Step by Step

Richard Connor

ONE OF MY FAVORITE movies of recent years was Hidden Figures. There’s a pivotal scene where the hero, Katherine Johnson, realizes they need to use an ancient numerical technique known as Euler’s Method to solve the trajectory equations for John Glenn’s mission. This involves breaking a complex problem into very small pieces, solving each part, and then summing them to get the solution.

Over my engineering career, I used various numerical integration techniques to solve complicated problems. It gradually occurred to me that this approach was a good metaphor for how our world works—and could be applied to our financial life as well.

Our world is massively complex and I make no claims to fully understand it. Still, a simplified model can help. Our daily actions make up the small parts of a complex system. These include how we vote, what we buy, who we marry, where we live, our career choices and countless other actions. The world acts as a giant integrator, taking our micro actions—along with everyone else’s—and integrating them to create the macro state we experience every day. Simply put, our world is the sum of all of our collective actions and interactions.

What I like about this model is it reminds me that my actions do matter, but that they must be understood in the context of the decisions of others. If my candidate loses, I need to think about why more people disagree with me than agree. If my favorite store goes out of business, I should ask why others are shopping elsewhere. It’s empowering and humbling at the same time.

I recently had a medical procedure that kept me homebound for a few weeks. One of the things I noticed was how many Amazon deliveries my little street of 20 houses saw each day. I would guess at least 10 deliveries per day. Is Amazon a predatory company succeeding by nefarious means—or is it successful because half of my neighbors like its prices and the convenience of its services? My simplified world model points to the latter. Millions of people making independent choices have led to Amazon’s success.

The application to our financial life is straightforward. There have been a number of articles discussing the latte effect on our finances. Such micro decisions help determine our financial health. To be sure, it’s rare for a single choice to prove decisive and, even if we make good decisions, we can be knocked off course by the actions of others.

Still, our financial success, or the lack thereof, is usually the summation of a lot of individual choices over a long period. Good choices—saving regularly, indexing, deferring taxes—integrate and compound to provide a secure financial future. Bad choices—carrying credit card debt, paying high investment costs, buying a new car every three years—have a similar but opposite impact. But don’t despair: There are lots of second chances and lots of opportunities to correct our mistakes, so we get on course for a sound financial future.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include What Are the OddsTriple Play and Read the Fine Print. Follow Rick on Twitter @RConnor609.

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Roboticus Aquarius
Roboticus Aquarius
2 years ago

There are a lot of good thoughts to ponder here, and certainly many seemingly small decisions can have a big impact.

I will aver on one point – I believe the Latte Effect discussion can be very misleading, so it’s important to put it in the proper framework. I think we’d agree that if you can:

save early and often (automate it, at least 15% if possible),
buy as inexpensive a house as you can be comfortable in
invest in low cost diversified index funds and do not sell
keep car expenses to a minimum (there is more than one way to do so)
do not carry balances on your credit card

you are likely to end up in a very good place financially, no matter how much avocado toast or maxi whatever ventis you consume.

The trick is more to figure out what spending fails to make you happy, and end it if possible. If the latte is just a bad habit, then end it, but if it’s part of what makes your day joyful, well then it’s probably $5 well spent.

Edit: I thought of an example. TV isn’t that big a thing for us. We haven’t had cable or equivalent for almost 25 years. We have had Netflix, but that’s it, and we’ve saved thousands that way vs the cost of cable or satellite. Books, on the other hand, I have no budget for. I buy whatever I want. That’s where my joy is.

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