Do you understand the power and velocity of money?
Do you borrow money to buy real estate, invest in businesses or buy companies? Or do you borrow money to buy furniture, TV’s, cars and other items like boats or jet skis that you don’t really need?
Your answer to that question will tell me a lot about your attitude towards money. If you have a scarcity mindset then you probably live on a budget like most people do.
If you have a fixed paycheck then you know how much money you make, and you know what you can afford and how much money is left over after paying bills (for most people not much at all).
The problem with living this way is that if you want anything out of the ordinary then you have to borrow money in order to get it. If you need a new couch or TV and you can’t afford it then, if you are like most consumers you will borrow the money to purchase the item as long as you can afford the monthly payments. With this mentality, you will put a much needed vacation on your credit card. You will purchase that wedding gift on a credit card. and you will upgrade your TV, couch and other items in your home when you can borrow the money from the company that sells those items.
If you make your payments on time you will have good credit. And why shouldn’t you? Companies love you since you always pay on time and you pay a LOT MORE for an item than another consumer that walks in to the store and pays cash. If your motivation is low or no interest then stores will cater to this by increasing prices and waiving interest payments for the first year or even two years (many furniture stores do this). Instead of shopping for the lowest priced furniture you will shop for the furniture store that offers the lowest interest rate. That is how those big furniture stores make all their money – by understanding this.
While you might sleep well at night with your good credit report, I am here to tell you that if you are living your life this way then you are well on your way to being broke. Really, really broke.
Why? because your whole life, your whole system is dependent on that paycheck. If that paycheck ever stops, if you lose your job or become disabled then you will find yourself with a huge pile of unpaid bills and car payments. And if you own a home there is a good chance that you will be facing foreclosure and in the process will ruin that perfect credit.
And all of that stems from one thing. Not understanding the Power and Velocity of Money. You see borrowing money to buy depreciating assets like furniture, TV’s cars and boats is a very, very bad idea. The reason for that is quite simple. You are not getting a return on your money. In fact, as time goes by that furniture, TV or car is worth LESS not more. But yet you are still stuck making those payments.
Compare that to a 30 year fixed mortgage payment on a rental property where your payment stays the same. For 30 years, your monthly payment for your mortgage does not change. But yet you can consistently increase your tenants rent by 3 to 5 % per year. Over time your money will be working for you. And over time that asset that you purchased with borrowed money will be appreciating in value. And while it is doing all of that it will be giving you tax deductions for interest, taxes and depreciation which will reduce your taxable income. If you borrowed money to buy rental properties then your borrowed money would be hard at work for you, increasing your cash flow and your net worth every single year. And 30 years later you would own the property free and clear with no mortgage payments. At that point the rental income would be retirement income or savings that you could invest.
If you really understood the power and velocity of money then you would use that perfect credit score of yours to it’s true advantage. You would learn how to borrow money to buy assets that appreciate like real estate or businesses. If you have a full time job and don’t want to buy a business then the best asset for you to buy is real estate since it is not that time consuming. and within the niche of real estate, single family homes and small income properties are the easiest and most affordable investments to get into.
If you have good credit you should establish lines of credit against your home. Establish a business line of credit. Learn how to borrow money to invest in assets that appreciate like real estate.
Buying a single family home is not that difficult. If you currently rent you can purchase a single family home with as little as 3 1/2 percent down with the Federal Housing Authority (FHA) loan program. If you already own a house consider getting a line of credit on your house and using that money to purchase your first rental property.
By understanding the power and velocity of money you will have your money working hard for you instead of finding yourself working hard for your money.
Think about what your bank does with YOUR money. You give them your savings and they pay you a nominal interest rate of less than 1 %. What do they do with YOUR money? They loan it out to people that need to borrow money to buy a house or start a business at much higher interest rates.
What the bank does is use YOUR money to make themselves MORE money. Clearly the bank understands the concept of the Power and Velocity of Money. Make sure you understand this concept too.