Last month, we introduced Newton’s Laws of Finance. They’re our spin on Newton’s famous “Laws of Motion” that you probably learned about in school.
This month, let’s look at Newton’s Second Law. Here’s 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 force, in the same direction as the net force, and inversely proportional to the mass of the object.
Yuck. While that’s probably as simple as 1+1 for someone with a physics background, it’s not exactly easy to remember, is it? That’s why most of us opt for this handy little equation:
F=ma, or force equals mass times acceleration.
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. But 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’s our version:
Retirement potential equals amount of savings & investing times length of saving & investing.
First off, let’s define some terms.
Retirement potential means the type of retirement you could potentially enjoy. After all, not all types of retirement are equal. Some people retire from their main jobs, but still must 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. But some people, of course, will be able to enjoy the type of retirement they always dreamed about.
Savings, of course, equals how much money you have set aside specifically for retirement. Essentially, it’s the portion of your income reserved for tomorrow rather than today.
Length of saving & investing is the amount of time spent saving and growing your money for retirement. In other words, did you start investing for retirement at age twenty-five … or did you wait until age forty-five?
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 enjoy by maximizing the amount of money you save for retirement and by investing those savings as early as possible.
Now, some caveats. Obviously, there are other factors we must contend with. How the markets perform, for example. Unexpected expenses, health care costs, loss of a job … life has many curveballs to throw, and each can have an impact on your retirement potential. But when it comes to planning for retirement, or any financial goal, it’s best to focus primarily on what we can control. And what we can control is how much we save, how much we invest, and when we start doing both.
Basically, a person who saves $5,000 a year for retirement, and starts investing at age 30, has far greater retirement potential than someone who only saves $1,000, or someone who starts investing at age 40. You can play with the numbers as much as you want, but the fact remains that retirement potential goes up the more you save and the longer you invest.
Another way of looking at it: just an object with greater mass needs more force to get moving, a retirement with greater potential needs more savings and investing to get moving.
Remember, retirement is about more than just picking a day to stop 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.
So, to increase your own retirement potential, ask yourself: should I be saving more than I am? Should I be investing more than I am? Should I be doing more than I am? And if you have any friends or loved ones—especially younger folks who may not have even started saving or investing yet—be sure to tell them about Newton’s Second Law of Finance.
Next month, we’ll look at the Third Law of Finance. In the meantime, start accelerating your own path to retirement. Start doing what you can to increase your own retirement potential.
Start following Newton’s Second Law.