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The Cold Equations of Personal Finance

Tom Godwin’s short story, The Cold Equations, was published in the August 1954 issue of Astounding Magazine. Many consider it to be the best science fiction short story ever written. Yet almost no one noticed the personal finance lessons of the story.

First, let’s look at the plot of The Cold Equations so we understand what these “cold equations” are.

The story is set in the future when man is starting to spread out to other planets in other solar systems.

A planet with a small terraforming crew suffers a medical emergency. Medicine is rushed aboard an Emergency Dispatch Ship (EDS) to deal with a disease particular to the planet. Without medicine they are guaranteed to die. Time is short; resources thin.

The EDS is stripped bare and loaded with the necessary medicine. There is only one pilot and fuel is measured precisely in a manner similar to modern military aircraft. There is no room for error. One miscalculation and all will die: the pilot in a crash when trying to land on the destination planet and the colony due to lack of medicine.

Shortly after launch from a mothership the pilot notices a problem that could mean only one thing, a stowaway.

The story makes it clear the pilot has only one option should there be a stowaway. With no margin for extra weight, even a small amount, the extra weight, the stowaway, must be jettisoned into space.

The pilot prepares to do his duty and calls out to where the computer says the stowaway is hiding.

The pilot expected a vagabond. It would make his duty easier. But, instead, the stowaway happened to be a young girl.

The pilot is taken aback.

The girl’s story is not that of a ruffian or vagabond. Instead, she wanted to see her brother who is working on the planet where the medicine is being delivered. They had been separated for years and she missed him.

The pilot is moved, but the equations. The girl had no idea what she had done; the consequences for her actions.

The pilot, moved by the innocence of the girl doomed to die by being jettisoned into space, took every action he could to make up for her extra 110 pounds. He called the mothership to see if there was any way to get another transport. No. Could flight corrections give the fuel on hand enough room to succeed with the extra weight? No.

Nothing could be done; all options explored. The ship was not allowed any extra fuel for the mission due to its nature. When the ship decelerated the G-force would reach 5.5. That meant the girl’s 110 pound mass would be like 550 pounds of mass that needed to decelerate. There just was not enough fuel. Either the girl died a gruesome death or everyone died.

As they approached the planet, and before deceleration started, the pilot was able to get a communication link with the girl’s brother on the planet. They ended up with only a few minutes to say their final words.

A lump forms in the throat as the story progresses. Tom Godwin makes it all feel so real. The pain, the innocence of the girl (she didn’t do anything that deserved a death sentence), the futility of the situation, the humanity of every character.

The story ends with the girl facing her demise stoically. She steps into the airlock, her head held up, resigned to her fate. The pilot closes the inner door and opens the outer airlock. The cold equations have been satisfied.

I want to share one short paragraph from the story that will help us as we explore how these cold equations apply to our personal finances:

The men of the frontier knew—but how was a girl from Earth to fully understand. H amount of fuel will not power an EDS with a mass of m plus x safely to its destination. To himself and her brother and parents she was a sweet-faced girl in her teens; to the laws of nature she was x, the unwanted factor in a cold equation.

The cold equations do not care who you are or if you are innocent or made a mistake. The cold equations, without a thought or care, execute their duty efficiently.
The cold equations do not care who you are or if you are innocent or made a mistake. The cold equations, without a thought or care, execute their duty efficiently.

The Cold Equations of Personal Finance

At first glance you might feel life is rarely so rigid. But if you think about it a moment longer you realize life is often times just as cold as the equations in the Tom Godwin story.

We have all heard the story of the twin brothers.

Brother A starts investing $5,000 per year at age 25 and stops once reaching age 34, only adding to his investment account for 10 years.

Brother B starts investing a bit later, dropping $5,000 into his investments starting at age 35 and keeps at it to age 65, a full 30 years.

At an 8% annual return, Brother A ends up with more money, yet Brother B invested $150,000 of his money while Brother A invested only $50,000. A cold equation, indeed.

Time, not timing, determines your outcome!

That is one very cold equation of personal finance. The sooner you start the sooner you reach a financial milemarker (a financial goal or retirement, as examples). Excuses don’t matter.

The cold equations do not care who you are or if you are innocent or made a mistake. the cold equations without a thought or care execute their duty.
The cold equations do not care who you are or if you are innocent or made a mistake. the cold equations without a thought or care execute their duty.

Warren Buffett mused:

There are two rules in investing:
Rule #1.) Never lose money.
Rule #2.) See Rule #1.

Buffett knows how much damage losses from a flyer can do. It takes a lot of gains, in percentage terms, to make up for lost ground. In fact, you never really make up for lost ground.

Yet, another factor in the cold equations of personal finance.

Debt is still another factor. Interest is an acid to financial goals. Yes, limited use of leverage is sometimes necessary (buying a home as an example). Getting out from under that debt as soon as possible is factored into the cold equations. Foolish use of debt only compounds the risks and damage a thousandfold.

Like the girl in the story, problems become magnified. Her slight 110 pounds of weight seemed insignificant. But when the forces applied from decelerating took over her weight had the compounding effect of 550 pounds. The same magnifying effect is seen in our story of the twin brothers.

In personal finance we call it the Magic of Compound Interest. Some, rightfully, call it the most powerful force in the universe. And the magic also works against you in the same manner as the 110 pound girl pushing 550 pounds of damage.

Compounding appears magical, but it is part of a cold equation. Every second the clock ticks forward another moment passes, a moment lost forever. Either you situated your finances to benefit from compounding interest or you didn’t. You never get that moment back. The cold equations have spoken.

And God forbid you do something really foolish like reversing the Magic of Compound Interest by saddling yourself with debt and paying the interest to those who are enjoying the magic.

Time counts and keeps counting. Retirement is a certainty unless you die first. Financial independence as soon as possible gives you options. No matter how much you love your work or running your business, the day will come when you are no longer able to carry the burden. Whether you saved and invested or not is of no consequence at that time. The cold equations will speak loud and clear. It is too late to go back in time and do it all over again.

You get the idea. The Laws of Nature do not stop with the hard sciences. The laws that apply to personal finance, retirement, and other financial goals are just as hard and cold. They don’t care about you, your ignorance or innocence, your family or heath.

The equations are hard and fast. Save x for t amount of time at r rate of return and you get y. No more, no less. The equation has no room for you. It will perform perfectly every time, with or without you. For or against you.

Know the rules and follow them and you are in command of your destiny. If not, the airlock awaits you. Cold, hard, uncaring.

I’ll finish with a sentence from The Cold Equations that perfectly sums up the consequences:

She had unknowingly subjected herself to the penalty of a law that recognized neither innocence nor youth nor beauty, that was incapable of sympathy or leniency.

I hope you enjoyed the unique connection I made to illustrate the seriousness of personal finance. I don’t think many people realize how rigid the rules are. Higher investment fees will always lower return. It’s the law! Ignorance or innocence will not change that fact.

If you enjoy stories that make you think long and hard after you turn the last page, I recommend The Cold Equations & Other Short Stories by Tom Godwin. Use the link or visit your library.


Wednesday 26th of April 2023

Love it!!! A topic I’ve been thinking about so much the last week or so and trying to drill it into my family’s brain. Looking to start our newborn’s 529 plan this week as well. Crazy to think the difference my parents and the generation above us could have made would they have known this in time. Incredible how the magic of compound interest works for us if we make sure we don’t put ourselves in a position where it’s working against us.