Last week, I decided to help my son with his physics lessons. While doing so, my mind kind of drifted towards the connection between physics and finance. Albert Einstein once mentioned that the power of compounding is one of the greatest forces in the universe. Indeed, and it also applies to the basic principles of personal finance and money.
Newton’s laws of motion, which form the foundation of classical mechanics, can also be used to explain decision-making in personal finance from a behavioural perspective — here’s how:
Newton’s First Law
The rule of inertia…a body will continue to be in its present state of rest (or motion) unless acted on by an unbalanced external force. Simply put, a person will continue to do the same thing over and over again until an external force comes into play to change the habit. Traditionally, a retail customer repeats the same mistake until they are hit upon by a life-changing event. Sadly, the event could be so debilitating that it would take another life time to recover from it. Hence, it is important for us to move out of inertia and take steps to better our financial life.
