Exploring elements of the Perpetual Wealth Code you can leverage to grow and protect your wealth – Volume of Interest, Velocity of Money and Free Cash Flow.
Tom: Welcome to Wealth Talks where we talk about solutions, money and other things that create wealth in your life. John, here we are back in the studio again, going through this list of what people wanted us to talk about on the podcast. We’ve gone through 9 or 10 of them and now we’re to one that really needs to be coupled with another.
Velocity of money, really needs to be coupled with velocity of interest. So we are going to cover two today. We’re going to differentiate what velocity of money is and how that differentiates from free cash flow because although it can be considered part of it, it’s the free cash flow that allows you to take advantage of the velocity of money.
John: Yes, so there are two things. Because we are talking about velocity of money we also need to understand volume of interest. An easy way to understand volume of interest is to take a look at a typical loan. It can be mortgage loan that lasts anywhere from 15-30 years or we can look at a credit card that lasts a long time, any type of loan that you look at.
That loan that you have, there will be a principle amount which maybe even or it may fluctuate and you have some sort of payment string that’s required on that and an interest rate. That’s generally called the APR, the Annual Percentage Rate but that percentage rate does not represent the true volume of interest. If you look at a mortgage over a 30-year period of time, if the APR (the Annual Percentage Rate) is only at 5% you can easily end up paying close to 50% of volume of interest.
John: That means over those 30 years as you make the payments about 50%, 50 cents of every dollar that you pay making payments, goes toward interest.
Tom: Years ago John, there was an example that I read and I shared when we had our radio show there in Salem. It was about a credit card that had an 18% interest rate that had a $10,000 loan balance and you paid the minimal payment to pay it off. Over the course of paying that loan off it took like 35 to 40 years, I’m not sure, I’ll have to go back and look at it, but the interest that you paid on that was like $60,000 during that time period. On a $10,000 balance you had $60,000 of interest, that’s a huge amount of volume of interest.
John: It sure is.
Tom: And that’s the interest that we’re talking about.
John: Yes. So, volume of interest is usually much higher than the Annual Percentage Rate unless you’re going to pay off the loan in a very short amount of time.
John: As we consider volume of interest, that’s the type of money that we want to be recovering as we use the perpetual wealth code to self-finance things. The volume is going to be what makes a big difference; it’s going to be the start of a big difference.
Tom: I used to tell people that, think of a tire on your bicycle or your motorcycle or your car. Does it really matter how quickly the air gets into your tire? Or does it matter how much volume of air you have in there to keep the pressure up?
John: Well, it matters what volume when you are driving it. If you’re standing there filling it up, you’d like it to go in quickly too.
Tom: Yes, but we can use a bicycle to pump up all three of those tires and we can get the volume that we need. But it is the volume that is critical.
John: Yes, very much so. So then, when we switch from volume now to velocity of money which is the second step. Now we’re talking about how quickly that air gets in there and how quickly it circulates. And we’re talking about our money management system. How quickly are we circulating the dollars, recovering the volume of interest over and over again?
That becomes very important because for example, here’s an example we shared on our webinar here a while back, where you have $20,000 in your life insurance policy cash value. So, you take a policy loan using those cash values as collateral and you put the $20,000 to work in your life. You might use that to pay down a credit card that’s charging you 17%.
Will you start redirecting the payment you were paying to the credit card company coming back to you? That’s $500 a month, so six months down the road you have $3,000 back that you have recovered on that credit card. What can you do to the $3,000 now to get that money put back to work? So, you have the velocity of money working for you, you don’t have to wait until the whole loan, that’s $20,000, to recover.
Tom: Because you are paying it back to yourself instead of someone else, if you’re paying it back to someone else you might not be able to afford to be able to leverage that money again but because it is now under your control, you can. To a certain point.
John: Yes. To a certain point. There’s a limit. We’re all limited by time as human beings. If we could use that $3,000 again in the next six months, say we recover 10% on a business purchase that we need to make by paying it all in advance and maybe we pay that back for $500 a month over the next six months, and then we use the result of that to pay the $1,000 of interest that’s still on the policy loan then go finance a vacation for $5,300. Now we’ve used that money three times in a year.
Tom: Well, John that’s why the velocity of money is what allows us to help people that are in credit card debt or other types of debt, allow them to get that debt paid off very efficiently and rapidly and still then have something left over instead of just being debt free. When that $3,000 comes back, if you’ve got an outside debt, you could use that $3,000 to pay down that debt and now you’ve saved yourself the volume of interest you’re going to pay the other credit or you can direct that volume of interest back to yourself again and that speeds up the process of eliminating debt.
John: Yes, very much so. And it speeds up the process then of financing business ideas once we’re out of debt. People often come to us and they say, well once I am out of debt then what?
John: You simply transfer that, first of all into business ideas that you already know about. Things that you know you can improve your service to other people to make more money. You can certainly include outside investments, but we have to remember that those types of investments carry more risk.
Tom: They do.
John: How much do we know about them? Is that really where we should start?
Tom: One thing that we are seeing more and more of is that parents are being able to use their cash value life insurance to finance their children’s education. Now, they can set the volume of interest and the velocity of money up instead of having a third-party payer do that. Because these student loans are anywhere between 7 and 9% now, and someone else is determining when those payments have to be made, and what they have to be made, usually based on what the student that has graduated and now working is making. So, a parent can do the same thing and give their child a lower monthly payment to increase their free cash flow but allow the volume of interest coming back to them to be greater and so the velocity of money now is working for them, for their retirement maybe and then when everything is said and done guess who gets all the money back they paid mom and dad?
John: The child.
Tom: There’s the death benefit, and typically children outlive their parents. This is the way to perpetuate wealth to the next generation. It didn’t have to be a student loan. It could be a down payment on a house. It could be financing a new car for their children or a vacation for their children. There’s all kinds of ways to put this into practice; you don’t just have to own a business or be in debt.
John: Now, I’m going to ask you here. Does this mean – financing college education, does that mean that when a child is born the parents should go out and get a policy for funding that child’s college in the future? Even if they are teenagers, should they go out and get a policy to finance college in the future?
Tom: Well, it’s a very good idea to insure your children as soon as possible, and that’s at 14 days. There’s no question about that. The facts are very clear on that. However, it becomes very difficult to get enough money in a child’s policy to fund their education simply because of the limitations on how much insurance that child can have based on how much insurance you the parent have. So, we encourage people to focus on insuring yourself and your spouse primarily because that’s really where the perpetuality is going to come from. The legacy is going to come from your life because if you pass, your child’s education is not going to be funded with the policies on their life. Nobody is going to pay those premiums anymore. But if you pass and the policy was on your life, now you’ve got a legacy that your child’s education or down payment on your house or their startup money for their business. It’s all right there in your death benefit.
John: Yes. And when you loan money from your policy to a child then the child pays it back, now that goes into the policy on the parent’s life, the death benefits on the parent’s life, the child is going to get that money back sooner.
Tom: Absolutely! Yes.
John: In the long run. In the long term if they would otherwise.
Tom: Starting policies on children is great because it’s going to give them a really strong policy because of all the compounding growth that’s going to be taking place in there and it’s a way to bless your grandchildren as well.
Tom: These are such simple business concepts. There’s an old saying that if people would treat their friends like family and their family like friends, the world would be a better place. And if we would treat our personal money like money that we would treat in a business, the financial world market and everything would be a better place too.
So, what we’re encouraging people to do is to become their own money manager and to take control of this velocity and volume of interest and create free cash flow whether they own a business or whether they don’t. Because if you treat your money, your personal money, like if it was an investment on a business and your business money like it was your, yeah just like the friends and family issue, things would be a whole lot better for everybody.
John: Yes and we’ve done a few podcasts here recently talking about working with your family and forming the relationships that you need in order to make this happen. Because probably everyone listening to this knows of a family who if their parents lent money for college, the kids say, “Hey, free loan from mom and dad. Bye, bye.” Whereas they can’t as easily do that with the student loan creditors. So obviously the child has to have the values that the parent has, everybody has to be on the same page in order for this to work.
Tom: Well you know we’ve told you and all of your siblings that if you borrow money from us and don’t pay us back, that’s the last time you’ll ever borrow it. It gives us a good working relationship because now we’re treating you like we would treat a friend, and so it’s just a matter of being honest on both sides. There’s no sense in letting someone take advantage of you whether they’re family or friends, and that makes the world a better place. So, yes absolutely. So, I think you’ve done a great job of explaining how velocity of money and volume of interest work, John, is there some place people can go and watch it? I know you’ve cut a video on this.
John: Yes, we cut a video on a webinar that we did here a while back. I’ll go ahead take the clip out of that video and we’ll put it up on the podcast resources page for you to check out. So just go to life-benefits.com, go to the resources in the podcast show and there’ll be a button there where you can download the podcasts resources and get right to this video.
Tom: This is really what we’re talking about when we talk about the flow of money. The flow of money can either flow away from you constantly and you always have to go back to work or you can learn to incorporate the velocity of money and the volume of interest and free cash flow model into your life, which we call the perpetual wealth code, and you can have money that is under your control that continues to grow. And the more money that you have in control that flows, the wealthier you can become.
John: So, you mentioned right at the start of this, dad, we’re going to talk about volume of interest and velocity of money. Could you explain a little bit more how the free cash flow part is different from the velocity of money?
Tom: Certainly, so let’s say John, that I borrow $10,000 for my life insurance policy. Well, that policy is going to grow just like it would have had I not borrowed that money. Because I’m not borrowing my money, I’m borrowing the insurance company’s money.
John: Right, that’s why there’s an interest cost for that loan.
Tom: That’s right. And so, I put that money to work maybe in my business maybe I pay off a credit card, maybe I make an investment and buy a piece of equipment that I know is going to make more money, however I use it. Maybe I’ll make a loan to you and you’re going to pay it back to me, okay. Now what happens, if it’s my money and I’m paying it back, that’s $10,000 that I didn’t have to spend out of my income, because I spent the insurance company’s money, the $10,000 I borrowed from them.
So now as the money manager I get to set up what the volume of interest is going to be. I get to set up those payments, I might want to pay that $10,000 back in 20 years, I might want to pay it back in five maybe two, it’s my choice. But whatever I do I want to make sure that I don’t spend 100% or more of the income that I just freed up, the $10,000, that’s the free cash flow.
So maybe I’ll pay back $6,000 this year, while I still have $4,000 of free cash flow. But my volume of interest going back into that policy, if I pay 6000, is like 18%, that’s huge. It didn’t hurt me because I have this free cash flow over here still yet that I didn’t spend. And that then allows me to pay the interest on the policy loan which is somewhere between four and five percent. I still have like 13% savings that I did because I did this or earnings if you want to call it earnings. So that’s the difference.
Now the velocity comes in if I take and use that $6,000 again before I pay it back to the policy. If I can use that again and make another 18% or 20% or something else, then I set up payments based on whatever I purchased or investment that I made, so that I always have free cash flow. Because if I don’t have free cash flow, now it becomes uncomfortable for me and then maybe even it can become unaffordable for me if I’m not careful.
John: Yes. And so, that’s the critical question when we come to volume of interest, velocity of money and free cash flow, is what type of income dowe have to support the payments that we’re giving back, and if we’re taking these loans, what are we using it for in order to make more money to make those payments.
Tom: That’s correct.
John: So that’s the real limitation here, is the income because we could put all of these things to work and it really adds an edge onto whatever we do because we’re able to keep more of the money that we make by using them. But if we go overboard before we have the income to justify it, then that’s the only downside.
Tom: That’s correct. And we’ve seen so many people that are working this system with other agents and they haven’t been warned about how the velocity of money can cripple them and actually cost them if they’re not careful.
John: It has to be balanced.
Tom: So, it has to be very balanced and we have to understand what we’re doing and if we’re trying to create velocity by creating micro loans or loans to other people, we have to realize that we are in risk of losing that money as well.
John: It becomes an outside investment then.
Tom: It does and that’s not a bad thing to do, it’s just that you have to be aware of it.
John: True, very much so. So, the beauty of this though is that even if you do make an investment in your business, it doesn’t turn out how you hoped and it didn’t create the income that you wanted to pay it back. Well, since you’re the person in control of this, you could stretch out the payments a little bit longer, recover a little more volume of interest, take a little more time to do it. You still get the money back over the long term, but you didn’t lose the money.
Tom: You just brushed over something there so quickly that I don’t think our listeners got it. You said you can stretch out the payments and increase the volume of interest, okay?
John: So here’s what happens, when you stretch out the term of a loan, you end up paying more in interest over the term of the loan. Because interest is based on time, and the shorter, the faster you pay it back the more you increase the velocity of money but the volume of interest goes down. That’s why when we mentioned earlier about the credit card example. We said the volume of interest is usually higher than the annual percentage rate unless you pay it off real quick. So that’s where that role comes in.
Tom: But that doesn’t necessarily mean that we need to pay our debts off real quick, because we might be able to make more money than what the volume of interest is going to cost us over that period. That’s the whole idea of borrowing money in the first place. It’s why Warren Buffet and all the people that have made a lot of money realize that the best way to create wealth is leveraging other people’s money.
John: Yes and there’s a difference there between the way that Warren Buffett leverages money to invest in business ideas that he knows have a high likelihood of success versus the way that some small business owners borrow money or even spend it up on credit cards not knowing exactly if they’re going to get that money back.
Tom: That’s correct.
John: There is a difference there.
Tom: Yeah. So, this has been fun. This is really the nuts and bolts of the perpetual wealth code and just breaking it down into the steps and the big loan terms. We don’t need to really know what velocity is of money or our volume of interest, we really don’t need to know what free cash flow is. But it just makes the different parts of the perpetual wealth code more distinct so that we can understand it. That’s why we spent the time doing this today.
John: Yes and by knowing that these factors are out there you’re going to be able to structure the loans that you take, the business deals that you want to make to serve more people. You’re going to be able to structure it in a way that keeps the most money in your pocket at the end of the day. That’s what we’re all about.
Tom: You know a lot of people take vitamins and supplements and most people that are taking it probably couldn’t tell you what Riboflavin or any of the other things that are in their supplement do for their body. They can’t tell you what B3 or B12 does or they might even not know even though the name of it. And the same thing here is with the perpetual wealth code. It doesn’t matter so much what the name of things are, it’s what they’re going to do for us.
So that’s why we’ve created this, the easy method of just following the perpetual wealth code, it’s why we cut the video. You don’t have to know these terms but there are people that want to understand those things, and so that’s why we’re doing this today.
So next time we’ll be back and we’re going to be talking about yet another thing that people have asked us to cover on this podcast. So between now and then you have a great rest of the day and week and we’ll be back next week.