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wealth growth

The Four Challenges to Building Wealth: Velocity of Money

As we continue our series exploring challenges to building wealth, we need to introduce the concept of velocity of money. In personal finance, the velocity of money refers to using your funds to build wealth more quickly by getting your money to do more than one thing at a time.

This is a well-kept secret of the financial industry and one that can transform your relationship to your personal finance.

How Can I Use My Money Now?

Accepting the status quo is not going to help grow your money and efficiently organize your personal finances. You’ve got to ask yourself “how can I use my money now to make things better down the line?”

Much of our culture and advertising is devoted to making you chase the “next great thing,” the next bit of instant-gratification, and that next hit of dopamine. While pervasive, it’s not a sustainable model for your life.

Choosing to embrace the following behaviors now while delaying those small bits of gratification will make your future life much more enjoyable:

  • Pay down debts
  • Build an emergency fund
  • Invest in your future
  • Invest in yourself
  • Save for retirement

Those choices may not offer the immediate reward promised by so much of our flawed, impulsive human nature and the marketing campaigns designed to take advantage of it. But in the long run, those small changes now will have a big impact on your life.

The Magic of Compounding

The reason why your choices today have a magnified impact on the future is because of two things: Lost Opportunity Cost and Compounding.

A dollar invested today has the opportunity to compound over and over through the years, building its overall value. You shouldn’t underestimate the awesome power of compound interest; If you’ve ever struggled with high interest credit card debt, you know how the momentum of compounding can build.

Turning this principle into a positive is why we stress the idea of “time in the market” rather than “timing the market.” Building your wealth is a process, and compounding can work for you if you consistently make intelligent choices over time.

When to Refinance Loans

If you’ve taken out loans, you’ve likely received countless direct mail advertisements for refinancing programs. While these seem like a great way to lower your payments, you must be cautious when evaluating them. Many come with early repayment penalties and fine print rules that heavily favor the program and lender rather than you.

If you have a loan you’re looking to refinance- such as your mortgage- look first for ways to remove your private mortgage insurance (PMI) after you’ve built 20% equity or more in the home. You can also look into ways to change your repayment term so that you can pay loans off sooner and save yourself thousands of dollars in interest. Any time a loan term can be updated in your favor it’s worth exploring new options. Just be sure to evaluate the entirety of your new solution and not just the face value of the monthly payment.

Make Your Money Work Harder

The real way to build wealth and increase the velocity of your money?

You have to be as demanding of your money as you are of yourself.

Are your investment and savings strategies underperforming? Update them. Is accelerating interest of outstanding debts hurting your overall quality of life? Rebalance your strategy to pay off debts sooner or explore refinancing options to ease some of the burden. Personal finance is complex, but solving issues can be as simple as acknowledging a problem exists and then finding a workable solution to that problem. We’ll discuss visibility and organization in our final post in this series, but know this: accepting lackluster performance will lead to a stressful and lackluster financial life.

Ready to learn how we can help you increase your money’s velocity to build wealth quicker and more effectively? Complete this questionnaire to see which Jarred Bunch Consulting service is right for you.

The Four Challenges to Building Wealth

If you’ve set up automated deposits, selected an investment mix, and have a general awareness of your overall financial status, you’re doing well. This is especially true when you consider the huge number of Americans who have under $500 in savings and don’t track their spending.

Unfortunately, there’s a lot more to growing your wealth than setting up these healthy behaviors. In fact, there are four distinct challenges to building your wealth and overall financial wellness. We’ll take deep dives into each of these factors in the coming weeks to help arm you against these threats to your wealth building strategies. Today we’re offering up a preview of the posts to follow as part of our four part educational series. We’re hoping you tune in and learn along with us each week.

The very real threats staring down your personal wealth include:

Lost Opportunity Cost

You might think that if you spend one dollar, you’ve effectively lost one dollar, right? Sadly, it’s not that simple. If a situation arises that requires you spend money you would normally save or invest, you’ve lost more than just that amount of money- you’ve given up what that dollar could do for you in the future.

Whether this spending comes from unexpected bills (like medical expenses or emergency car repairs) or from impulse spending (we all remember Cyber Monday), the outcome is the same: you’ve traded the future growth potential of that dollar for the use of it right now. In our deep dive, we’ll look further into how to measure lost opportunity cost, the role of volatility in assessing it, and how to use these measurements to make decisions about your finances and life.

Rules of Financial Institutions

When is the last time you read your bank or credit union’s service agreement? Do you know the steps to take if you want to close your current checking account and open one elsewhere? There’s a reason why the fine print is small and difficult to discern; hidden within service agreements and fine print are many policies that make your money work harder for the institution than it does for you. It can be difficult to disconnect from your current bank’s ecosystem. They want to ensure that while your savings account earns 0.01% interest annually they can loan your funds to a credit card user and charge them 27% APR.

In our examination of financial institutions’ rules, we’ll reveal how they make it difficult to use your money, how to find a more beneficial partner, and ways you can use banks’ approach to finance to guide your own wealth management strategies.

The Velocity of Money

Velocity is the speed of something in a given direction. While “the velocity of money” is typically used by economists studying the GNPs of different countries, it also applies to your personal finance. In this setting, it means how you get your money to do more than one thing for yourself at the same time. Whether this means opening a higher-yield savings account to hold your quarterly payments for freelancer income taxes or refinancing your mortgage to remove a PMI and expedite your amortization rate, figuring out a way to make your finances work harder and faster is key to your financial health.

In our dedicated blog post we’ll further explore the velocity of money, its potential impact on your financial wellness, and ways you can adopt financial institutions’ strategies to make your money work harder.

Financial Organization and Coordination

You can’t build what you don’t know. It’s not enough to be aware of your finances – you have to aggressively coordinate and organize your money so that it moves and grows in a productive manner. This topic is one of the largest stumbling blocks for the general public – our financial systems mean ignorance is bliss for many. But taking time to organize your money and enact a strong plan will empower you and remove a lot of the stress associated with personal finance.

We’ll look into ways to organize your funds, why you should treat your household’s finances like a business, and how to get over the initial fear and pain that comes from discovering where your money may have gone wrong.

Wrap Up

The short story? These are in no way simple challenges to tackle. But taking the steps to empower yourself through this learning will put you on the path to building your wealth and improving your overall financial wellness.

Ready to tackle these challenges together? Complete this questionnaire to help us better understand what value we can bring to your life. It’s time to start making your money work for you.