On this episode:
Scientists have long used Newton’s Laws of Motion to better understand and control the world around them. By understanding these Laws of Finance, you can better understand and control your finances.
Highlights:[01:15] The Simplicity of Sir Issac Newton’s Laws of Motion [02:06] First Law of Finance [05:54] Second Law of Finance [09:25] Third Law of Finance [12:03] Putting These New Laws of Finance to Work For You
When you were in school, you probably learned about Newton's laws of motion, first published by Sir Isaac Newton in sixteen eighty seven. These laws explain how physical objects move. They're so important and easy to understand that most of us still remember that even decades later. So as I'm thinking about these laws the other day, I came upon a realization, a light bulb moment, almost as if an apple had fallen off a tree and hit me in the head. These laws can also be applied to finance. So on this episode, I'm going to share with you Newton's laws of finance.
Welcome, the money moves. I'm your host of Julio Sylvia. My goal is to share practical insights about business worth and money so you can design your financial future and enjoy life on your terms. Now let's get moving.
Sir Isaac Newton once said, truth is ever to be found in simplicity and not in the multiplicity and confusion of things. When it comes to your finances, I'm often surprised by how many financial gurus and talking heads seek to make things so intricate and complicated. You know, it seems as though they would rather show off how smart they are versus really explain a concept and assist people in making better choices with their money. So guess what? Newton is right. We're going to keep it simple and find the truth, because scientists have long view Sir Isaac Newton's original laws of motion to better understand and control the world around them. So by understanding and adapting Newton's laws of finance, we should be better able to understand and control our money.
We all know that Newton has three laws of motions, so we will have three laws of finance. So let's look at Newton's first law. Here's how we all remember the original. An object at rest tends to stay at rest and an object in motion tends to stay in motion unless acted on by an outside force. So here is the new version. The financial law version of financial plan at rest tends to stay at rest, while a financial plan in motion tends to stay in motion unless acted on by an outside force. So what exactly do I mean by a financial plan? Well, there is no one definition of what a financial plan really is. In general, it kind of works like this. First, you look at your current financial situation. What is your income? What is your cash flow? How much do you pay in
Second, you determine what you want your future financial situation to look like. Like what goals do you want to accomplish? What treasures be they people or possessions do you want to protect? And finally, you lay out all the individual steps necessary to get you from your current financial situation to your desired financial situation. What exactly do you need to do to reach your goals? When do you need to do them? Put these three things together and you have a basic financial plan. In my experience, most people agree that having a financial plan is valuable, but there is a widespread problem. Most people procrastinate when it comes to creating or even implementing a financial plan. You know, it's not uncommon to hear excuses like, hey, I'm too busy right now to create a plan or I'll do it next year when life settles down or I
want to wait until I have a better job or the elections are over or the stock market goes up.
There is just too much uncertainty right now. Well, no matter what the excuse, let's go back to that first law. Finance our financial plan at rest tends to stay at rest. People who procrastinate, who delay, who act passively will usually continue to do so indefinitely. Guess what? Next year never comes. Life never settles down. Uncertainty never goes away. And so a financial plan never gets created. And things just sort of stay the same forever. How the good news of this first law of finance is it? It also says that a financial plan in motion tends to stay in motion. It's amazing to see this law at work. People who actually get the ball rolling, who act, who put in the energy to create and execute their financial plan. They start to build momentum. Suddenly things starts happening and keep happening. Their savings grow. Their tax
situation improves. Their goals are reached not once, but over and over and over again. Literally, people have been seen to go from I feel like I've never retire to retire much sooner than I thought I would. All because they stayed in motion. You see, what we're really talking about here is inertia. Whether you're moving or standing still. People are like all physical objects. They find it easier to keep doing what they're already doing. If you procrastinate, hey, you'll find it easier to keep doing so. But if you start working towards your goals, you discover it's much more doable than you ever imagined. Now let's look at Newton's second law. Here is how a textbook might describe the original. The acceleration of an object as produced by a net force is directly proportional to the magnitude of the net forth in the same direction as the
net force and inversely proportional to the mass of the object. Oh my. Huh? That's probably as simple as one plus one for someone with a physics background. It's not exactly easy to remember, is it? That's why most of us had this handy little equation. Force equals mass times acceleration, and that's probably what you remember. Basically, the greater the mass of an object, the greater the amount of force needed to accelerate the object. If you hit a baseball with a bat, the ball will go flying. If you hit a car with the same bat, the car won't move at all. You need a much greater force to cause the car to accelerate. This law is a little tricky to apply to finance, but here is the version that we're going to settle with. Retirement potential equals the amount of savings and investing times the length of
saving and investing. First off, let's define some terms. Retirement potential means the type of retirement you could potentially enjoy. After all, not all retirements and types of retirements are equal. Some people retire from their main jobs, but still have to work part time to make ends meet. Others won't have to work anymore, but don't have the means to travel or spend time on anything but the most inexpensive hobbies their needs. But some people, of course, will be able to enjoy the type of retirement they've always dreamed about. Savings equals how much money you have set aside specifically in this case for retirement. Essentially, it's the portion of your income reserved for tomorrow rather than today. Now, length of saving and investing is the amount of time spent saving and growing your money for retirement. In other words, did you start saving for retirement at age
25 or do you wait until 45 or even 55? What this law says is that your retirement potential is based off the amount of money you save and invest multiplied by how long you have saved and invested. In other words, you can personally control the type of retirement you'll be enjoying by maximizing the amount of money you save for retirement and by investing those savings as early as possible. Another way of looking at it is this just an object with greater mass needs, more force to get moving. Our retirement with greater potential needs, more savings and investing to get moving. Remember, retirement is about more than just picking a data stock going to work. It's about where you want to live, what activities you want to enjoy, and how much money you'll need to accomplish both while still taking care of basic needs and expenses.
It's about what dreams you want to fulfill. And so the law says the amount of time and the amount invested and saved is what's going to make that determining motion happen. Let's look at the third and final law, and the original is probably the easiest for non-scientist to remember. For every action, there is an equal and opposite reaction. This law is easy to understand. Imagine shooting a cannon ball. The ball will fly in one direction while the cannon will roll backwards in the opposite direction. The same principle applies when you're firing a gun. The kick you feel is just Newton's third law saying hello. So how do we apply this to finance like this? For every financial action, there is an opposite reaction. Or to put it another way. For every financial decision you make, there is the potential for an unintended consequence. Here's what
I mean. Let's say, for example, that you own 100 shares of X, Y, Z Corp. The value of your shares have gone up recently. So you decide to sell, you'll make a nice profit and you have a quick infusion of some cash that you can use however you want. But you've also triggered a capital gains tax. Or let's say you decide to allocate more of your investment portfolio to bonds instead of stocks. Bonds are traditionally thought of as providing more safety than stocks. And who does want more safety? Right. But you're going to miss out on next week's stock market rally in the first scenario. You turn a profit, but also generated taxes in the second scenario. You traded in potential growth for safety. You see, for every financial action, there's an opposite reaction. One aspect of your financial life goes in one direction and
another aspect goes in another direction. The point of all this is that when people make a financial decision, they often make it without truly thinking about the consequences. They act without understanding the inevitable reaction. They want something. So they decide to get it. They fear something. So they decide to avoid it. It's not that those decisions are necessarily bad or wrong, it's that they're made without seeing the whole picture. So how do you obey Newton's third law? Well, whenever you need to make a financial decision, always ask yourself, what are the pros and cons of this particular decision? What are the benefits? What are the risk? How will this decision affect my entire financial life? If you know that an action will have an opposite reaction, you'll think twice before making a decision.
Just like all of Newton's laws of motion are important and work together. All of these laws of finance are important and work together and they allow you to make a better financial plan and better financial decisions. You know, it's important that you do have a plan because you need to know how much money you'll need to meet your expenses and reach your goals. You can choose the right investments, provide the income you need at a suitable and specific level of risk. You potentially minimize taxes for both yourself and your heirs. You see what areas of your finances are stable and which may need improvement. And so much more. So let's review our laws of finance one more time. First, a financial plan at rest tends to stay at rest, while a financial plan in motion tends to stay in motion unless acted on by an
outside force. Second, retirement potential equals amount of savings and investing times, length of saving and investing. And finally, for every financial action, there is an opposite reaction. Financial professionals like myself off the night to use the word holistic when we describe what we do. For instance, holistic financial planning and holistic investment management mean holistic simply means that we understand that the individual parts of something are interconnected and they must always be seen that way. They are parts of the whole. Newton's laws of finance. So exactly why the word holistic has meaning. Whenever you make a financial decision, you must make it with the whole of your financial situation in mind. And if you need some help. We're more than happy to help guide you. It's what we're passionate about doing. Simply visit financial security group dot.com. And there you can contact us, get a hold
of us, and we're happy to help you put these laws of finance into action for your benefit. You hold the power in your hands to get the ball rolling. And it's a mighty power indeed, because it's a fundamental law of nature.
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