Leverage is one of the critical ingredient of building wealth. I have picked up valuable lessons from the literature from Robert Kiyosaki’s “Rich Dad, Poor Dad” and Todd Tressidder, with the various concepts of leverage summarized below.
General idea is that we can build our wealth faster if we adopt the various methods of leverage instead of just trading our time for money.
Building wealth requires you to work smarter rather than harder by applying the following principles of leverage:
1) Financial Leverage: Using other people’s money so that we are not limited by our own pocket and wallet. For example, using a 80% loan-to-value property financing, a 10% increase in property valuation will imply a return of 50% (note: financial leverage cuts both ways, so the same apply to loss-making situation).
2) Time Leverage: Using people’s time so that you’re not limited to 24 hours in a day. For example, successful business entrepreneurs tap on the talent of other people (the employees) to create value and wealth.
3) Network Leverage: Using other people’s platform, connections and databases to market certain products instead of our individual effort. For example, compared to the old days where we may spend hundreds of dollars on classified ads that may not reach our target audience for selling / renting our property, we can now tap on the successful property listing sites & databases to market our property for sale / rent at a fraction of the price but with potentially a much broader reach. Crowd-funding sites now also allow people to pool network and resources to fund new developments, businesses, and even property acquisitions!
4) Knowledge Leverage: Tapping into the other people’s knowledge, expertise, and experience so that we can build on our own knowledge to create wealth. For example, we can read up on the various investment analysis and corporate valuation guides (one favorite is New York University’s Professor Aswath Damodaran) and tap on the authors’ expertise to improve our own analytical skills to have a greater likelihood of creating wealth.
Leverage allows us to build more wealth than we could ever achieve alone by tapping on various other resources, and extend our potential “reach” beyond our personal resources (cash, time, experience etc) via the “leverage multiplier” effect.
Welcome your thoughts.