Understanding Velocity Of Money
Christopher Koopman Contributor: PowerPassionProsperity
Understanding the velocity of money concept and how to apply it in your life can help you create a more efficient wealth creation process. The simple explanation of velocity of money concept is the rate at which currency is exchanged within an economy. For example, a high velocity of money factor is great if that “velocity” is moving your money into assets that appreciate and can be leveraged to further build wealth. If our capital is moving towards servicing debt and to pay bills, this would be a low velocity of money factor. Knowing how to apply velocity of money strategies to your financial life can help you accelerate your wealth creation process! You can learn to be a beneficiary of this concept rather than a slave to it.
For example, lets understand how banks work, and use the velocity of money strategy to benefit themselves. Banks have been around for a very long time and are experts at building wealth. How does a bank build wealth? Let’s look at a simple example that can easily be understood. If there was a giant bright green LED sign outside your local bank that said “savings account rates at this bank are 5%”, I would imaging you would take your money from your current savings account, and deposit at this institution. The reason is that our brains immediately think that the higher the rate of return, the faster our wealth can grow. However, banks themselves never chase rates of return or “yield” to build wealth for themselves. They want us to believe this is how WE should build wealth, when in reality, depositing money in a bank helps THEM to build wealth for themselves. The reason is they use our money on deposit and apply leverage to those dollars. They are constantly lending money to others. When you deposit money at your local bank, and let’s say that bank is so generous to give you my crazy pretend example of 5% interest on your money in a super savings account (which does not exist in the current interest rate environment), have you ever thought “what do they do with my money”? I can tell you it’s certainly not sitting in your bank account! Have you ever tried to close a bank account? The manager comes out and tries everything to ensure you don’t close that account. The reason is they are constantly lending money out to others, to charge others interest.
So now you have your money in a 5% savings account, and you feel good because you are earning way more than everyone else in their savings accounts. However, the bank is earning way more than your 5% in your bank account. How? Simply put, they loan that money out to others, and charge more interest than they are paying you. For example, someone needs a car loan, or a credit card, or a business loan, and let’s say that person doesn’t have good credit, they may charge that person 9% for their loan. Those payments go back to the bank, and the bank makes money out of thin air simply by loaning your money to others, at a higher rate! They do this multiple times over and over and over again, and the bank makes a ton of coin on your money held in “deposit”. This is an example of how banks apply the velocity of money concept.
But what about you? How can you apply this concept in your life? Is that even possible? Well, yes! First you must understand the 4 rules that banking institutions want you to do with your money:
- Give them your money
- Keep it with them for as long as possible
- They give you back as little as possible
- Keep your money standing still, like in a bank account
Most people follow the Banks rules. Yet, let’s think of another way to velocitize your money.
Perhaps the easiest example, is to consider how real estate appreciates. If you have a home worth $100,000 (just to make this example easy to understand, I realize most homes cost more than 100k) and it appreciates 5% in one year, that home has now increased in value to $105,000. It does not matter if you have a mortgage for $90,000 or no mortgage at all, the home still appreciates. What if that mortgage of 90k was used to purchase another house, that then generates rental income, possible tax deductions, and more appreciation? You are now using one asset class, to leverage, in order to acquire another asset class, with the anticipation that both assets will appreciate. This is the velocity of money. Money is in motion, and not standing still. Money is working “through” assets. Now I am not suggesting that you do this, it’s an example, but it illustrates the power of the velocity of money in an easy to understand concept.
What if you can apply velocity of money strategies to other financial instruments you may own already or might own in the future? If done correctly, you can increase your wealth by velocitizing it, rather than accumulating it. We can all agree that 3 + 3 = 6. What if you can learn to change the way in which you accumulate wealth, to turbocharge its response, so that your money works more like 3 x 3 = 9. This would be more effective, perhaps giving you a faster response on how your wealth accumulates.
To accomplish this, you MUST view your entire financial landscape in a holistic way, so that you can make more intelligent financial decisions. When planning to build more wealth in your life, having a Macroeconomic view of your entire financial world, rather than a microeconomic view, will only help you to create more efficiency. Understanding how money flows through your financial world, and what forces attack your wealth, will allow you to decrease the eroding factors of wealth. Remember, money that stands still gets attacked by its environment. Taxes, debt, lost opportunity costs, inflation, are some of the eroding factors of wealth that attack your wealth over time. Think of money like an apple. If you left an apple on a kitchen table for 3 years, that apple would have rotted, and eventually decayed to nothing. That’s because its environment attacked it. However, put an apple in alcohol, and it will last much longer. The “process” of how to preserve the apple is the important take away here.
So, let me ask you…what processes do you have in place to ensure your money is not eroding away?
I am the president and founder of Statera Wealth Solutions, Inc. We focus on sustainable wealth building solutions for those who want to grow and protect their wealth. Our modern perspective challenges outdated conventional financial wisdom, awarding our clients improved financial wellness and less financial stress.
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Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
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Hope everyone enjoyed this month’s special advice from Chris Koopman!
May all of you have an empowering week!
WJ Vincent II
EmPower Your Dreams, Ignite Your Passion, Accelerate Your Prosperity
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