The Inertia of Personal Finance

I didn’t do well in physics class in high school. But for some reason, I remember the concept of inertia. Basically if an object is at rest, its tendency is to continue to be at rest. If the object is in motion, it will continue in the same direction unless redirected by something else. It’s a concept we observe all the time in our surroundings. But we also find inertia in personal finance.

The Flow of Money

Just like in the real world, the motion of our money tends to stay unchanged. We develop habits and continue to make the same right choices or wrong choices day after day, month after month. If you regularly overspend on groceries, you will likely continue to do so. If you get in the habit of bringing your own lunch to work, you will keep on doing so. People who carry balances on their credit cards are much more likely to do so in the future. An automatic contribution to your retirement account rarely gets reviewed or changed. And on the flip side, if you’re not currently saving for retirement, you will most likely keep on kicking the can down the road until it’s too late. Barring large life changes or extreme intentionality, most of us will rarely disrupt the flow of our money.

 

What Will Disrupt the Flow?

Inertia doesn’t mean the object will always stay at rest or always continue its current trajectory. Inertia resists change in motion, but does not completely prevent change. The same is true in personal finance. While the flow of money and our money habits are prone to stay the same, they are not set in stone. Our current state is not our destiny.

You alter your finances for a variety of reasons. Perhaps your income changes, for better or worse. You might get married or have kids. You might read a compelling article or blog post (nudge). Someone you know may give you good or bad advice. And sometimes your money flow or habits are altered gradually over time because of a series of smaller influences.

Inertia Can Either Work For You or Against You

Inertia in itself is neither good or bad. It just is a fact. However, depending on how you have your finances set up and what habits you develop, inertia can either be the key to your financial success or destroy your financial goals.

Develop Good Habits

We are all creatures of habits. Good habits are critical to success. Develop habits, both small and large, that help you manage and save money. Get in the habit of buying store brands, or watching grocery store sales. Run multiple errands in a single trip. Remember to turn lights off when you leave a room. Maintain a budget and track your spending. Identify areas in your spending that could use help, and develop a habit that helps that area.

Kill Bad Habits

Killing bad habits is just as important as developing good habits. In the best case, bad habits cause you to overspend on things you don’t necessarily value. In the worst case, bad habits make you go over budget and in debt and keep you from saving for future goals.

Not all regular activities are necessarily bad habits for all people. Going out for coffee on a daily basis, for example, might be a great value for someone who has room in their budget for it, and values the 15 minutes of alone time. For another person, however, a daily coffee run could mean not having enough at the end of the month to cover rent. Whether a regular habit is good or bad both depends on your disposable income and values. Other bad habits could include daily trips to the bar, weekly meals out or regularly buying impulse items in checkout lines. Identify habits that keep you from meeting your financial goals. Eliminate these habits and replace them with good habits.

Automate Your Finances

Automating your finances is one of the easiest ways to take advantage of inertia. Automate your finances to virtually guarantee your financial success and to save yourself the time and energy of consistently doing things that you should do anyway.

Savings is the important thing to automate. Saving money is so unnatural for most of us that if we don’t make it automatic, it just won’t happen. Set up automatic transactions to fund emergency savings, savings for any near term goals and retirement savings. To make inertia work for you, be sure that you’re saving enough. Don’t try to tell yourself that you’ll increase the savings amounts later. You won’t get around to it.

Bills are another thing that you should automate. There will almost never be a reason you shouldn’t pay a bill. If such a reason were to arise, you can step in to stop the bill payment. Otherwise, put your bills on auto-pay so that they always get paid, and get paid on time.

Embrace Inertia

Once you set your finances up for success, inertia becomes a powerful ally. When your transactions are automated as they should be, and your spending habits are both frugal and well within your budget, you don’t need to spend unnecessary brain power worrying about your finances. You know that your bills are being paid and your savings goals are being met, so you can focus on the rest of life. Don’t take this as a license to get lazy. Periodically revisit your finances to increase savings where possible. As your life changes, you’ll want to fine-tune aspects of your budget. But otherwise set and forget!

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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.