The Physics of Finances
The more time I spend on this planet the more I think the entire universe is run by a single set of rules that apply across the board to all things — physics, history, art, biology, and, of course, personal finance. While I may not be right, it’s something to think about on my commute to the office.
Most recently, I have been thinking that the laws of physics and the laws of money (as I understand them) are surprisingly similar. So in the spirit of interdisciplinary enrichment, I decided to present my Special Theory of Personal Finance. Stockholm, here I come.
E=MC2
Einstein’s most famous equation in its simplest form basically means that mass and energy are interchangeable. In physics, this is done in a nuclear reaction, in finances this is done every day we go to work to convert our labor into cold hard cash. Therefore, energy and money are interchangeable. Either you can wash cloth napkins or buy paper ones. You can pay a higher electricity bill or move your reading chair to a sunnier window.
Chaos
A famous theory of Chaos is the Butterfly Effect. The idea is that small things can have large consequences such as a butterfly fluttering its wings in South America causing rain in the south of New Jersey. The less well known Latte Effect is the tendency of a daily Starbucks run to create a high pressure system in your home when the bills come due. Fortunately, the math is much easier in this case, and tracking your monthly expenses (all of them) and multiplying by 12 to get your annual total may reveal a eureka moment worthy of Archimedes.
Punctuated Equilibrium
Another idea from Chaos Theory says that some things tend to stay the same or change very little before collapsing into chaos. For example, the amount of stress added daily to fault lines in the Earth’s crust is minimal. However, eventually that stress builds up to cause an earthquake. Your finances collapsing under the strain of a birthday or an auto bill follows the same pattern. Scientists lubricate fault lines and start small forest fires creating small collapses in order to avoid large ones. Similarly, though it may cause more stress occasionally, it is best to put away an emergency fund so that when large expenses come along, your financial house will stay standing.
Classic Physics
The conservation of mass and energy are central to physics, the idea being that what you put in is what you get out. An object in motion will tend to stay in motion. However, in life, an object in motion stops and the amount of work you put in may not be equal to the amount of gain you get. This is because of friction. Financial friction may keep you buying paper napkins because you hate to do laundry. Every person has different areas of friction and amounts of energy and cash within their own financial universe. A weekly latte will not break you if you have sufficient resources to draw from. But if you don’t, watch out!
Physicists now theorize that there could be 10, 26, or even an infinite number of dimensions that we don’t notice due to our limited perceptions. So remember, options are out there even if you don’t perceive them right away. Just don’t forget to save — Einstein himself said that the most powerful force in the universe was compound interest.
Copyright . Published 1 August 2007 in The Zone.
Reader comments
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Thanks! That was cute and original.
permalink — 3 August 2007, 16:42