The Velocity Of Money And How It Makes You Rich

You probably first heard the term "velocity" in high school physics or watching a Top Gun movie.

Velocity is speed + direction.

When we are talking about money, the idea of the "velocity of money" is something people never really discuss.

The concept is simple. The execution is life changing.

Making $10,000 in a year is good.

Making $10,000 in a month is way better.

Why is that? Because time is a crucial component in terms of investments. 

The wealthy understand this. Here's how it works.

Time Is The Secret Ingredient To Getting Wealthy

Any bank, venture capitalist or investor worth a damn asks about the time horizon for their expected return on an investment.

If I invest $500,000 into this project and you're saying I'll get a 20% return, how long can I expect that?

• 5 days? It's probably a scam. 
• 5 months? I'm excited but need to know exactly how that will work.
• 5 years? I'll likely pass since there are better options to get my money back faster.

But its still 20% ROI! That's $100,000. You're going to pass on that?

In examples 1 and 3...yes. But I'd take option 2 if it made sense.

It's not about the amount of money. It's about the time it takes to get it back so I can reinvest it.

If I took the 5 year option, I could have potentially invested it 2-3x and earned 20% each time.

Here's some math on that.

Initial investment: $500,000 x 20% = $600,000 

Reinvesting it again: $600,000 x 20% = $720,000

That's $120,000 more than if I just made 20% one time in those 5 years.

That's why the "speed" or amount of time that I get my money back is so important.

Another way to measure velocity is by the amount of transactions.

Here's a question. Would you rather...

• Make 30% on an investment
• Make 3% on an investment 15x

Well, let's do the math using a $1,000 investment. 

• $1,000 x 30% = $1,300
• $1,000 x 3% = $1,030 x 3% another 14 times = $1,558

The second option is a total ROI of 55.8%.

If small gains can be made at a rapid pace, they can be very effective. 

The challenge obviously is always earning the same amount without taking losses, but its another way to think about the velocity of money.

Ignoring Time Is The Secret Ingredient To Staying Poor

Just as the rich focus on the velocity of money, the poor are the ones who ignore it.

They make excuses to do the basic, most fundamental things regarding their money.

"I'll worry about retirement when I'm older or making more money."

"I pretty much know my expenses. I don't need a budget."

"I'll invest in this thing and maybe it will double in value in 15 years."

"I'm just paying the minimum on my loans right now."

Low transactions. Slow speed. The direction is barely up or even down.

Beware Negative Velocity

Interest on your loans is an example of the velocity of money going down.

The higher the interest rate, the worse the velocity.

Your credit card is one of the worst examples of a negative money velocity.

High interest. Compounds daily or monthly. Easy to use = lots of transactions.

The Best Way To Track It

It comes down to a balance between assets and liabilites.

The best way to understand the overall velocity of your wealth and whether its in a downtrend or uptrend is to calculate your net worth every month or every quarter.

These data points will help you see clearly which way you are trending.

The faster the uptrend, the better.