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The velocity of money
By Bully The Bear  •  June 15, 2010
[caption id="attachment_4119" align="alignright" width="150" caption="Photo by darkpatator"]Photo by darkpatator[/caption] I was re-reading this book by Garrett Gunderson - Killing Sacred Cows. It's a very wonderful book with very refreshing concepts, so I make it a point to revisit some of the concepts espoused in the book every year when I have the time to do so. It's so easy to read that if you only have time to read one financial book this year, make it this one! You can have a sneak preview of the book here. Since it's the preview, not all the pages are shown, but I think it's enough to showcase it's attractive typesetting and page layout. I remembered this particularly interesting concept, called the velocity of money. It is borrowed from the discipline of economics but in this case, it's applied to the field of personal finance. Basically, it's just an equation that is somewhat similar to the the mathematical form of efficiency. No wonder the concept feels similar to productivity. This is extracted from the book Killing Sacred Cows by Garrett Gunderson Basically, the concept is talking about how to keep input at a minimum while increasing as much output as possible. The point here is how to continually extract more output and yet at the same time reduce your input. One example of this is to use the savings you had to buy into financial instruments that gives you a passive income. Then you use the passive income to buy more such instruments that will generate even more passive income. While the input remains the same (which is the initial amount of savings that you put into the instrument in the first place), the output keeps getting higher and higher. This is because the principal and the interest both earns you an interest, thus creating a self feeding loop - exactly how compounding works. Read more...
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By Bully The Bear
La papillion is french for butterfly. This blog chronicles my journey from an amateur in the stock market to where I am today. Have I turned into a beautiful butterfly? I don't know, but I think my metamorphosis is still on-going now :)
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