The Velocity of Money (Revisited)

This lesson is really adapted from Robert Kiyosaki’s book, “Who Took My Money?” You might want to add this book to your reading list! He writes that the velocity of money is one of the reasons why the rich get richer while the average investor risks losing a large portion of their savings.

From Robert’s book:

As a professional investor, I want to…

1. Invest my money into an asset.
2. Get my money back.
3. Keep control of the asset.
4. Move my money into a new asset.
5. Get my money back.
6. Repeat the process.

There are two extremely important reasons why we should use the velocity of money to our advantage:

1. It significantly reduces our risk.
2. It allows us to compound income at a faster pace.

For most of us, money is a limited resource. We don’t have unlimited amounts of money to invest, so we MUST optimize the money we do invest. To optimize our investments as Cashflownaires, we arrange things so that our money earns recurring income.

The challenge then becomes creating AS MUCH recurring income as possible from the money we have to invest. The velocity of money allows us to optimize for cashflow by quickly expanding your financial resources.

When you pull your money back out of an asset, you’ve instantly expanded your financial resources and are able to use this extracted money to create more cashflow. On a high level, the velocity of money allows us to layer cashflow streams on top of cashflow streams.

Billionaire Mark Cuban tweeted: “People create wealth by owning assets that appreciate or create/earn other assets.” Stop and think about that for a minute.

It’s not about using your money to acquire more assets, which is how most people think as they constantly save more in their retirement accounts each month. Wealth flows from using your asset’s money to acquire more assets… from using your cashflow to buy more assets.

This perspective has the potential to change how you see investing. When considering a new investment, ask yourself how many new assets will this new investment acquire for my family?

When I was building my real estate brokerage, I taught a strategy I called “Homes Buying Homes.” I basically applied the velocity of money to single-family rental properties using rent to own programs.

Kiyosaki wrote:

“A professional gambler wants to be playing the game with house money as soon as possible. While in Las Vegas, if I had put my money back in my pocket and only played with my winnings that would have been an example of playing with house money. The moment I began betting everything, I lost the game because I lost sight of my goal, which is to stay in the game but to play with other people’s money … not my own money.”

When you come to a point in your investing at which you have gotten all of your money back and still own the asset, you are playing with house money. In essence, you’ve doubled your money (expanded your financial resources) because you have extracted your entire investment back out of the asset.

You can invest this money into a new income-producing asset. Your first asset is now earning new assets for your family.

Another way to use this strategy is to unlock the equity you have sitting inside assets you own. Equity is typically idle money providing zero return. One of my investment rules is to always…

FUNNEL ALL INVESTMENTS
THROUGH REAL ESTATE

I do this because the income from real estate can be used to buy new assets. Most people are making contributions to their company 401(k) plan. These contributions are paid, in most cases, directly out of your pocket. This money is now trapped in whatever funds are offered by your company’s retirement plan. The only way to use the velocity of money with these trapped funds is to borrow against your retirement plan.

Instead of trapping your money for 20, 30 or 40 years in a company-sponsored retirement plan, use your contributions to acquire income-producing real estate. Then, if you want, use the cashflow from your real estate to fund your retirement plan. This way, you’ll be using the velocity of money to your advantage.

By the way, is there a way for you to use the velocity of money on all of your other investments? You may need to use some creativity to come up with some ideas on how to extract your money back out of your investments.

One idea that many people use with real estate is to borrow their equity out of their properties. They’ll either refinance the asset, or they’ll create a second “equity” loan.

I used to be a big proponent of this approach and used it extensively with my properties before the big crash. It felt like I was getting my money out of the property using Kiyosaki’s approach; however, this isn’t actually what’s happening because you’ve got to pay this money back to the lender.

The equity you borrow isn’t YOUR money. It’s the lender’s money, and you’ve actually increased your risk instead of reducing your risk.

If that’s not bad enough, understand that this money you’ve borrowed is still tied to the initial asset and will negatively impact the cashflow of the initial asset.

When you extract your money out of an asset without the use of leverage, you completely disconnect the extracted money from the initial asset. The money extracted has zero impact on the return of the initial asset.

When the crash hit in 2008, I was way over-leveraged and almost had to file for bankruptcy. This was because I had previously borrowed the equity out of several of my real estate investments, incorrectly believing that this equity was my money. It wasn’t! This became instantly obvious when the market value of those properties dropped significantly. I ended up having to pay interest on equity that had vanished, creating a double-whammy.

As with most risky things in life, borrowing equity is very easy to do. Sign your name on a few documents and boom… you’ve got a large check. Just know that this large check has some painful strings attached and may not be worth it. Figuring out how to extract your money (or equity) from assets without borrowing it out is a little more difficult. It requires more thought and creativity. It also may require a great deal of planning! 🙂

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