How people get rich with leverage

Archimedes the Greek (who is often credited with discovering the principle of the lever) once said: “Give me a lift and a place to stand, and I could move the world.” He understood that a lever was a tool to multiply your strength beyond its natural limits. He also knew that the larger the lever, the greater the increase in force.

Unfortunately for the uninformed, the lever can be another cliché, a two-edged sword. Used unwisely, the wrong type of leverage can not only multiply your upside, it works just as efficiently on the downside and can increase your risk.

Most people who think they understand leverage think it applies only to using borrowed money to buy stocks on margin (dangerous) or using a mortgage to buy a home or investment real estate (insurance). My own father is my number one proof of the dangerous side of leverage, but his sad story doesn’t invalidate my premise that if you want to be really rich, leverage is central to your enrichment program.

Remember, a lever is just one way to multiply your force, and there are three forms of leverage that count, and you need to use them wisely. There’s money leverage, people leverage, and time leverage, and I challenge you to show me a rich person who didn’t use at least one of them. (I’m ignoring movie stars who make $20 million a movie and athletes who make millions of dollars a year for a few years. They don’t count, because you’re not one of them.

No leverage?

Most people don’t have leverage in their profit picture, and that’s probably why they’re not rich. Is there a difference between a McDonald’s counter clerk making $6 an hour and a lawyer making $300 an hour? Not as much as you think. In both cases, if they don’t work, they don’t get paid. Their income is limited by the number of hours they work. The average employee’s income in an American company is limited by the number of hours he is able or willing to work. Really rich people have No limits on what they can earn, even if they don’t work.

And it’s even worse than it seems; personal income is taxed at the highest tax rate imposed on any type of personal income. If you rely solely on income from your own work, you are like a salmon swimming upstream with a weight on your back. One facet of the get-rich strategy is to be personally poor or in modest circumstances, earning as little highly-taxed personal income as possible, while controlling companies that produce large profits at much lower tax rates.

If you use leverage wisely, you’ll work less and earn more. You will earn money even if you can’t work, because your money will work for you, your employees will work for you, your partners will work for you, and your money will do double, triple and more work for you. .

Now let’s look at the various forms of leverage:

#1: Money Leverage: The old cliché says that it takes money to make money, and that’s true, but it doesn’t mean it has to be. its money.

Everyone uses leverage when applying for a mortgage to buy a much better home than their savings could buy. Wealthy real estate investors couldn’t get rich if they didn’t borrow money to buy properties. Banks are not only in the money business, they also make levers, and the government is your friend in this case. Unlike buying stocks on margin, no government agency enforces real estate margin call rules against you. If real estate hits a soft spot (like recently) and your home’s appraised value falls below the balance owed on your mortgage, you don’t have to put up more money to protect the lender. Make your payments, and it remains yours. This is due to effective lobbying by the real estate industry.

#two: How about rich businessmen like Bill Gates. He used a lot of leverage, increasing his profits and the security of his business and the value of his assets. He raised a lot of money from investors by selling some of his stock and used that leverage to grow his company. His remaining corporate shares are the vast majority of his $60 billion wealth. That is leverage. When Ted Turner was asked how rich he was, he said, “I must be Really Rich, I owe a lot of money.

There is good debt and bad debt. Consumer debt is always bad debt. Business debt is good debt if you use it right. It’s okay to borrow money to buy assets that produce enough cash flow to pay off debt, and then some. So let me elaborate on the rules for deciding whether a debt is good or bad.

bad debt

– Borrowed money to buy something that disappears as soon as you use itleaving only the debt, like a vacation.

–Borrowed money to buy a money-eating alligator. It could be a vacation or an RV, or even the biggest and best house you live in (which is the best argument for buying a smaller house than your credit score would allow). If you redefine “asset” as something that produces a positive cash flow, then your house is not an asset, as it is a negative cash flow alligator.

– Borrowed money to buy an item that usually depreciateslike a car or a boat. I’m talking about real depreciation here, which means true loss of market valuenot phantom depreciation, like the tax deductions you can take on an investment property when it’s really appreciating.

good debt

I won’t make a list, because there’s only one kind of good debt: borrowed money that works for you to build income-earning assets and produce enough cash flow to pay interest and systematically reduce principal. rich people forever use debt as a business tool.

More money leverage

Borrowed money is not the only type of money leverage. When an entrepreneur sells shares to finance the company by selling part of his corporate shares in a private placement or going public, he is using money leverage, but that is always a financial calculation. If he can sell ten percent of your company and thus produce cash that will double your company’s sales and/or profits, that’s a good deal and you’d be a fool not to. So he is richer, because the value of his remaining shares becomes greater than it was when he owned 100% of the shares, and he has working cash to invest in his company. Such cash is a lever that increases the strength of it.

people leverage

I have known businessmen who still work twelve to fifteen hours a day because they don’t trust other people to do their jobs well. That probably reflects more on the entrepreneur than on him personally. If they are competent, let them do their job; if they aren’t, get rid of them and hire the ones that are. Such entrepreneurs do not understand the principle of leverage of people. A smart businessman will hire people to do all the things they can do better than he can or wouldn’t get done if he didn’t have time to do it, so that he can spend all his working hours doing only the things he can do better than them. in addition to providing the leadership and strategic direction for your company that only he can provide.

People’s leverage is not only profitable, but its lack can spell the death knell for a company. Nobody can do everything. If you try, you’ll either get burned, or drop a ball you didn’t have time to secure, or miss something that slips away and ruins the business, or you’ll be so mired in the details that you won’t be able to stick around. keep up with developments in your industry and you will miss out on opportunities.

The CEO Mindset

Businessmen who use people leverage by assembling a complementary team of real executives who know their stuff in their specialties and are allowed to use their skills can become very rich in a short time. A true CEO will tell his team what the business goals will be, set the policies and battle plan, have them race against the plan, then let them work within his guidelines and the budget he approved. , while he monitors their performance very carefully and helps them make any necessary corrections. His tracking tools are budgets and financial reports.

Then there was the failed presidency of Jimmy Carter. He was a good Christian gentleman with a good heart and very bright. He could dive into the smallest details of government and politics as well as anyone, but he forgot that the electorate had hired him to be the CEO of the biggest company the world has ever known, and the big picture was lost on him. escaped and he created the worst combination of high interest rates, inflation, and unemployment in our history, and that brought down his presidency.

To his credit, he’s been a pretty good former president, with his Habitat for Humanity program. He can hammer a nail with the best of them, as the media never tired of showing us, but we hired him to be our CEO, not our building contractor. That is leverage of people.

I have been the founder and CEO of one network marketing company and the main distributor of another. That’s where I learned this Principle of Leveraging People. If you built a team of distributors who were always building their teams, you were making money that you didn’t have to earn on your own. You had passive income whether you worked or not or made sales. Personally, I don’t like to do multilevel marketing, but I believe in the principle that people take advantage with passion. It’s an essential strategy to use if you ever want to be rich and secure, especially if you want to earn more and work less.

Leverage in a Nutshell

Let’s see if I can summarize the principle of leverage:

Leverage means making money from the use of money contributed by others or loaned to you, and also making money from the efforts of employees, partners and business associates. It means earning money that you didn’t have to earn by the sweat of your own brow. While he earns money by the sweat of his brow, he also earns money by the sweat of his brow as they work hard to make him rich.