Off in part because it helps workers perform better over the long-term. That’s especially true for those of us who create for a living!
Almost everything will work again if we unplug it for a while.
Including ourselves.
Many years from now - on your deathbed - will you say…
I wish I’d spent more time in the office.
Door #2 “Book It”
Supports travel,
Expands the list of people who can join in the fun,
Lowers costs due to booking early, and
Maximizes options.
In the unlikely event you have to work a day you’ve scheduled for PTO, you’ll get extra credit with your leader / manager / teammate.
Booking PTO makes it the most likely outcome. Static friction takes hold!
Consider the Cost
If none of this resonates, consider the value of your time:
Most people get at least two weeks of holidays / Paid Time Off
There are 2,000 hours in a standard work year (50 weeks * 40 hours)
Someone who earns $100,000 a year would make $50+ per hour
The cost of forfeiting:
One week = 40 hours * $50 = $2,000
Two weeks = 80 hours * $50 = $4,000
Three weeks = 120 hours * $50 = $6,000
We all like where we work! (If not, we need to talk.)
However, would you hand your company’s investors $2,000 to $6,000 in $50 bills?
Schedule and take your Paid Time Off! 🙏
Good Decisions by Default
Each of us makes decisions based on our circumstances.
How we design our options - or have them designed for us - influences the choices we make.
On Autopilot
According to a Vanguard study, auto-enrollment triples defined contribution plan participation rates for new employees:
91% participating under auto-enrollment
28% under voluntary enrollment
Let’s try that again, Take 2! 🎬
Consider a 401(k) plan. The study found:
If new employees are automatically signed up to contribute, more than 9 out of 10 of them will save for their retirement.
Without being automatically signed up to contribute, fewer than 3 out of 10 of them will save for their retirement.
The difference is MASSIVE! 😉
Results are similar with auto-increases, such as defaulting to contribute:
3% the first year,
increasing 1% each year
For instance:
3% the first year,
4% the second,
5% the third, etc.
Autosaving can change the trajectory of an entire family.
Grandparents Saved Half Their Raises!
Part of the reason I’m so keen on saving systems is that I saw how it helped my grandmother.
She insisted that whenever she or my grandfather received a raise, they’d automatically save half of it. It never felt like a sacrifice because they still increased their spending!
They did that throughout the 1970s and 1980s. Annual inflation for 1974-1982 was between 6% and 13%!
Their real spending likely fell. They made do,
My grandmother wound up with a tidy sum.
Compound Interest
Fortunately, the laws of Finance are even more favorable than the laws of Physics.
An investment with a consistent growth rate doesn’t continue in a perfectly straight line. It compounds!
Let’s say someone saves $10,000 at the beginning of each year and earns an 8% annual return.
Year 1
At the end of the first year, they wouldn’t just have $10,000.
They’d have $10,000 + 8% * $10,000, or $10,800.
That’s an $800 growth from the investment!
Year 2
At the end of the second year, they’d have:
$10,000 saved from the beginning of the year,
$10,600 from the previous year, and
$1,664 in growth ($20,600 * 8%)
Importantly, the investment return is $64 more than $800 * 2. The $800 interest earned the first year earned 8% interest the second!
They’d end the year with $22,464.
Year 3
In the third year, they’d:
earn $2,597 and
end the year with $35,061.
That’s $5,061 more than the $30,000 they contributed! 🎉
Year 40
At a constant annual rate, the gap between what they contribute and have would grow exponentially.
After 40 years of saving $10,000 and earning 8% each year, the balance would grow to almost $2.8 million.
The investor would only have contributed 40 * $10,000, or $400,000!
The other $2.4 million would come from investment growth. 🤯
The First $10,000
It’s also helpful to track the original $10,000 investment.
Year 1
The value at the end of year 1 = $10,800,
$10,000 + $10,000 * 8%
Year 2
The value at the end of year 2 = $11,664,
$10,800 + $10,800 * 8%
Simpler Calculation
Each year, the ending value is:
Beginning value + beginning value * annual return
The math’s the same as:
Beginning value * (1 + annual return)
A decimal can represent the annual return: 8% = .08
In this case,
Ending value = beginning value * 1.08
Using this simpler calculation:
End of Year 1 = $10,000 * 1.08 = $10,800
End of Year 2 = $10,000 * 1.08 * 1.08 = $11,664
End of Year 3 = $10,000 * 1.08 * 1.08 * 1.08 = $12,597…
Exponential Growth
Someone got sick of multiplying by 1.08 and invented exponents.
Here, I use the ^ sign because that’s how most spreadsheets and calculators compute exponents. Another way to show it is superscripts.
1.08^2 is an 8% annual growth for two years
1.08^3 is an 8% annual growth for three years
1.08^40 is an 8% annual growth for 40 years
Multiplying by the starting value estimates each year’s ending value:
End of Year 2 = $10,000 * 1.08^2 = $11,664
End of Year 3 = $10,000 * 1.08^3 = $12,597…
End of Year 40 = $10,000 * 1.08^40 = $217,245!
That is, $10,000 invested at an 8% return would grow to more than $217,000 over 40 years!
We mortals are primarily limited by our age and lifespan. 😉
By the way, the exponential calculation is my favorite way to quickly estimate future values!
Congratulations on making it through that Math Obstacle Course!
Auto-Increases AND Compound Interest
Here’s where it gets especially fun. Let’s combine:
automatic saving increases and
compound interest.
Grow Savings at 3% Annually
Extending the previous example, someone:
saves $10,000 a year and
earns an 8% return annually for 40 years.
However, instead of saving a fixed $10,000 each year, they save 3% more each year.
That small change has a big impact!
Instead of:
Saving $400,000 and having almost $2.8 million, they’d
Save about $754,000 and have nearly $4.0 million at the end of 40 years.
How might that be achieved? By setting a high, yet achievable, retirement plan contribution percentage and letting raises do the rest.
Thanks, grandma! Rest in peace.
Laziness, a Virtue?
Yes! Laziness is a virtue. Someone got sick of carrying heavy stuff and invented the wheel. 😉
As James Clear - author of Atomic Habits - says:
You do not rise to the level of your goals,
you fall to the level of your systems.
Creating a saving system can make all the difference.
If you’re interested in optimizing your financial system…
Disclaimer
In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.
P.S. Nudge
If you’d like to devour a great book on the subject, check out:
Nudge: Improving Decisions About Wealth, Health, and Happiness
It’s written by:
Richard Thaler, winner of the Nobel Prize in Economics and
Cass Sunstein, winner of the Holberg Prize.
I’d suggest the book to anyone looking to make better decisions.
I consider it a must read for financial planners.
