Originally published on Forbes.com
The old-fashioned financial world puts their faith in one formula: Wealth = Money x Rate x Time.
In other words, take money out of your own business and invest it in other businesses through the stock market. Or, you must take on more risk to increase your rate of return. Or, just wait it out—30 years or more—and given enough time you will be wealthy. (And, as they’ll tell you, “You really should have started saving earlier.”)
This is the accumulation mindset. And while the numbers are sound in a sense, the idea may be intellectually bankrupt in a world where most people live paycheck to paycheck. There is another way—a better equation. One that doesn’t focus on taking wealth out of your business and locking it away for 30 years, but instead focuses on exchange, value and the movement of your money, i.e. cash flow.
How to Build Wealth With the Money Velocity Equation
Most people are convinced they have to work hard today, grinding themselves to the bone, so that they can be wealthy and happy 30 years down the road. And this is a tragedy, because it’s just not so. If you stop thinking of wealth in terms of accumulation, and instead focus on cash flow, I believe you’ll actually end up wealthier in the long run—and you’ll live wealthier along the way.
Let me show you why using a new equation: the Money Velocity Equation. The Money Velocity Equation is simply your output divided by your input.
Money Velocity = Output ÷ Input
Here’s what it means. Maybe you’re putting in 40-50 hour weeks or longer, plus investing considerable capital to make your business work. That’s your input. The output is what you get for working so hard. And remember, it’s not what you make, it’s what you keep. So it’s how much cash flow goes into your personal bank account after taxes and other business expenses are considered.
(Don’t worry if you don’t know how to value in dollars how much work you put into the business. The equation is a concept more than a number figured to the exact decimal point.)
The secret to wealth according to the Money Velocity Equation is to increase your output faster than your input. To increase the reward taken out exponentially more than the effort put in. Or better yet, to increase your output without increasing the input at all. In other words, improving your positive cash flow without working harder, without investing more money, and without taking more risks.
And the best, fastest way I’ve found to immediately improve your cash flow without working harder is to stop overpaying the government, stop overpaying the banks, and stop overpaying wall street and big insurance companies. You can save tens of thousands of dollars per year just by doing these three things.
How to Stop Overpaying the Government, Big Banks and Wall Street
An internal study at Wealth Factory found 93% of businesses are overpaying on taxes. So it’s important to find an accountant who specializes in your area of business to see if they can spot any savings. If you already have an accountant, make sure that you haven’t outgrown them by getting a second opinion on your tax returns at least every three years—because that’s how long the IRS gives you to go back and amend past returns.
This can be very financially rewarding: we worked with one business owner who received a $102,000 check from the IRS for taxes he overpaid, and he saved ~$20,000 per year going forward. That’s $20,000 straight to output, without increasing your input.
I’ve personally benefitted from a ‘second opinion’ twice over the last 6 years, and collected two separate ‘rebate’ checks from the IRS totaling over $52,000. It wasn’t that my accountant was doing a bad job either. He was just working with the information I had given him.
I’ve also personally witnessed business owner after business owner improve their cash flow by taking a closer look at their loans. Sometimes it means consolidating several loans into one to get a lower minimum payment, and hopefully a better interest rate. Sometimes it means cashing out low-performing investments when you can get a higher return by paying off high-interest loans. And there are other creative strategies as well, such as refinancing equipment, cars or your mortgage at a low-interest rate to access money to pay off your high-interest loans.
It’s not uncommon for the business owners to free up $700, $800, even $7,000 per month or more just by restructuring their loans—and it all goes straight to output, increasing your personal Money Velocity.
And here’s a controversial point — what if instead of funding retirement accounts full of mutual funds using the old-fashioned wealth equation, you kept the money as extra cash flow and saved it to invest in your own business. Even a basic savings account can be a good place to put it, but there are places to put your money that earn a much higher return and still provide liquidity. Surprisingly, permanent life insurance can be a great fit if set up properly (when done right, we call this Cash Flow Insurance at Wealth Factory).
Now, instead of investing money in other companies that you don’t know, understand or control, you have money ready to invest in your own business where the returns are often the greatest—and you’ve increased your output without increasing your input.
Just by doing these three things you can boost your personal Money Velocity. It’s like going from making $200/hour to $250 or $300 per hour—without working harder, investing more money, or taking any more risks. And it’s immediate, you don’t have to wait for the long haul to start living wealthy today.
The Key to Growing and Enjoying Wealth
The old-fashioned wealth formula asks you to divert money away from you and your business, until 30 years down the road when you can finally, and hopefully, enjoy it.
But as an entrepreneur, you are your greatest asset, and anything that constricts or restrains your momentum slows down your personal Money Velocity—and thus your ability to grow and enjoy wealth. Instead, embrace a better wealth equation that works with your strengths rather than against them. Increase your personal Money Velocity and use the extra output to fuel what you’re best at: building wealth in your business.
