Are you a science buff? Do you wonder if Galileo or Newton ever had to think about wealth creation while pursuing what they were best at?
Science is a fascinating subject. I have a degree in Mechanical Engineering. So, science and math are my favorite subjects. With my new-found passion for personal finance, I tried to find nexus between the age-old laws of science and modern laws of wealth creation.
It really is fun to revisit those scientific laws that changed our world. But, this time, with new perspective to apply them to improve your personal finances.
If you doubt that scientific laws have little influence over your wealth creation efforts — read on!
1. For every action there is an equal and opposite reaction. – Issac Newton, English Physicist
This famous third law of motion states that every action is accompanied by a reaction of equal magnitude but opposite direction. Everything we do financially in our lives also carries equal and opposite reaction.
Isn’t it true that financial recklessness ends up with equal magnitude of major financial wreck?
If you spend in oblivion then you have to face equal and opposite reaction of rude awakening. Those who live beyond their means have to face the consequences of their actions. The law always works!
2. Give me a place to stand, and I shall move the Earth with a lever. – Archimedes, Greek Mathematician
Archimedes was an aristocrat. So, I doubt that he invented law of lever for the world of finance, yet leverage is a widely used principle in finance. If you are buying shares on margin or buying real estate with mortgage, you are using law of lever.
We all have recently witnessed that leverage can be dangerous if you don’t use it wisely. I’ve lost money while investing during the tech bubble of late 90′s due to excessive use of leverage.
But, I’ve also used leverage to buy commercial real estate and it has worked very well for me. Nonetheless, leverage is a two edge sword – use it wisely!
3. Law of elasticity – Robert Hook, English Physicist
Hook’s law of elasticity is an approximation that states that the extension of a spring is in direct proportion with the load applied to it.
Many materials obey this law as long as the load does not exceed the material’s elastic limit.
We all have our own elastic limit with the plastic that we carry in our pocket. You are going to break your financial well-being by over reaching beyond your elastic limit — your capacity to payback your credit card debt in time.
4. Rule of 72 — Albert Einstein, German physicist
I never ceased to be amazed by the power of compounding. This rule simply states that to find number of years it takes to double your money — divide 72 by the expected return in percentage.
So, if you start early in your life and keep investing to expect a return that commensurate with the level of risk you are assuming, you can plan to retire at certain age by applying rule of 72.
For example, if you have $10,000 and if you expect a return of 8%, it will take 9 years to double your money. Your $20,000 will double again in 9 years to $40,000. If you invest in high yielding dividend stocks and keep reinvesting dividend, your money will compound even faster.
Wealth creation wasn’t the aim for these genius minds when they embarked on their scientific inventions. Yet, if you apply these powerful laws in your personal finances, you’ll certainly gain a new state of financial wisdom.