What is Relativity?
In physics, the basic definition of relativity is that physical phenomena are highly dependent upon the position (motion, etc) of the observer.
I was in Minneapolis recently for work. It was a super windy day with 40-50 mph gusts. It was the worst airplane landing I had ever experienced with the plane violently rocking back and forth and up and down right up until touchdown. The wind made the trunk lid slam into my head as I was putting my luggage in the trunk. I headed to Trader Joe’s to buy my imports. As I was checking out, the lady said: “Isn’t it a lovely day? Every day is a lovely day when you don’t live in Duluth!” Hilarious, right? Except I sort of didn’t get it because I’ve never been to Duluth. I’m assuming this is similar to us (in Anchorage) saying in the middle of winter: “At least it’s not Fairbanks!” (which is probably lost on YOU, dear reader!).
This whole scenario got me thinking about relativity. Though I was physically in Minneapolis, my experience of the area relative to the woman that lived there was a mere blip on the radar. As an observer to this joke, I was able to appreciate its delivery and, based on context, it’s basic meaning. But what if I was visiting from Duluth?
We continually emphasize how personal finance is personal. It’s different for everyone. My thoughts and experiences may be similar to your own or maybe you can’t relate at all to my line of thinking (even if your numbers are similar!). Relativity in personal finance is an important part of the equation. You can calculate, with simple numbers both your financial position and your financial direction. But calculating your relative position to a financial phenomenon can be more tricky. Let’s start the discussion assuming that my numbers are exactly the same as yours. On paper, our positions and directions are exactly the same. Now let’s look at some phenomena that will mess up our equal positioning.
- I have heard many people express a desire to give their children what they never had as children. I wanted for very little as a child and my parents (to their credit) did a pretty great job of teaching about money while making sure I felt secure (and not spoiled). My relative position on giving to my children is pretty neutral on this front. I hope to do the same. I want to give them knowledge and opportunity and financial confidence, but I also want them to learn to work and earn and value that earned money. Maybe you feel more passionately about making up for your childhood for your children. You are very sensitive to your kids having the “in” thing that you never got to have. Or you want to make sure that your kids don’t have to miss out on adolescence working insane hours like you did.
- Though our finances look identical now (we’re pretending, remember?), you maybe had to fight through debt to get here. Our relativity toward debt is completely different. We’re sick of our mortgage debt, but the interest is low and it really doesn’t impact us all that much. The experience of clawing out of that debt has changed you. Your relationship with your finances is different than mine because of that.
- We’ve had our share of minor health issues, but we’re also relatively healthy. We often take that health for granted in our future plans (we’ll work more! we’ll travel the world! we won’t slow down until we’re old!). We don’t have a fear of health constantly plaguing our plans. Having to navigate how much energy you can allot each day to things is exhausting. And not knowing how you’re going to feel is hard to calculate in future plans. Health relativity is a big factor.
Now let’s assume our finances aren’t the same.
You’re a year away from financial independence OR you alone make a salary over $100,000 OR you are still facing a huge amount of debt OR you make half of what we make. Money gets relative really fast.
When we were replacing our windows, we spent HOURS painting and measuring and cutting the trim. A lady we knew said: “Just hire my guy to do all that for you. He only costs $50/hour and you could get out of the work!” For this lady, saying $50/hour was the same as me saying $10/hour. I can see hiring someone for a really time-consuming task for $10/hour for as long as it takes (maybe… I still probably wouldn’t do it… but bear with me here…). But at $50/hour, that’s more than I make! My time is currently worth less than $50/hour. If you work for the national minimum wage, hiring someone for $10/hour would be out of your mental thinking.
Finances are relative
Our past experiences are part of the equation. If you feel like you missed out on things in your childhood, you may have to be careful about overcompensating on your own children. As we start making more money, hiring someone to paint boards for $50/hour may start to seem normal. The term “lifestyle inflation” is merely another term to describe how your relative position changes when you see more money coming in. We have to be cautious of that as well. Also, spending habits are born from your past experiences and while it is easy for me* to say: “Stop buying your morning coffee and Google ‘Latte Factor’,” that might just kill you. Calculating your relative position to different financial phenomena can help you predict the impact of those phenomena on your finances.
Now I’m interested: What city would you guys use in the same joke as the Duluth one?
*I don’t drink coffee. So it’s easy to say that’s obviously the first thing you should cut out! 🙂