With a background in physics, I sometimes like to give things a little physics twist. I had lots of fun writing this post about my own interpretation of the conservation law of money. But it’s not only for fun. It does actually help me shape an important spending habit. There won’t be any real physics or maths involved, promise!
Does the Conservation Law of Money exist?
School teaches us the fundamental conservation laws of nature (mass, energy, momentum, electric charge, etc). But school doesn’t teach us much about money and finance, which we either have to learn in higher education or in life.
I’ve heard STEM folks discussing whether it exists the conservation law in economy, something like “money can’t be created or destroyed, it can only be converted from one form to another”. To me this is debatable and thought-provoking.
For the physical form of money (i.e., a piece of paper or polymer), the law seems to hold just like a regular conservation law in physics. Banks can create money out of other materials and anyone can burn money into ashes.
However, in terms of value of money, which involves the understanding of economics, things get substantially more complicated. Actually most things get complicated when there’s a human factor involved. Economics is not a pure science with only atoms and maths.
My own interpretation of the Conservation Law of Money
Hubbie and I both have a physics background. I don’t know much of economics and haven’t heard enough of finance folks trying to interpret the conservation law of money in macro economy. So I only dare to have my own interpretation of the conservation law with my own money. It shouldn’t be taken literally as an exact law, but it’s fun and it works for me.
Here is my interpretation of the conservation law:
At any given moment, we only have a fixed amount of money; our money neither creates itself from thin air nor vanishes; it can only be converted to things we buy or from things we sell.
Here comes some applications of this “law” to our household finances.
Application 1: we should only buy within our fixed purchasing power.
Buying beyond the money we currently have is the sure cause of consumer debt.
Application 2: we should always prioritize our purchase.
Buying one thing means sacrificing buying another.
“I’m lost… Can you come down to earth?”
Sure! Here’s the way to put it in everyday life. The money we pay for a new TV is the money gone. We can’t get both the TV and the couch if we only have money to pay for either one. Of course this is a silly example, but oftentimes we face similar situations in life that force us to make a choice depending not only on affordability but also necessity and priority.
We hate consumer debt and because our money is limited, we have to make careful decisions of what we can and should buy.
If we keep exchanging our money for the unnecessaries, we will remain with no money to acquire the necessaries. The Hubbie calls this “opportunity cost”, but I prefer to dub it “the application of the conservation law of money”. For me it’s just more fun.
If you read my previous post about our simple 3-step budgeting, you probably remember we have a fixed monthly allowance for expenses. We don’t break our budgeted expenses into categories because a simple lump sum monthly allowance gives us flexibility and sustainability. The challenge is we have to be particularly disciplined with that lump sum. Acknowledging and religiously applying the conservation law of money is vital for this way of budgeting.
After taking care of the fixed monthly expenses of housing and utilities, we’re now free to spend the remainder. It’s very easy to get into a full consumer mode with money in hands. However, since we’re aware of our limited expense allowance, we always prioritize the purchase of truly needed things over simply wanted things.
Conservation Law of Money in action
Things we can’t afford are not even considered in our buying list. With something we can afford, we’ll always examine if buying it can bring us health, create more free time, increase our true value or accumulate our wealth. Even if it fits into those requirements, we’ll still ask ourselves if there’s a better buying option or a higher buying priority.
That sounds like a lengthy complicated process just to decide to buy or not to buy. However, the more we do it, the quicker and more natural this pre-purchase thinking has become, because it reinforces our financial self-awareness everytime.
That’s how the Conservation Law of Money – quote, unquote – works for us and that’s how we never overspend our lump sum monthly allowance on any particular category without the need of detailed budgeting.
If you know buying that pricey stuff doesn’t really add much value, but you really truly want to buy it for some strong unexplainable reason, then yeah, just give the earth a break and go buy it. But remember:
– buying that stuff implies sacrificing buying something else,
– steer clear from your savings,
– don’t create consumer debt just for the sake of buying.
Think through and proceed with caution!