Maybe at this moment you are sitting at a desk, or in a comfortable chair, motionless. At least you seem to not be moving when you look around at your surroundings. Or, maybe you are on a plane traveling at 500 Miles Per Hour. You know you are moving, even though you are comfortably seated. You can look down and see land passing beneath you. You are clearly in motion.
All speeds are relative. To measure speed you must measure the motion of other objects relative to an object at rest.
At the latitude where I live (36.3437° N) the earth is rotating around its axis at 800 MPH. That is crazy fast! Yet, I do not feel it. Then again, since the earth will complete one revolution in orbit around the sun in 365 days, a trip of 93,000,000 miles, I am on a spaceship moving at the speed of 66,000 MPH! Once more, I do not feel it.
The Sun revolves around the center of our Milky Way Galaxy, pulling along the orbiting planets with it (including earth) at the speed of 550,000 MPH. Mindblowingly (is that a word?) the Milky Way Galaxy is also moving, at the rate of 2,237,000 MPH.
Time to reach for the airsick bag. Time to hold onto something!
Speaking of time, it is integral to measuring velocity, as in, Speed = Distance/Time. Speed is also a factor in calculating time, as follows: Time = Distance/Speed.
Like our obtuseness toward speed, we are mostly oblivious to the passing of time.
Time always seems to flow perfectly normally for us, until we see the effects of aging and the changes in the society around us. When we attend a High School Reunion, it becomes clear to us that time is not uniform in its effects. We are occasionally jolted by the changes we see in others and in ourselves, but generally unperturbed by the incessant passing of time.
In a similar way, we are individually oblivious to the velocity of our money.
The Velocity of Money
The Velocity of Money is the rate at which money moves from one transaction to another. It refers to the rate at which people spend money. It is used on a macroeconomic basis to refer to the money supply and its turnover in the national economy. It is a measure of how long people actually hold onto their money. If we are fearful for our jobs, we will want to hold more cash which dampens the velocity of money. If, on the other hand, we feel optimistic and confident in spending, the velocity of money will grow faster. If we fear inflation coming on the horizon, and sense that the value of our money may begin depreciating quickly, we will increase spending now.
Therefore, the velocity of money simply means the movement and multiple uses of the same dollar. Just as it applies to the national economy, velocity of money is also the business model of banks. When we deposit money in the bank, the bank uses our dollars as leverage in order to borrow more money from the Federal Reserve. The bank utilizes our dollars, as well as leveraged dollars from the Fed, to extend loans to other people seeking credit or mortgages. As banks receive loan payments, they again borrow more from the Fed and consequently extend loans to more people. The banks are using the same dollars in multiple ways and making profits on the velocity of money.
Personal Money Velocity
Just as speed is relative, and time does not seem to impact everyone uniformly, so also do some people achieve greater financial success than others. Personal Money Velocity is one of the secrets behind wealth accumulation. The velocity of money concept that banks rely on can also be a valuable concept for us as individuals. We can make repeated use of our dollars to meet multiple needs.
It takes the assistance of a trained independent financial professional equipped with the right questions for most people to put the Velocity of Money concept to work for themselves.
According to Garrett Gunderson, the Money Velocity Equation* is simply our output divided by our input. Input is the hours people work in their careers, and the money they manage to set aside in savings and investments. Output is what people earn from their jobs and the returns on their financial accounts.
Money Velocity = Output ÷ Input
The goal is to increase the numerator (Output) faster than increasing the denominator (Input).
Helpful Questions for Use by Independent Financial Professionals
If you are an independent financial professional, your ability to help your clients improve their Personal Money Velocity is dependent on your skill in discovering opportunities by using right questions. Consider the following questions:
- Are you paying unnecessarily high interest on indebtedness? Is it time to restructure your debt? Should you cash out low-performing investments in order to pay off high-interest loans? Any reduction in interest owed goes straight to Output, thereby increasing the client’s personal Money Velocity.
- Are you paying too much in taxes? Who prepares your taxes for you? Have you ever sought a “second opinion?” Reducing a client’s tax burden moves money straight to Output, without increasing the client’s Input.
- What financial vehicles have you selected for your retirement accounts? Will every dollar of income be taxable? What will happen to your “nest egg” during market corrections? Guiding clients to alternative investments and savings tools can help them earn a much higher return and still provide liquidity. Not surprisingly, permanent life insurance can be a great fit if set up properly. Utilizing tax-free strategies to supplement taxable income sources increases Output without increasing the client’s Input.
- How long are you planning on being retired? Have you considered that you might run out of money? Utilizing deferred income annuity (DIA) products also known as “longevity annuities” extends the Output for life without requiring more Input.
- Do you have money sitting idle in an account getting .01 percent interest? Or is it moving? Maintaining emergency funds equal to at least six months’ worth of income is prudent. More than that amount means that resources are not producing income and are exposed to unnecessary taxation. Reallocating idle assets to tax-deferred products capable of producing tax-free income later increases the client’s personal Money Velocity.
- Are you contemplating purchasing a costly item (boat, luxury car, second home, etc.) that will, based on the principle of opportunity cost, take money out of circulation? Do you realize that once your money is spent, you’re missing out on the opportunity for that money to be invested elsewhere? Deciding not to spend on high-cost temptations frees up money to be invested for greater returns and increases the client’s personal Money Velocity.
We know that “it’s not what you make, it’s what you keep.” We are also all aware that it’s how much cash flow goes into our personal savings and investment accounts (after taxes) which develops wealth. Independent financial professionals can help their clients increase their personal Money Velocity by asking the right questions.