Most people think about money in a straight line: earn it, spend it, maybe save or invest what’s left. But there’s another way to think about your finances—one that focuses on how to use each dollar more efficiently and productively.
This idea is known as the velocity of money. While the term is commonly used in economics to describe how fast money circulates in the economy, it also has personal finance applications.
Definition: The velocity of money refers to the rate at which money is exchanged in an economy. It is typically measured by dividing the gross domestic product (GDP) by the money supply. (Source: Federal Reserve Bank of St. Louis)
Understanding how this concept works can help you make more thoughtful decisions with your savings, investments, and home equity.
What Is the Velocity of Money?
At its core, the velocity of money measures how many times one dollar is used in a set period. The faster it moves from one person to the next, the more economic activity it creates.
Example:
– You pay a contractor $500 for a home repair.
– The contractor buys materials from a supplier.
– The supplier pays their employees.
– One of those employees shops at a local business.
The same $500 circulates through the system, benefiting multiple people and businesses.
How Banks Use It
Banks use this concept via fractional reserve lending, where only a portion of deposited funds is held in reserve, and the rest is loaned out.
Example: A $100,000 deposit might allow the bank to loan $90,000 to someone else, who uses it to make a purchase—thus moving money into the economy.
(Source: Board of Governors of the Federal Reserve System)
How You Can Apply This Concept Personally
You don’t need to be a bank to benefit from the principle of keeping money in motion. Below are a few strategies for doing so—responsibly and with flexibility.
1. Borrowing Against an Investment Portfolio
If you have a non-qualified brokerage account, you may be eligible for a securities-backed line of credit (SBLOC). This lets you borrow against the value of your investments without selling them.
Advantages:
– Avoid triggering capital gains
– Access liquidity without disrupting your long-term strategy
– Maintain market exposure and potential growth
2. Using Home Equity Strategically
Home equity—if accessible and appropriate—can be leveraged to support financial goals. Common uses include:
– Renovations that improve long-term home value
– Debt consolidation
– Funding education or other long-term plans
Note: This is for informational purposes only and not a recommendation to use a HELOC or take out a mortgage. Please consult a qualified mortgage professional before making any decisions.
Other Account Types That Can Support This Strategy
To maximize the velocity of money in your personal financial life, consider how these types of accounts might work together to enhance access, flexibility, and coordination:
– Brokerage Accounts
– Securities-Backed Lines of Credit (SBLOCs)
– Home Equity Lines of Credit (HELOCs)
– Cash Value Life Insurance Policies (access to values may vary by policy design and funding; consult your advisor for details)
– Business Lines of Credit
– Cash Balance Pension Plans (for business owners)
– Real Estate Equity (not held in a retirement account)
– Non-qualified Annuities with Liquidity Features
– Trust Accounts (when properly structured for liquidity)
Each account has its own set of benefits, liquidity characteristics, tax implications, and rules. The key is to coordinate them strategically so your dollars can remain productive, even when not in use.
Final Thoughts
The velocity of money isn’t just for economists. It’s a powerful concept you can apply in your financial life—using assets strategically to generate more value without increasing risk or complexity. If you’d like to explore how to put this into action, we’re here to help you build a plan that works.
The Guyton Group offers fee-based planning, wealth advisory services, and securities through Park Avenue Securities LLC (PAS) and insurance through The Bulfinch Group Insurance Agency, LLC. Fee-based plans may include tax and wealth planning suggestions, but we do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. Andrew Guyton is an Investment Advisor and Registered Representative of PAS and Financial Representative of The Guardian Life Insurance Company of America (Guardian), supervised from: 160 Gould Street, Suite 310, Needham, MA 02494, 781-449-4402. PAS is a member of FINRA & SIPC and a wholly-owned subsidiary of Guardian. The Guyton Group and The Bulfinch Group are affiliated, but neither firm is an affiliate or subsidiary of PAS or Guardian. The Guyton Group and The Bulfinch Group are not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. Financial Balance® is a service mark of The Guardian Life Insurance Company of America® (Guardian), New York, NY 10004, © 2020 Guardian. Andrew Guyton, CA Insurance License #0I61971; FL Insurance License #W252632. 8110132.1 Exp 6/27
Material discussed is meant for general informational purposes only and is not to be considered a recommendation of tax, legal, investment advice or a course of action. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. All investments contain risk and may lose value.
The primary feature of whole life insurance is the death benefit. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
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