The Velocity of Money

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So, I recently ran my mastermind here in Canberra as a live event. And, first of all, it was so good to be back doing events in the flesh where you get to break bread and sit with people who are doing the same sorts of deals you are and who are heading in the same direction.

The theme for this intensive was the velocity of money. I chose the theme for this particular intensive after reading a book called Shoe Dog.

It’s an autobiography of the founder of Nike, Phil Knight, over the first 10 to 12 years of his journey around starting that business.

And one of the reasons I loved this book and why it inspired the theme for this last intensive was because Phil is really good at explaining how he lived on a knife-edge for the first decade or so of starting his business and explained the fundamental concept of velocity of money.

While I wouldn’t necessarily invest from the same kind of perspective as he would, it just got me thinking of this concept of the velocity of money and how most investors seem to have a broad understanding of it but don’t really delve into the idea in the context of investing.

Most of the time, investors give it virtually no consideration.

So, in this article, I want to unpack this concept called the velocity of money and explain to you why it’s critical in the context of speeding up the results that you get with your investing.

Common Issues with Investing

One of the first common issues I find with investors is that they don’t have much urgency – people think they have a lot of time to build wealth in the future.

Many business owners explain the urgency away by saying that they’re in the long game and that their total focus is on stockpiling their money and building income. But, there isn’t necessarily a focus on converting that into wealth.

Another problem would be that investors outsource their decision-making.

So, traditional wisdom points in the direction of managed funds and handing over decision-making control to somebody else. They get sold on this idea that compound interest is what’s going to get them to the finish line. And they believe that, if they leave it to someone else, they’ll do the right thing with your money.
And that’s not necessarily true.

I think that most people accept that they won’t achieve financial freedom, if at all until they’re 65. So, in the meantime, they just hope that the people who are playing with their money don’t mess it up for them – it’s all blind faith.

But, there is a world of opportunity out there for those people who are interested in it.

Time is the Ultimate Prize

We mustn’t lose sight of what the main prize is. And the ultimate prize is time.

Many of us go into business because we see it as a more effective way to fast track freedom. But, we forget that business is just the mechanism for building wealth.

What we’re really seeking and why business is the ultimate vehicle is because it is the fast track to freedom.

If we can bring the same energy and cadence to how we look at our investing, we can be more mindful about directing resources as we build our wealth.

This whole concept of waiting until you’re 65 years old is irrelevant when it comes to building financial freedom because, ultimately, you should want your financial freedom as fast as possible and with as little friction and risk as possible.

And, ultimately, that is possible if you’re aware that you have the capacity to design your exit. We all want the ability to step off at any time and have enough to live the life we want.

So, I believe the velocity of money is important because it drives the size of our wealth and the speed of our wealth.

Why Velocity of Money is Important

The first point I want to make is that I see the concept of velocity of money as the money multiplier.

Our bias towards or away from different investments is really what swings us into or out of investments.

The best example I can give is that we’ve had a lot of people, over the last five years, show interest and get excited about things like crypto. And then obviously, many people have biases to and away from things like property and shares.

But, when it comes to these biases, most people aren’t thinking about the velocity of their money because they’re only thinking about the kinds of returns they can get.

From an economic viewpoint, I think it’s important to remember that velocity refers to how many times a single dollar changes hands.

The theory is that when the velocity of money is high, the economy could be perceived as being healthy – it means that people are feeling good about spending their money and that one dollar is changing hands many times.

When that gets too fast, too quick, then we go into the scary territory of things like inflation.

But, in general, if you look at what’s happened over the last 12 months, governments worldwide have been trying to stimulate the economy to increase the velocity of money and get people spending.

So, to some degree, velocity and healthy economies go hand in hand from an economic standpoint.

The Velocity of Money in Business

When we talk about the velocity of money in business, it’s also reasonably straightforward to understand.

When you think of a business that sells widgets, the shop’s goal isn’t just to buy widgets. Instead, the goal is to buy them, sell them, restock again and repeat.

When you do this process over and over again, the turnover is the velocity of money.

So, the business owner knows that they’re not in the business of accumulating goods. The real business is creating velocity of money, and business owners understand that well.

The Truth About Creating Velocity with Investing

The reality when it comes to creating velocity with our investing, all common sense around needing to turn out money over, flies out the window.

It’s hard because institutions and banks teach us to accumulate our money on their shelves. They want us to stack goods on their shelves, so they teach us not to touch our money and that we’re in it for the long haul.

They’ll keep reverting us back to the miracle that is compound interest that will help you reach your nest egg by 65 years old.

And, meanwhile, they go out and do the complete opposite. They apply velocity to our money and turn it over and over again so that they can make exponentially more money.

Essentially, banks tell us that if we put our money with them, it’ll always be there, and we can withdraw it at any time. But, we all know that our money is not actually there because they turn around and go to the government bank or the RBA, and they leverage our dollars to borrow more money.

Then they take all of that, give it to us as borrowers, charge us interest and then go back to the central bank to borrow even more money.

So, they’re creating this cycle of extremely high rates of return.

From the bank’s perspective, their overall return is not dependent on the percentage they charge individual borrowers. Instead, it’s on the number of times they can lend the same dollar.

Think Like a Bank

So, the takeaway I’m trying to get you to consider is that it’s imperative to think like a bank – how can you create a similar process of velocity in your own finances?

I’m not talking about the borrowing and lending that banks do, but how do you create a movement of your money? How do you get multiple uses of your own money?

Because it’s moving money around and using it in as many different ways as possible, it creates benefits and inherently reduces our exposure to loss.

So, how do we lose money? Well, we lose it through stagnation or inflation and market fluctuations. Stagnation is that reference to money being stuck and not moving.

A pretty good example of this, if I’m going, to be frank, is actually our retirement accounts.

What happens is, we put money into our retirement accounts, and by virtue of the way that these things are constructed, they just limit our freedom to move our money around. So, our money becomes vulnerable to financial predators such as management fees, losses in the financial markets and inflation.

And all of these large funds market the idea of the nest egg to the point where they even use it in their logo.

So, they get your money, use it to create more money and then don’t give it back to us until decades into the future, where we’ll supposedly have enough to live on for the rest of our lives.

The problem for the average Joe citizen of Australia, or New Zealand is that you can’t move that money into something that’ll produce money until retirement.

So, the retiree has got to do something at that point that they’ve never done before, which is turn a block of money into an income stream.

Or, in the alternative, just start eating the cow – means they’ve got to take their nest egg and calculate how many years they’ll probably be around for and then spend their money according to that.

And this goes full-circle back to my other episodes and articles where I talk about intergenerational wealth and that we’re not getting wealthier generation by generation because we continue to believe that the goal of our lives, financially, is to build a nest egg and then eat it.

Quite frankly, I think that’s a backward way of viewing the goal of investing.

Net worth is not the aim of the game. Instead, the aim of the game is to build a portfolio of investments that generate more income than what you need to live off of.

One of the best examples of this is, if you look at someone like Bill Gates, it doesn’t matter how hard he tries to spend his money and how much of his money he gives away; the velocity of his money is so great and has so much momentum that he wouldn’t be able to give it all away. It’s impossible.

High-Income Earners Use Less Velocity

This leads me to another concept that I want to talk about, and that is that, in my observation, high-income earners use less velocity.

Here’s the thing: if you have a high income, society assumes that that will automatically lead to wealth. And the more and more people I speak to, the more that I see that this isn’t necessarily true.

If you’re a business owner that has the gift of a high income, the gift is actually your ability to convert that income into wealth sooner.

The problem is that when you have a high income, it’s often easy to behave as if you’ve got all the time in the world. More often than not, high income leads us to feel that we’ve earned the right to a more luxurious lifestyle.

And so, what happens is this idea of building wealth gets pushed down the road: you outsource decision-making to others because you tell yourself that you don’t have the bandwidth or the headspace to address it yourself.

I do understand that, though, because you only have so many hours in a day. And to be honest, finding a good deal flow and finding great investing opportunities take time.

You Can Employ the Concept of Velocity Regardless of Income

However, I want to emphasise that the level of your income doesn’t necessarily affect whether or not you can employ the concept of velocity.

A low-income earner can still apply high velocity and hit their goals fast. The game of investing is about finding the investment mix that is going to get you to your goals quickly, effectively, safely and with as little friction as possible.

So, if you’re struggling to find effective investments in the pond that you are fishing in now, maybe it’s time to start being more innovative and start looking for opportunities in other areas.

For me, the foray into the world of alternative investments was a life-changing discovery from the space of velocity because I get my money back, and I can recycle it over and over again.

“Velocity of Money is the 9th World Wonder”

Albert Einstein was reputed to have once said that compound interest is the 8th wonder of the world – he who understands it earns it, and he who doesn’t, pays it.

If compound interest is, in fact, the 8th wonder of the world, then the velocity of money for me is definitely the 9th.

I’ll just conclude with a quote from Robert Kiyosaki, “I’m less concerned about the money I have and more concerned with the velocity of my money.”

Final Thoughts

Just on a final note, people talk about health and our human bodies in the context of moving it or losing it. In other words, if you stay mobile and don’t move and care for your body, then it’s going to deteriorate and break a lot sooner than you planned.

It’s the same with our money.

Money must move into new places to survive and grow – and this is the velocity of money.

If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.

Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!

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