What Amount Of Spending Rate, S, Can You

Bear?
Chris Harding
March 2018

1 Problem Statement
Recall that with continuous compounding at an interest rate of r > 0, an in-
vestment I(t) with initial investment I0 = I(0) is I(t) = I0 ert . What happens
if you wish to withdrawl funds from the investment at a rate of spending S,
where S > 0 is constant? The differential equation is:
dI
= rI − S
dt
Your goalss are as follow. You have an initial investment I0 , and you cannot
change it or the rate r. You want to be able to spend as much as possible but
you also don’t want to ever spend all your money. What amount of spending
rate S can you bear?

Hint: If you’re not sure what to do, find and classify the equilibria in this
model and think about which initial conditions lead to which long-term behav-
iors.

1
2 Solution
This problem is the last problem and is from a quiz that was, except for this
problem, linearization problems. So, I was in a linearization mind-frame.
I eventually realized how to solve the problem, and I used the Integrating
Factor method of First-Order Linear Equations of the form
dy
+ p(x)y = q(x)
dx
I rearranged the equation to
dI
− rI = −S
dt
Integrating Factor and solution
R
ρ = e −rdt = e−rt
Z
dρ d
= e−rt · · −rdt = −r · e−rt
dt dt
d[ρI] dρ dρ dI dI dρ dI
= · ·I + · ·ρ=I +ρ
dt dρ dt dI dt dt dt

d[ρI]
= −Ire−rt + e−rt (rI − S) = −Ire−rt + Ire−rt − e−rt S = −Se−rt
dt
Remember, the problem statement states that Io , S, r are constant
Z Z
d[ρI] = −Se−rt dt

−S −rt
ρI = e +C
−r
What is I0 , r, and S at t = 0 and I = I0 ?
S −r(0) S
e−r(0) I0 = e + C → I0 − = C
r r
S
and C = 0 because this is the maximum r to deplete funds to be spent

Another way to look at this is that: rI0 − S = C = dIdt = 0 if S is maxi-

mum and the funds are immediately depleted and there is no I0 to grow at the
beginning.
Answer: S ≤ rI0