Chapter Seven

Indispensable Economic Principles

Part 2: Velocity of Money, Continued

Here’s another way to see “velocity”, again the $15,782 car loan is the example. The payment is $320 month (including the interest, of course). Making that same payment to your own “bank” carries that interest to your “bank” instead of their bank. In itself, that is a wonderful deal. But, think of this: does your car payment to the credit union earn interest once it’s paid? Yes. But, it grows for them - not for you. Paid to your own “bank”, each loan payment begins to earn interest immediately... for you.

Then, add this powerful “velocity” factor: in twelve months, at $320 per month, you have restored $3,840 to your “bank”. It is part of the “block of money” that is already averaging 17.8% a year to your “bank” (instead of theirs) over the five year loan period. But, during that five year period, you can use it again – and perhaps yet again - to self finance another want or need, or you can invest it. It looks like this:  

This table measures what each $3,840 that is restored to your “bank” by your “loan payments” in a year will grow to if it is re-used or re-invested until the end of the five year period. (It assumes an 8% rate of return on each $3,840 for the balance of the five year period.)  

This is added value to the 17.8% financing costs that are being recovered. Do the math if you wish… we’ll just say it’s a really high total rate of return!

“Not having to pay 20% interest on a credit card is as good as earning 20% tax free, risk free - phenomenal.” Andrew Tobias, syndicated financial columnist.

To which we would add: turning money that would be paid out as interest into savings, and turning a stagnant pond of money into flowing velocity, can make you rich – or richer… not a bad deal either way. 

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