Losing Your Velocity
“The simple inherit folly, but the prudent are crowned with knowledge.” (Proverbs 14:18)
Another important issue when it comes to being able to access the money that you are stewarding for the Lord is Velocity. We’ve spoken before about the importance of Velocity and I’m sure we will again. Here we’ll simply give a short description of Velocity and then focus on the impact of eliminating this force working between your IRA/401K assets and the rest of your assets.
I pulled an old economics textbook off my shelf and it gives the definition of Velocity as “the ratio of nominal Gross National Product to the number of Dollars in the money stock. Velocity indicates the number of times per year that an “average dollar” is spent on goods and services.”1 This definition obviously applies the economic principle to the economy of the country as a whole, but let’s look at how it applies to you as a person. Most people (and Personal Financial Planners) completely ignore basic economic principles when looking at individuals’ situations, but those principles do not cease to exist just because we ignore them.
Personal Velocity looks at how productive each dollar is within your system. The more a dollar moves through your system creating value (either by earning a financial return or by creating a non-financial benefit), the more velocity you have. Your dollars are working harder and thus you have more output for your limited input. You are more efficient. Isn’t this a main determinant for successful stewardship?
However, money that goes into any Qualified Plan (such as an IRA or 401k) cannot come back out without restrictions, taxes and penalties. So this money is trapped within. Therefore, Velocity is impossible between assets which are held within and outside these plans. You are cutting off the ability to utilize this force for your benefit.
There are many ways that you can utilize the power of Velocity within your financial life, but let’s give a quick simple example here. You’ll understand this more as we apply the concept in multiple areas of your financial life. Let’s say there are two people saving money. Person A saves money in a money market that pays 2%. Person B puts that money in a CD that pays 2%, but can’t be touched until the end of the year. This is the only money that either has. Both of them are achieving the 2% interest that this money is earning. However, Person A also has the added benefit of knowing that he has cash on hand that he can access very quickly and without penalty if an emergency comes up. Person B does not have this benefit. Even if no emergency happens, Person B must deal with the nagging doubt about the decision that he’s made. Dealing with this doubt and worry reduces his ability to be effective in life, whether that be within his relationship with the Lord, his family, or in his ability to be productive at work. There is a cost to all of this in his life. If an emergency does happen, there is a direct financial cost to Person B, and in comparison a financial return to Person A. This is a helpful simple illustration that shows both financial and non-financial consequences. In the future, we’ll illustrate many more that have much larger impacts.
Can you now see that there is a significant cost to you in not being able to access your assets within a government qualified plan? This can seem like an abstract economic theory, but the decision to segregate certain assets has very real consequences to your ability to build wealth with what you have been given. Do you think that in some ways this is like the foolish servant in the parable given by Jesus who buried the talent?
Tomorrow we’ll begin to talk about the real tax consequences of 401k’s and IRA’s.
This is _Part 15_ in the series titled The Trunk. To continue with this series, click on Pt 16. To use this as a growth tool, please read Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12, Pt 13 and Pt 14.
Photo credit: e453753