Want to achieve your goals a lot faster? An easier way to decrease the time it takes to reach your goals is by learning how to leverage assets.
The purpose of this post is to explain the concept of leverage with a unique spin, so you can use leverage to attract wealth in your life.
What Is Leverage?
In finance, the definition of leverage is simple. You use debt to invest, in the hopes that the investment will earn a greater return than the price you paid for debt.
For example, you think a stock will raise 15% each year for 3 years, but you don’t have any cash to invest. Talking to your banker, he tells you he can lend you $5,000. You have to pay monthly payments back to the bank, including 5% interest each year on what you owe. Borrowing at $5,000 at 5% interest for 3 years will cost you $149.85 a month or $5,395 total over 3 years. (Easy calculator to see the cost of leverage)
After three years, the stock raises 15% each year and now equals $7,604. You have paid off your debt which cost you $5,395. You used leverage to earn $2,209.
How To Leverage Assets Without Going Into Debt
Every dollar you have in debt increases your risk. The investment grew 15% each year for 3 years, but that was no guarantee. What would happen if the investment lost money? You would now owe money on the amount you borrowed, plus money on the investment.
Using leverage has it’s advantages. However, there is one fundamental flaw I see with the way leverage is typically taught – why can’t assets besides money be used for leveraging.
In order to apply leverage without using debt, I find it better to use the word borrow. Therefore, I need to ask myself – In what areas of my life can I borrow now, to earn a greater return in the future.
Doing a little brainstorming, here are a couple ways in which I plan to use or have used leverage:
1. Knowledge - My mind not my money is my biggest asset. I’m leveraging my mind now in trying to pass the CFP exam in November. The plan is, that being a CFP allows myself to become more marketable. Therefore, I’m borrowing now from my time, but plan on earning a greater return because of my knowledge in the future.
2. Time – This is another area where I can think of multiple ways to use leverage. Let’s look at a simple example. What if I spent 20 minutes a day learning keyboard shortcuts for 20 days. The total cost of time involved would be 400 minutes, but the total time saved would be well above. Another example is reading a productivity book. Two years ago, I read an applied Getting Things Done: The Art of Stress-Free Productivity by David Allen. The total time it took to read and implement GTD was probably 10 hours. Over two years, reading that book has allowed me to increase my productivity by about 10 hours a week.
3. People – In the future, I’m looking to hire outside help for GenYwealth.com. One task that the assistant will do is keyword research, which is just data entry. If my time is worth $100 an hour, and my assistant costs me $5 an hour, it’s well worth it to hire an assistant to complete this task. Instead of doing a task that costs me $5 an hour, I can concentrate on tasks that earn well above $100 an hour.
Think outside of the box. In what areas of your life can you apply the concept of leverage?