Benefit from Inertia

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to the benefits of inertia in a moment.

But first - here are some links you may want to save for later.

Turn $200,000 into $13 Million?

Could Waiting a Year Cost $140,000?

Schedule Your PTO ASAP

Now, let's get on to the blog! 😀

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:

1. Wait to see whether the upcoming week will be busy and then try to book time off
2. 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.

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.

Hey, thanks for reading my post on how to benefit from inertia.

Just a reminder, I share a lot of resources that can help you.