Here is a basic introduction to the concept of leveraging and an explanation of how you can fast track your path to success by leveraging money through the use of good debt.
Are you planning your way to financial freedom?
Well, I’m definitely dreaming of that freedom and now starting to imagine just what my financial potential is. But having started to extend myself at work, and being fully invested financially, and starting to work on a side hustle, I’m starting to feel a bit stretched. And as I crunch the numbers, I’m starting to see that at the current rate of return on all my investments, my big moment of freedom and success is still a very long way away.
Have you felt like that? Like the numbers are just not going to add up and your success just looks too far away.
Well I’m there. But far from being beaten, I’ve started to look for the answer. And the answer is leveraging.
In this instalment we will focus on leveraging your money. Click the title for more.
(To learn how to leverage time read, How to Leverage Your Way to Freedom Part 1)
The Basics of Leveraging Money
Basically, leveraging means you use the money you have and your potential to earn more, to loan a larger sum of money. This way, you leverage your small amount that will take forever to grow into a larger amount that can fast track you to a fortune quicker.
It’s not an easy concept, which is why not everyone is doing it. But it’s the simple magic that makes the fortune of many of the millionaire success stories of the world.
The answer is debt.
Basic advantage of Leveraging Money
The basic advantage of leveraging money is that you can use a little of your own money and multiply it with other people’s money. By multiplying your money, wisely, you can increase the size of the returns you get. By managing the cost of using other people’s money with the higher amount of returns, you can make a much larger return than if you simply use your own money.
For a simple example:
Let’s say there is an investment that is paying a 10% return. And say I have $1,000 dollars to invest.
$1,000 at 10% = $100 return on my investment.
But let’s say I can leverage my money and I can use my $1,000 to secure a bank loan of $9,000 at 5% interest.
My calculations would then be:
($10,000 at 10% = $1,000) – (9,000 at 5% interest = 450) = $550
So by loaning 9000 and adding it to my $1000, my return would be $1,000. But I need to take off the amount of interest for loaning the money. That is $450. So my profit is $1,000 – $450 = $550.
That’s a much higher return overall.
$550 – $100 = $450 more return by leveraging money.
This is obviously a very simple calculation. The actual calculations would take into account fees and other variables, and would never be that simple to calculate. But that is the simple math that shows how leveraging can take you from a small return ($100) to a bigger return ($550).
And so, if you can leverage your money to get more capital, at a lower interest rate than your expected return rate, then it is a huge advantage to do so.
Leverage Money at Scale
Once you can see the basics of the concept, you can start to see how leveraging can be used to go from small, to medium, to big, and to astronomically big numbers.
It’s how magnates like Trump and Kiyosaki build massive fortunes and own whole buildings.
Here is Robert Kiyosaki on the concept of good debt and showing how this basic concept of leveraging can stretch to a higher level -a greater scale:
Using the bank to leverage my investments, I can leverage my money. Using simple math, let’s assume I have $100,000 and am looking to invest it in a $100,000 property that rents for around $800 per month. You can find many properties like this if you look diligently.
I could use all my money to purchase one property for $100,000, or I could use good debt to buy five $100,000 properties.
The bank would lend me $80,000 for each property and I would divide my $100,000 into five $20,000 down payments.
At 5 percent interest, the payment on the loans would be around $500, including taxes and insurance. So, my cash flow on each property would be $300 a month ($800 in rent – $500 in debt payment = $300 per month) for a total of $1,500 ($300 x 5 = $1,500) per month—an 18 percent annual return.https://www.richdad.com/good-debt-bad-debt
So, by leveraging money, we can go from making one investment bigger, to making one investment multiple investments – increasing our rate of return and ultimately the amount of cash we get to pocket.
Ways of Leveraging Money:
There are many ways to leverage our money and start to multiply our potential.
The everyday leveraging is credit. We use our credit card to access more money than we currently have.
Many of us do this operation all the time, but we are often on the wrong side of it. We leverage our money to buy extra stuff. By using a credit card, we are using our little bit of money to buy a lot more stuff. The problem is we don’t get a rate of return on our purchases and we have to pay a high rate of interest.
This is bad debt. It should be avoided at all costs.
Home loans are probably the most popular use of larger scale leveraging.
A home loan give us the great ability to get that dream house to live in. However, this is where Mr Kiyosaki makes his famous contradiction to the norm.
A home is not an asset.
You must be aware, that with the standard home loan you are locking up all your valuable money in a home that with interest will likely cost you way more than it’s worth.
As a home, it’s a liability – it costs you money and more than it’s worth.
As a rental, it’s an asset – it makes you rent and the rental income pays all that interest while you make whatever’s left. And if you’re lucky, or smart, or both, you also make money when the value of the house increases and you sell for higher than you paid.
A Way to Extend:
Beyond the rental option, there is also the flip option. By leveraging money and time, we can buy a cheap house with leveraged money, and use our time to improve the value of the property. Then we can sell it at a higher value.
“There are literally thousands of wealthy people who started out borrowing money to fix and flip a house, used the profit to buy a couple more fix and flip houses and so on to the point where they now own multiple apartment houses.”5 Ways to Use Debt Strategically to Your Advantage
Leveraging Money on the Market:
Investing on the stock market, gives investors the option of using a margin to extend their position. A margin is simply a loan they can use to extend their positions in investments. These loans are great if the market is going in the right direction. You can multiply your returns and make a fortune.
However, you must be careful not to over extend – a change in direction can trigger a margin call, where the institution enforces a payment of the margin. If this happens at the wrong time you could end up owing more than you have.
Leveraging Time and Money in Business:
A business is an asset. If it makes money. If you can start a business that brings in a reasonable return, then it may very well be worth it to use leveraging to get the money to help you get started or to help you expand.
Debt for Business
Most people never start a business because they’re afraid of the risk involved in getting a loan. But if you wait until you’ve saved enough money to get your business off the ground, it will probably never happen or if it does it may take a long, long time. This, again, is an area where you could use debt strategically and it might pay off in a big way. Plus, the interest you pay on the loan will likely be tax-deductible.5 Ways to Use Debt Strategically to Your Advantage
So, if I want to start a business, but I don’t have enough money, I can leverage my money to get a larger amount of money that will allow me to start operating and make a return. If that return is larger than the cost of interest, then it’s a smart business decision.
Final thoughts on Leveraging:
For the average Joe, working away in their 9-5 job, it will be very difficult to grow enough capital to become super wealthy. By growing in a linear, save and earn safe returns manner, it will take a lifetime to build up to hopefully a home and a modest retirement income.
This is the path for many stable and thoughtful people.
However, if you want to go to a higher level, or retire earlier, then leveraging money is the way to fast track your financial path to success.
Always remember, leveraging is a two edged sword. Always, be careful, do your calculations, and make sure you are covered.
We are fully invested at the moment and each month we’re growing one of our steady, safe investments.
However, we’re looking ahead to stretching these investments.
Currently, where we are, it’s not time to jump into the margin and extend our stocks, so we’re looking at using a loan to set up a rental property, or maybe to purchase another small piece of land, as our last small parcel seems to be inflating at a reasonable return.
Anyway, we’re learning as we go. We feel almost maxed out and now may be the time to access leveraging and take our path to success to a whole new level.
We are not advising anyone to go out and get a big loan they can’t afford. Good debt is amazing, but bad debt is crippling. Knowing the difference is not always obvious. Make sure you take the time to do the calculations and do it smart.
All the best on your mission to success.
Mission to Success
The mission for success is to take our life to the level of awesome. We are actively learning the lessons that will bring us more success, that will improve the future for our children and will help make the world a better place.
If that’s something you want for your life, feel free to come join the mission for success by clicking here: Mission for Success!
All the best, and remember to keep striving for success.