How To Use The Velocity Of Money To Grow Wealthy

“You need to save to become wealthy” ……

Was an adage my dad preached when I was a kid. He was a saver and lived through the Great Depression. Back then, they did not have much so what little they had they saved.

After World War II, he worked a factory job for a few years and saved every penny he could so he could live his dream of purchasing his own farm.

After he saved enough to pay for the farm in full using cash, he left that job to work on his farm. As I talked before about growing up on a farm, we didn’t have much. Sure, we always had a roof over our heads and food on the table, but that was about it.

One day, I met a friend of my dad’s (we’ll call him “John”) who owned a real estate development company. I remember John telling my dad that the land in our county was the cheapest in the nation. John told my dad that he should mortgage the entire farm and buy up as much land as he could because the price will be increasing in a few years.

My dad would have nothing of it. He didn’t want the debt and didn’t want to put his family’s future at risk.

Turns out John was right. About 5 years later, land prices doubled and continued climbing for several years. John followed his own advice. He bought a lot of land, leased it out to farmer’s, and years later sold it for a great profit.

Why am I telling you this?

Because dad’s advice to save your way to being wealthy didn’t work.

A lot of personal finance blogs preach that you need to minimize expenses and save a lot of money (>50% of income) to achieve financial independence.

I beg to differ.

While that is one way to achieve financial independence, there is a better way that the ultra-rich have been using for decades.

The ultra-rich use a concept, like John did, that puts their money to work constantly and never lets their money sit idle.

This concept is called the velocity of money.

What Is The Velocity Of Money?

The economic definition of the velocity of money is the frequency at which a unit of currency is used to purchase goods and services within a given period of time. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.

The formula for the velocity of money is:

Velocity = Gross Domestic Product (GDP) / Money Supply.

For an economic standpoint, the velocity of money refers to the rate or pace at which there is a money exchange and measures how frequently the money moves between transactions.

Another way to look at it is the velocity of money measures how hard each dollar works to increase economic output.

When the velocity of money is high, it means each dollar is moving fast to purchase goods and services and generates a lot of production. A healthy economy will use the same dollar multiple times to generate demand and create more production.

Likewise, when the velocity of money is low, an economy will stagnate since people are hoarding money and not using it to generate more output.

But what does this have to do with personal finance?

The velocity of money can also be used to grow wealth, increase cashflow, and minimize risk more efficiently. We will discuss this and much more next.

Using The Velocity Of Money To Create Wealth

In personal finance, the velocity of money refers to using your funds to build wealth more quickly by having your money do more than 1 thing at a time.

The basic idea behind the velocity of money is how fast an investment can return your original principal. Once the initial investment is received back, this money can be used in another investment. This way cashflow can be generated from 2 separate investments using a single pool of money.

How Is This Done?

The investment needs to generate cashflow. Without it, you do not recoup your investments. As described by Robert Kiyosaki’s article, the great thing about cashflow generation is that once you receive your original investment back, you are then essentially playing with the investment profits (aka “house money”).

The house money will keep the 1^st investment alive and growing which enables you to re-use the capital you originally invested to deploy into another investment. Rinse and repeat this several times and watch your wealth grow exponentially!

The advantages of this are two-fold:

• Risk reduction – The 1^st rule of investing is never lose money. Getting your investment back enables you to minimize risk since your original investment is covered. If a bad investment is made, that’s ok. Just draw the income from your other investments, try again, and move on.
• Grow wealth at faster pace – Growing wealth will start out slow, but once the momentum starts, income is compounded at an amazing pace. This is akin to the snowball rolling down the mountain analogy. It takes some time and effort to get the snowball moving. Once it starts moving on its own, just get out of its way and watch it work!

If you want to learn more about how to use the Velocity of Money to grow personal wealth, check out Garret Gunderson’s podcast to learn more.

Why The Wealthy Use Velocity Of Money

The wealthy love using the velocity of money to grow their assets, cashflow, and net worth. By only investing the original down payment, your return on the investment (ROI) is maximized and risk is minimized.

Since you are not putting up the complete amount of the investment and leveraging (aka getting a loan) for the rest of it, this makes it easier and faster to recoup your money. Once your money is returned to you, this money can be re-deployed for purchasing other investments while you pocket the cashflow from the 1^st investment.

With that cashflow, you can also live off the income, payoff the loan faster, or use it to buy a 3^rd asset. The possibilities are literally endless.

You know what the velocity of money also does? It allows you to keep control of the asset. Since it is cash flowing income and covers the expenses, you are earning a pure cash profit. Plus, the equity of the asset is also growing which adds to your net worth. This is a great double dip!

Then you just repeat the process over and over again. It’s definitely not a “get rich quick” strategy but it certainly builds wealth faster than a buy and hold strategy. The rich have been using this concept for years to keep growing their wealth and you should too.

Even the greatest buy and hold investor, Warren Buffet, uses this strategy. He likes to buy stocks that supply a dividend, so he gets his money back faster. Once he recoups his money, he then takes the original investment and re-deploys the money to buy more assets.  It’s taken him a lifetime to accumulate his wealth but what an accumulation it has been! As of this writing, Warren Buffet’s net worth is currently at approximately $99.3B!

How To Use The Velocity Of Money To Grow Wealth

Here is an example of how to use the velocity of money to grow your wealth.

Let’s assume you have $25,000 you want to use to invest in a rental property. You buy a duplex for $125,000 and use your money as a 20% down payment. This way you avoid private mortgage insurance (PMI), increases your cashflow, and starts to build your net worth.

After the mortgage and all expenses are paid, let’s assume you have earned $1,000 a month free and clear. At this rate, it will take just over 2 years to recoup your investment. A flowchart of this transaction would look something like this: