The velocity of money is a basic Economics concept.
The velocity of money refers to the speed that people use the money to buy goods and services in the country.
The definition of the velocity is the number of times a dollar is used to buy goods and services in a year.
If you use a dollar to pay the doctor for the cough mixture today, and he uses it to buy the canned drinks. You have started the velocity of money. The shop owner can use the dollar to pay for newspaper. The newspaper delivery boy uses the dollar to buy catfood. The cat food owner uses the dollar to pay for his gas. The gas operator saves the money in the bank.
Once the money goes into the bank, the velocity of money ends. If you count the number of times the dollar is used, you will get the velocity of money.
However, in personal finance, when we talk about the velocity of money, we are talking about how fast the money can generate more money for you.
If you have $1000 sitting in the bank, and receiving a miserable interest of 2%, you are not going to get rich. You have not used the concept of the velocity of money to work for you.
If you used the $1000 to buy share in the stock market, you have started the cycle of the velocity of money.
If you sell the share for $1200 a week later, and use the $1200 to buy another stock, you aregenerating more money.
That is how the velocity of money works. Once you have a few profitable trade, you will double your capital.
That is how the rich get richer while poor get poorer. The rich are constantly moving their money from this investment to another investment.
They are making sure that the money does not sit in the bank and earn just the miserable low interest. They want to move around to make even more money.
Are you using the velocity of money to your advantage? You can get rich if you use the velocity of money concept properly.
Before you start any form of investment, make sure you have enough financial knowledge. You want to invest and make money wisely. You do not want to make stupid decision or ignorant decision and lose money.
The concept of the velocity of money works only when you are skilful enough to apply it.
If you are not knowledgeable about investment, then let the money sits in the bank. At least you will not lose the money.
Scheng1 is a passionate blogger from Singapore. Rich in every sense reveals my deep desire in enjoying life, and be rich in every possible ways