Most middle-school children know Newtons third law of motion. “To every action there is an equal and opposite reaction.” This law applies to everything in life, not just physical objects in motion.
Newtons’ law plays a key role in financial matters. Failing to account for it may lead to disasters such as our current battle with stubbornly high inflation. Several factors are driving inflation but one of the biggest is excessive government deficit spending. I warned a couple years ago this behavior would bring about a Newtonian reaction. I remember an early discussion with a friend who had just received his stimulus check. Having a large family he was quite pleased with the gift from Uncle Sam. As that same family goes to the grocery store today they are feeling the painful application of Newtons’ law as they, and all the rest of us, are repaying that stimulus money with interest in the form of inflation. I think what Newton really meant to say was there is no free lunch.
The third law applies to every aspect of personal finances. I watched my older brother put it into practice when I was very young. Every week he took the couple of dollars he earned working and put it in the bank. One day I came home from school and he was riding a brand new mini-bike. When I asked where he got it he taught me about the third law, although at the time he didn’t know that’s what it was called. He taught if you save money you will be able to buy nice things. If you don’t save money you will always be broke. It is a pretty easy law to understand.
The action opposite of saving is borrowing. When we borrow we are able to buy something today that we cannot currently afford. I must admit there is a great feeling that comes from buying a nice bike, or car or boat with someone else’s money. Borrowing is the action in Newtons’ law. As you can guess, the reaction is that all loans need to be repaid, with interest. The reaction is absolute and cannot be avoided. Sometimes loans are defaulted, uncollectable or even forgiven, but don’t be fooled into thinking the law has changed. They still must be repaid by someone, somewhere and with interest. There is no cheating Newtons’ third law.
When people come to me for investment advice I begin with the belief that if you can’t manage the money you already have, earning more of it won’t likely do you much good. A good starting point might be to consider the impact of Newtons law on your finances. In government, business and families the law is simple. If you save money, you will be rewarded with a better future. As you borrow, you risk negatively impacting your future. It really isn’t that difficult. Every financial action you make will have a consequence. Think carefully about what that might be before you take the action. Newton will be watching.
Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor