In the podcast:
01:20 – Why this topic might interest you. Do you want a good life? Financial freedom? Consider what wealth means to you.
03:47 – Wealth, choice and habits. When it comes to wealth building, you may have more choice than you believe.
05:30 – What is the velocity of money? The old practice of squirreling it away isn’t the best option.
08:20 – Various stages of income. Here’s how different people approach money-making.
12:49 – Wealth-building and timing. Time is of the essence, especially when building wealth.
14:16 – What do the wealthy people do? There’s a reason some people are wealthy and others aren’t.
17:14 – Measuring money’s velocity. How fast is your money moving?
19:54 – Should you rely on financial institutions? Here’s what the banks would have you believe.
21:40 – Creating movement for your money. How far can 100K go?
25:43 – Playing with other people’s money. Now there’s nothing to lose.
In this episode, our repeat guest is wealth coach Salena Kulkarni, back to speak more on wealth building, and in particular on the concept of the velocity of money.
Before diving into the topic, James makes it clear that neither he nor Salena are giving financial advice. What this is is a general discussion on wealth building that may be useful to listeners, who afterwards can seek their own financial adviser for more qualified guidance.
Why this topic might interest you
As mentioned, this is not James and Salena’s first episode together, so if you’d like a listen about the foundations of wealth building, you can check out episode 850.
Now if you’re a business owner like James, you might be interested in wealth because after all, part of the reason people get into business in the first place is they want to create a good life for themselves. And James has found life can be better with money and with other types of wealth.
You can get wealth from freedom. You can get it when you are able to do things that satisfy your soul. You can be rich in family, if you spend time with them. Whatever wealth means for you, this episode will give you some solid foundations you can think about and perhaps explore with someone qualified.
Since Salena last came on, she’s gotten clear on who she helps with wealth building. And with the shift she’s got a new website, inkosiwealth.com. What does inkosi mean?
Inkosi, says Salena, is the KPI in her world, the key metric for measuring success. It refers to how much passive income you have accumulated as a percentage of your baseline goal. People can, of course, be touchy about sharing their numbers, so inkosi is the great equalizer.
Whatever your aspiration is, say a six-figure or eight-figure passive income stream, the inkosi metric of what percentage you’ve achieved of your ultimate goal lets you share it openly. And as for the word itself, inkosi is the Zulu word for tribal leader. Because the ultimate goal of wealth is really about impact or influence.
Wealth, choice and habits
Too many of us, says Salena, are trapped in the work we do, and think we don’t have a choice. So the dreams and aspirations and impact we want to have in the world go unexplored.
That would apply to a lot of people, says James. But one thing he loves doing is showing people they do have a choice. He did this in fact with a recent guest, Lloyd, who went from pressured employee to a happy owner of his own business.
“We have a lot more choice or control than we think.”
And what’s true of career is true of wealth-building. We have a lot more choice or control than we think.
If your money is in a bank account accruing the .001 percent or whatever low amount it is, you may be making a choice that you think is secure and conservative. And it may go back to the preservational mindset of your grandparents or the builder generation.
But those habits could actually be damaging, because there are many other things you could do with your money that most people just aren’t aware of.
What is the velocity of money?
So what does the velocity of money actually mean?
Salena starts by describing the problems she’s seen around wealth building.
Many people, business owners, especially, think they have all the time in the world to think about building wealth. And so she’s seen people work hard to make money and their businesses, just to let it stockpile sit in lazy assets. They don’t do much around converting it into wealth.
Traditional wisdom says we should save our money in things like managed funds and shares and hand over decision-making to someone else. And we are sold the idea that compound interest will get us to the finish line.
We’re told to trust in investments that will deliver you what you need, when the time comes. And the average Joe thinks getting to the right wealth amount by 65 years is okay. Meantime, hope the people managing it don’t mess things up.
So many business owners have put blind faith in investments, and have a huge reliance on just the income stream from their business.
Salena loves the idea of the velocity of money because it means, if you have your eye on the ultimate prize, which is autonomy, you’ll see there are much more effective ways to fast track wealth building.
A business is a mechanism for building wealth, but it’s a vehicle for greater freedom. So we can bring energy and cadence to our investing that will actually direct our wealth, and then age becomes an irrelevant factor when it comes to financial freedom.
We can design our exit and step off whenever we choose, or have the impact that we want. But effectively, velocity of money is about how quickly and effectively we can take $1 and put it to work not just once, but over and over and over again.
Various stages of income
We’d be talking about an enlightened group, says James. Because there are at least two stages before that that he can think of. There are people who don’t work at all, and are on benefits. And then there are employees. And most of them may not have a surplus by the time they retire.
Then there’s the business owners. They’ve accepted the risk and responsibility of employing people, of earning revenue and contributing back into society with wages.
And then there’s the stage when they can ask, Aside from putting me and my team to work, why don’t I put my money to work? When there’s actually a surplus, the question is how to make money work for you.
This is a muscle most people have not developed. Others are brilliant at it. With even an average income job, you can build quite a wealthy portfolio if you start early enough, and have the right information, and are into the right assets.
Wealth-building and timing
We’ve established a case, says James, that we should get into wealth building as early as practical.
Yes, says Salena. Take, for instance, Warren Buffett. Buffett is currently worth about 84 point something billion. And what most people don’t know is that most of that, 81 billion out of that 84 billion, he only made after his 65th birthday.
Over the many years he’s invested, he’s averaged about 22 percent per annum. So no question, he’s a good investor. But his real secret has been time. Warren Buffett started investing when he was 10, and he didn’t retire.
And he’s got a Charlie Munger, says James.
He does have a Charlie Munger, says Salena, absolutely.
That’s Salena’s role, James says, for the people she’s helping. She’s got the mental models and the contacts, which is a huge part of what she does.
What do the wealthy people do?
It’s like Peter Drucker taught about business – it’s about doing the right things. You need the right contacts, and you need to know what really wealthy people are doing, the sometimes boring stuff you won’t hear about in general conversation.
Salena agrees. Relationship capital, for her, is the new gold.
But circling back, there’s that running joke of Einstein’s, that compound interest is the eighth wonder of the world. If that’s true, says Salena, then velocity of money is the ninth wonder.
“It’s our biases that either swing us towards or away from specific investments.”
Now, intuitively, people understand velocity of money as a concept. But there’s a disconnect between the actions you take and how you think about something. It’s our biases that either swing us towards or away from specific investments. Take crypto. Some people will get into it led by the return they think they can get, without bothering to understand the fundamentals.
That’s right up there with betting on a horse race, says James.
Measuring money’s velocity
Now when you talk of the velocity of money, says Salena, it’s simply a reference to how many times a single dollar changes hands. But there’s actually a couple of ways you can measure it. If you’re in an economy, for example, where there’s high velocity of money, the perception is that it’s a very healthy economy. People feel good, and they’re spending money.
In business, consider a shop that sells widgets. The goal of the shop isn’t to buy the widget, but to buy the widget and sell it and restock the shelves over and over again. That process of turnover is what we call velocity.
The business owner knows they’re not in the business of accumulating goods. They’re in the business of creating velocity. Unfortunately, the typical baby boomer was taught to squirrel, and save, and pay off debt, and invest for the long haul.
It was the builder generation before them that would have imprinted that, says James. His grandparents really valued when they could hang on to something; they had oldschool doctrines. But this was pre-internet.
The internet changed a lot. It allowed anyone to have a business and succeed quickly without going to university or working their way up through apprenticeship.
And what James thinks Salena is saying is, there’s going to be a lot of changes with things like inflation, and some of the vehicles where we used to park our money will get left behind.
Should you rely on financial institutions?
That’s a good seque, says Salena. Financial institutions in particular teach one thing, but they practice another. Accumulate your money on our shelves, they say. Stack your goods on our shelves and don’t touch them.
That’s so true, says James. He knows of an investment bank with high-profile clients, who pay someone to do Forex trading for them. He makes them about an 80 percent return month on month with Forex, and they pay out their clients around 15 percent. They pocket the rest. And they pay their regular savings account clients around one percent.
Banks rely on us to believe our money’s there, says Salena, and we can withdraw it any time. But she thinks we need to start thinking more like banks, because the banks’ returns aren’t based on the percentage they charge us. They make money by working out how many times they can take the same dollar and lend it to as many people as possible.
Creating movement for your money
That’s the banks’ version of velocity of money, even though they’re telling us to stack our money on their shelves. So if we were to think like a bank, and look at our other opportunities, what we’d really be trying to work out is, how do we create movement and gain multiple uses of our money?
Imagine you have $100,000. You could stick that into the bank, and just get simple compound interest at five percent. If you took that 100,000 now in five years, it would be, say, 137,000. That’s the lowest level of velocity.
Now add a bit more velocity. Say you took that $100,000 and put it into an asset, which could actually compound. You can borrow from the bank and buy, perhaps, a house. That should be, says, half a million dollars. And in five years, that larger asset has compounded with that extra velocity. It’s now worth something like 638, over five years.
But let’s add even more velocity. Let’s say at the end of each year, you took whatever money you’d make, and put it into a cash flowing asset at five percent. Same thing – you take that money, buy the house, and then each year, for some reason, the banks will let you take that off the table and put it into a five percent yielding bank account. At the end of five years, you’d have $785,000. So you’ve made 175.
Now finally, if you took that $100,000 and bought not only one leveraged asset, but at the end of every year, used your gain to buy another leveraged asset, then you’d end up with 1.245 over five years.
Obviously, says Salena, the banks won’t let you pull that money off the table every year – they’re just not inclined. But there’s a lot of value in just understanding the simple math.
So does velocity of money simply mean reinvesting, James asks?
It’s about turning over the same dollar, Salena says. So if you put $1 in, how do you get it back out and then put it into something else?
James did that last year with Bitcoin, over and over again, and got slugged with capital gains tax.
There’s that. And so Salena’s example presupposes a perfect world. But there are key learnings that people can take away and apply.
One is, the velocity of your money is what will determine the size of your wealth. Second is, the more you leverage, the faster you will be able to reemploy your money, and the faster you’ll be able to build your wealth.
Playing with other people’s money
Leverage is really just compound interest using someone else’s money. And that’s not to say you should always leverage it. It’s just a principle of wealth building, but to be an investor, you need to receive money, and invest it forward.
“Once you’re playing with the house money, there’s nothing to lose.”
Once you’re playing with the house money, there’s nothing to lose. Professional gamblers know this, and Salena does not advocate gambling at all, but once they’re playing with house money, and have their own money back in their pocket, they can get creative.
Professional investors who get their money back and then use the cash flow from their investments to make further investments understand the same thing.
Last year, says James, he traded US stocks, and doubled his money. He took the original capital out, and played on with the profits. So he wasn’t worried from then on – the whole thing could melt to the ground, and he wouldn’t have lost his initial capital. It’s a good strategy.
So the takeaway from this episode, says James, is that you want to start building your wealth muscle early. You want to get that money working for you, just like a bank would, and put it to work. Don’t let it sit around.
Just a reminder, nothing discussed here is to be taken as advice. James and Salena are talking in general concepts and about their own practices, in the hopes of sparking your interest in your own wealth building.
If you want to get in touch with Salena, the easiest way is via email, [email protected]. She’ll be back for more episodes, so if there’s a question you’d like covered, email her or James.