THE VELOCITY OF MONEY

In discovering how money works in your life, you must understand the principle of the velocity of money. Everyone from the government, banks, financial institutions, and the average-American consumer desires the velocity of money because it is needed to achieve their financial goals. The definition of the velocity of money is simple. Money, without movement, will not increase and accumulate more value. The velocity of money and the institutions that rely on this process will impact your personal financial life more than you can imagine. The movement of money or lack of it can influence taxes, interest rates, rates of return and inflation.

If you were to dig a hole in our backyard and bury a thousand dollars, what would be the value of that money if you dug it up 10 years later? Since it had no velocity or movement, it did not grow in value. In fact, it may have lost value or buying power due to inflation.

Businesses rely on the velocity of money for their profit margins. They sell goods at a profit and invest that money into more products. They follow this process over and over to create more profits. Without velocity, businesses would suffer, and profits could fall, and businesses fail.

The banks are the kings of creating the velocity of money. According to government reports, a bank spends a dollar an average of five and a half times. They take the money Grandma put into her CD and lend it to someone for a car loan and then they take the payments from the car loan and lend the money out for the home-improvement loan. This process continues for about five transactions. With each transaction, interest is paid to the bank, which creates their profit.

By understanding how a bank creates the velocity of money, it becomes clear why banks and lending institutions urge you to make additional monthly payment. These businesses understand one thing: money will never be worth more than it is today (buying power), and the faster money comes in, the faster they can spend it five times. Much of the marketing from these financial institutions emphasizes the importance of paying off your loans as soon as you can. Everyone would love to be debt-free, but at what cost to your buying power?

The banks and lending institutions clearly understand that money will never be worth more than it is today due to inflation, and the velocity of money creates wealth for them. They are in a win-win situation. They can collect money from you via extra or additional load payments and spend that money faster or collect interest and principal payments as they come due. Having a process that enables you to spend a dollar more than once is the definition of velocity of money. Once again, this process is completely different than simply getting a rate of return on your money.

There are, and can be, unintended consequences in trying to create the velocity of money. If money doesn’t move, problems and possible failure are not far behind. When the U.S. Government faced a crisis financially, their solution was simple. The government understands it receives revenue through taxation, which is compounded when people spend money (taxes) and businesses, but products (taxes) and manufacturers make more products (taxes). Wages are paid (taxes) and employers hire more people, and the velocity of money becomes a windfall for the government.

So, the government’s solution to any financial crisis is to put more money into circulation using banks and other financial institutions. Hundreds of billions of dollars have been released by the government through the Federal Reserve. What you must understand here is that the Federal Reserve is not part of the Federal Government. The Federal Reserve is the banking system in the United States. So, when the Federal Government borrows money from the Federal Reserve and the reserve prints the money lots of it they then distribute that money to their own Federal Reserve Banks.

In essence, the government borrowed all this money from the Federal Reserve who, in turn, gave it right back to themselves (banks), leaving the citizens of America of the hook to pay back the load plus interest, to the Federal Reserve. Phew! What a mess. But what happened next in many of the government financial bailouts created a circus of errors. After receiving billions of dollars from the Federal Government through the Federal Reserve, the banks and financial institutions sat on the money.

That money did not move, and it failed to create velocity. The government was relying on velocity of money to increase revenues that would help support all their social programs along with the everyday expenses of the Federal Government. Without the velocity of money, the government now faces unsustainable debt and unfunded financial commitments. The only real solution the government has left is to reduce benefits of their social programs and/or increase taxes far into the future.

The government believes in the velocity of money. Circulation of the money creates revenue for them every time a dollar is. In order to pay its expenses, every dollar they print needs to be involved into two thousand transactions that would be taxed 3% to 4% on every exchange. If the money doesn’t move fast enough, it simply creates more debt. More debt by the Federal Government means more taxes you and every citizen must pay far into the future.

Creating the velocity of money your personal life is an important factor in preparing your financial future. Once again, traditional thinking continues to feed the problems in your financial future (TAXES, RISK, PENALITIES, INFLATION, etc.). It doesn’t solve the problems in your future. The reality is that in order to solve the problems, you must first understand the problems.

It is very important to pay attention to what the government is doing. This is where trends and shifts are created. The government’s actions directly impact the banks, financial institutions, inflation, taxes, the value of the dollar, interest rates and rates of return far into the future. Your personal financial success is directly related to these issues. Your ability to save, plan and retire will be challenged by the actions of the government. As always, the goal of our discussions is to encourage people to think, not simply to be told what to think. Being told what to think is devoid of ideas and creativity. Focusing on how money works in your life and the velocity of money will become the center point in helping you to solve the problems in your financial life

SOMETHING OUT OF NOTHING

If I am addressing a group of people, I will ask someone to lend me $20. Someone is always kind enough t obliges me, and I tell the rest of the people to get out their wallets and purses because we are going to play an exciting game. I will hold up the $20 that I have just borrowed and sell it to the first person who can give me a $10 bill. This exchange usually happens rather quickly. I ask the person who just purchased $20 for $10 how he feels. His response is usually favorable. Now I am holding the $10 bill, and I would like to sell the $10 for a $5 bill. This trade also takes little or no time to accomplish. I ask that person how he feels. Hey typically feels pretty good also. Now I will sell the $5 bill I have from that transaction for $1. This happens quickly because everyone is beginning to understand how the game works. I am left holding a $1 bill, and I ask, “Now that our know how to play the game, I have a pocketful of $20 bills – would you like to play again?” Of course, everyone wants to play again because now they understand how to play the game. I will then take the $1 bill I have left and return it to the person I borrowed the $20 from and ask him how he feels. Not very good, right?

I note that I gained three new friends at the expense of one. Now I ask, “Where is our big winner?” Usually, the person who bought the $20 for $10 jumps up. Wrong! You see that person did well but only doubled his money. The person who paid $1 for $5 did much better: he received five times what he paid.

What is more important in this lesson is that three people learned how it felt to be the bank, buying, and selling money. They all felt pretty good and made good money. They all realized it was easy to do once they understood how to do it. After learning this lesson, they all wanted to be in the banking business.

On the surface, they all understood the lesson I presented, but they needed to go one step further in their thought process. The real lesson is how banks and lending institutions are distributing $35 (a 20, a 10, and a five) for $19 ($20 borrowed and had $1 left) and collecting interest on the $35 from the $20 that was not theirs in the first place. They have created something out of nothing. The velocity of money and interest collected pay for the $19 they borrowed and much, much more. Every dollar collected by a bank has a future value attached to it.

Unfortunately, most of us are caught up in the other side of their game paying interest. Unknowingly, many people are so caught up in debt and interest payments that it is ruining their lives. Their ability to use “today’s” dollars, which have the most buying power, is gone because those dollars are going to someone else.

LUC

Another aspect of the $20 lesson is that the people who had Liquidity, Use and Control (LUC) of their money were able to take advantage of an opportunity when it came along. They had the money to buy the $20 for $10, $10 for $5, and the $5 for $1. All too often, people have all their money tied up in other areas. They have prepaid this or overfunded that, to a point where if they need money for a real opportunity, they have no money to take advantage of that opportunity. Ask yourself a question: “How often does opportunity knock, and how long will it wait for me?”

LOC

As for the poor person I borrowed the $20 from in this lesson, he suffered a “Lost Opportunity Cost.” Not only did he lose 19 of today’s dollars, but also the ability to earn money from the $19, forever. On a daily basis, many people transfer wealth away when they also lose the ability to earn money on that money into the future, which negates any opportunity to create velocity of money in their lives.

If you would like to have a conversation on how I can help you:

Increase your cash flow and money supply during your retirement years.
Eliminate market risk and brokerage fees.
Protect your assets from Long-Term care depletion.
Reduce your tax liabilities.
Create tax-free income while creating a family legacy.
Never affect your current lifestyle in a negative way.

And, if you would like to know how we accomplished all this without you spending one more dollar than you are currently spending, call me and let’s have a conversation.