“I want my money to be like a river, not like a pond.“– Lisa Sasevich, Inc. 500 business owner
In the arena of wealth, two myths are most pervasive: that the stock market is the only place to grow your wealth, and that you achieve this through accumulation. In other words, you should always be moving money into equities or qualified plans, nothing more. And while this may deliver some results, that’s not the same as Prosperity. To achieve Prosperity, you cannot rely solely on accumulation! You must have velocity of money, too.
What is Velocity of Money?
Typical financial planners teach to “accumulate first, then disburse.” In other words, keep putting money into your pool of stock-based assets. Then someday, when you accumulate “enough” money in your accounts, you can stop working, begin the distribution phase, and live off of your assets (or the interest your assets produce).
The problem with this wealth accumulation strategy is that the stock market goes down as often as it goes up, and you can lose significant portions of your assets in a market downturn. It can take years, if not a decade, to get your account back to where it was, making growth a painful slog. Yet by design, you don’t feel it because you’re encouraged to keep funneling money into the account, and nothing else.
The velocity of money speaks to the speed of growth, and this can only happen by moving money through your assets, not simply “into” your assets. In other words, you’re circulating your dollars through your personal economy regularly. This way, your assets aren’t stagnating, and in the long run they actually do more for you by creating additional cash flow and opportunities.
What Does the Velocity of Money Measure?
The velocity of money isn’t a measurement, so much as a methodology. Think of your asset base like a body of water. Would you rather have a pond that stagnates or a river that flows? When you move your money, you create a flowing river of wealth.
What do we mean by moving your money? Using it! For example, if you save into a whole life insurance policy, you’re creating a savings pool with liquidity. At any time, you can use a policy loan to access this money, which does two things. The first is that you can use this loan for an opportunity, specifically one that will produce cash flow. The second thing that happens is actually passive, which is that your cash value continues to compound with interest and dividends uninterrupted. This allows you to create a new cash flow stream with as little opportunity cost as possible.
When you have a stock-based asset, it’s difficult to pull money out because doing so makes your losses feel greater, and your growth seem smaller. There’s no such thing as uninterrupted compounding in stock-based assets. This means your money can really only do one thing: sit.
Accumulation is the goal of most people today. Everybody desires to have enough money, though there is much debate about how much is “enough.” People strive to accumulate an amount of money that means they will never have to worry about money again – or at least, they’ll never have to move in with their kids! However, the reality is that accumulation alone often isn’t enough. Unless your money is moving and increasing your cash flow, you’re not doing your future self favors. (Especially not with those future tax bills.)
The Velocity of Money Formula
So what’s the velocity of money formula? Well, there isn’t one. Not strictly. That’s the thing—the idea of accumulation relies on guesswork and speculation. You don’t know how much is “enough” money to stop working because you don’t know how long your life will be, how much things will cost in the future, or even what the tax rates will be.
You could have the most logically sound formula in the world and still end up with numbers that are nothing but speculation, generalization, extrapolation, and GUESSWORK. There is no crystal ball in finance, no matter how much we’d all love to know the future. (And believe me, we’d love that, too.)
This is why it’s critical to stop chasing “ENOUGH” and instead start building your assets and your cash flow in such a way that you don’t have to worry about running out. Cash flow (the money flowing to/from your person, also called income and expenses) is what we live on. And in the end, you want to have as much cash flow coming TO you as possible, in addition to any money you’ve accumulated.
Because here’s the thing: when you only have an accumulation to live off of in your golden years, you become afraid to spend. You don’t want to run out, because you could live for ten more years… or you could live for 30 more (if not well beyond). You simply don’t know, and that pool of money won’t feel like enough no matter how much you have. We don’t want this for you, or anyone!
You’ve heard it said that “It doesn’t matter how much you make, only how much you KEEP.” But the truth is, It doesn’t matter how much you make, how much you keep, or even how much you save—it only matters how much you can SPEND after you’ve earned it and saved it!
Monetary Velocity vs Wealth Accumulation
If the purpose of accumulation is to provide income in later years, why not concentrate on strategies most proven to generate cash flow? Yet, typical financial planning TELLS us to accumulate the biggest possible pile of money – money that isn’t in our control and that we’re told not to spend!
So we work hard and throw a portion of our income into 401(k)s, IRAs, perhaps a taxable brokerage account, and a 529 plan or two. Accounts that can only be used for limited purposes at specific times. Accounts we can’t access without paying taxes, penalties, and perhaps even fees.
Meanwhile, the financial institutions and even the government benefit from the accumulation. They leverage it, tax it, or collect fees for sending us quarterly statements letting us know how “our” money is doing. They may even keep a portion of it when we die.
Instead, USE your MONEY!
Move money THROUGH your assets, not just TO them!
Velocity of Money Examples
So how can you apply this velocity principle to your own finances?
It’s all about seeing opportunities with your cash. For example, if you have some cash value built up, you could leverage it for a down payment on a property. Then, you could use the cash flow from that property to pay down the policy loan and the mortgage. After that, you’ve got “free and clear” cash flow. Alternatively, you could use the cash flow from real estate you already own to fund a new life insurance policy, which you can later leverage for opportunities.
If you own a business, you can use your whole life insurance cash value to invest in your business. There are a million ways to do this, such as purchasing new equipment, creating a webinar or online course, expanding your product line, and more. Expanding your business can help you increase your cash flow over time.
You can even leverage your assets as collateral, as a way of accessing additional funding from a bank or other lender.
When you use your assets in this way, you can achieve exponential growth and boost your lifetime cash flow. Otherwise, you’ve got to accumulate money in different buckets, only seizing opportunities when you’ve filled a given bucket. By having one or two sources of replenishing capital, you’re expanding your capabilities dramatically.
By using your money wisely—rather than just letting your banker or brokerage house use it — you can:
- Grow Your Asset Base. Use money from one asset to purchase another asset.
- Increase Your Cash Flow through Leverage. When you purchase a cash-flowing investment, you increase your spendable cash flow.
- Build Wealth with Certainty through Diversification. You can diversify away from the dollar into assets that will have value in any economy. Ownership, not accumulation, is the foundation for prosperity!
- Decrease Taxes. By moving money from regular income to capital gains, you may lower your taxes.
- Control Your Money. Prosperity is not measured by how much money you have, but by how much FREEDOM you have with your money.
What is the Velocity of Money in Economics?
You may be aware that consumer spending—the movement of money—makes up the MAJORITY of our economy. Yet we’re not trained to move money in our personal economies, we’re taught to accumulate it and let it sit in various types of accounts, sometimes unused for decades!
Savvy business owners, corporations, and bankers know how to keep money in motion. If banks acted the way we are taught to act, they would keep all of their deposits sitting in the vault unused! And they’d go out of business, unable to compete or turn much of a profit.
Of course, banks USE it, leverage it, multiply it, and generate enormous profits… much higher than what we imagine.
People think that when banks pay us 1% on our savings and allow us to borrow money at 4%, they are earning 3% on that transaction—4% earnings subtract 1% cost. This is NOT correct. When a store owner buys a widget for $1.00 and sells it for $4.00, they are enjoying a 400% mark-up!
It is the same with banking. When the cost of attracting dollars is one-fourth the cost of loaning those dollars, banks are enjoying a 400% gain. (And that’s BEFORE they start creating money through the process of fractional reserve banking, which we’re NOT a fan of, but that’s another topic.) You might even be shocked to learn where banks put their money.
Money Velocity and Whole Life Insurance
If you want to increase your money velocity, we highly recommend using whole life insurance as your foundation. First and foremost, this is because as an insurance product, you’re guaranteeing your peace of mind. No matter what happens, you’ll be leaving something to your heirs.
In the meantime, you can enjoy the living benefits of your insurance, which includes the cash value. And this is the portion you can leverage for emergencies AND opportunities, whatever those may be.
The reason whole life insurance is so useful is because when you leverage your cash value, your account continues to grow at its full capacity. Why? Because you’re not making a withdrawal, you’re using your account as collateral. The effect of this becomes more impactful as the volume of your cash value increases because you’ll earn a greater volume of interest. And with the policy loan, you don’t have to give up any of that growth.
This money is also replenishable. As you pay back your loan, the collateral falls away in proportion, meaning it’s available to be leveraged again. And if the loan idea scares you away, remember: when you use a policy loan to partake in opportunities, the cash flow can contribute to those loan payments. Paying the loans strengthens the company, which strengthens dividends. You’re making choices and taking actions that strengthen your asset base in the long-term.
Are you ready to learn more about how you can benefit from life insurance? Check out our Ultimate Guide to Whole Life Insurance. And if you’re ready to take the leap and get an illustration, book with us today to get the ball rolling.