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Thread: Leverage - A Key to Success and Wealth

  1. #1
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    Jun 2007
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    Default Leverage - A Key to Success and Wealth

    Leverage is one of the most incredible tools you have at your disposal to help you develop true wealth and financial independence. Unfortunately, very little information has been published to explain, in easy to understand terms, this absolutely essential bedrock principle in the development of substantial financial reserves. In this article, we'll discuss this principle as it relates to wealth development and will cover four critical types of leverage you must employ if you are to achieve maximum success in the shortest possible time. If you're serious about developing wealth and financial independence, you must make it a point to study and learn how to implement leverage in your life and work.

    If you carefully study the actions of people that have achieved significant wealth, you will find that one of the key differentiators between them and the average individual is their use of leverage, usually in a variety of ways, while the majority of people tend to conduct themselves in most or all areas of life in generally non-leveraged fashion. Interestingly, the more a person learns to employ leverage successfully, the faster his or her financial growth tends to accelerate. Since people who successfully employ leverage accomplish exponentially more in the same amount of time then people who do not take advantage of this powerful tool, they tend to have more free time and not only greater financial resources, but more balanced and fulfilling lives.

    The argument has been made by many that continue to lead very modest lives, often in quiet desperation, that implementation of high leverage activities is risky. Sadly it very well may be the avoidance of leverage that often results in the highest risk over time, since the intentional avoidance of risk often results in avoidance of opportunity of even greater measure.

    Understand that the use of leverage for success and wealth accumulation requires time to learn. It essentially requires stepping out of your comfort zone, and through practice and experience finding the interrelated methods of leverage implantation that fits your personality and talents. It also requires patience and a often the discipline of delayed gratification. When you first start changing your view of the world and how you approach opportunities, you will make mistakes and you may very well invest time, energy, and money with little in the way of short term rewards. But once you have identified and successfully developed your leverage systems, and have primed the leverage pumps that will produce your financial fortress, your future will never be the same.

    If you look at the population in general, very few people understand the concept of leverage, and as a result, continue to work harder than ever to just make ends meet, wondering, "What is the secret that the super successful know that allows them to gain such wealth and success?" If there is any so called "secret" that the wealthy know that the average population does not, this would most likely be it. It is easy to find people that can cite specific isolated examples of leverage, but they seldom have a thorough understanding of the principle as it relates to the creation of powerful wealth development vehicles.

    In this article, we're going to explore this powerful concept, and see how it relates not only to real estate and the realization of financial independence, but how you need to reprogram your thinking in all areas of life if you are to truly realize all that you are capable of achieving. We'll go through each of the four most critical forms of leverage one at a time and will give you some important insights that will hopefully help you increase your understanding and use thereof for success.
    First you must understand and employ financial leverage. Financial leverage involves employing the financial assets of others to increase significantly the yields you can achieve on a given amount of assets which you invest. For example, if you invest $1000 and receive an annual return of $100, you have realized a yield of 10%, and your $1000 has grown to $1100. Now, on the other hand, consider you take the same $1000, borrow $9,000 additional, and therefore invest $10,000 with the same yield percentage of 10%. Now, you have realized a return of $1000, or 10 times as much as under the original scenario. If the cost of the money borrowed is say $500 for the time it is borrowed, then you'll still realize a net return of $500 on your original $1000, since that is still the entire sum that you personally brought to the table. This is a 50% yield, which is significantly higher than that realized by the investment of your original $1000 alone.

    Notice in the example above that we employed $9000 of borrowed money and only $1000 of our own money. This is very typical scenario in real estate investing. In fact, professional investors often are able to reduce their investment contribution in a given opportunity to substantially less than 10% of the total amount invested, thus further boosting yields. In fact, there is no vehicle available today that offers the significant financial leverage opportunities, with controlled risk, that real estate offers. Indeed, this has been the case for many generations, and it is highly unlikely that this will change in our lifetimes.

    Because of the unique nature of real estate, and the high level of predictability of its value, real estate has become one of the most desired forms of collateral. This coupled with the desire of all mankind to have reasonable shelter, have resulted in a system of lending which allows very high amounts of financial leverage.

  2. #2
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    Jun 2007
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    Interestingly, many financial planners, especially those that represent particular products or companies, tend to steer people away from highly leveraged opportunities. It is understandable that the use of great amounts of leverage without proper knowledge and without proper risk management steps in place can be cause for concern. The reason however that many financial planners do not include leverage concerns in their advice portfolio is often because they themselves have no working knowledge of the principles of rapid wealth generation through leverage implementation. The best source of specific knowledge on successful leverage implementation for wealth generation is the wealthy that have reached or that are well on their way to the financial success you desire to achieve.

    Another well known example of financial leverage is the use of margin to buy stocks. Margin is basically where the brokerage firm lends money to the investor to buy more stocks than the investor's capital alone would be able to purchase. Interest is paid on the money, and if the value of the stocks pledged as collateral decreases below a preset limit the investor experiences a margin call, whereby additional assets must be delivered to increase the amount of collateral securing the borrowed money. The purchase of stocks on margin is a tool that is in the portfolio of many wealthy people, but keep in mind the risks associated with trading on margin must be controlled carefully. Additionally, the amount of leverage that can be employed is significantly less than is possible with real estate investments, most notably because of the less secure nature of the collateral. The trading of options is another example of leverage in action, although it is not in the truest sense investing. Leverage does not have to be employed in investments alone, and can be utilized in a variety of situations. Options are more involved and in general present higher risk than either real estate investing or investment in stocks through the use of margin.

    The use of financial leverage is not enough, however, if you wish to accelerate your financial growth to the maximum extent possible. In order to truly reach your dreams as quickly as possible, you absolutely must leverage the time of others. Many real estate investors launch a successful investment career, but never take the time to strategically think of how they can arrange their personal and business life to employ the time of others. Just as the majority of the population, they fail to grasp the importance of implementing multiple leverage strategies, and thus when they think of making more money they think in terms of working more hours. This type of linear thinking is absolutely contrary to the way most wealthy individuals view their world.

    Let's look at a specific example. Assume you have developed a successful track record of investing in real estate requiring rehabilitation. You spend a lot of time looking for opportunities and in overseeing the contractors working on the properties. Although you have become quite efficient, this still limits the amount of opportunities you can pursue and therefore limits your financial growth. You either need to clone yourself, which is not possible, or you need to leverage the time of others if you are to achieve greater success. You could, through strategic relationship development and through working on a few small opportunities with others, find one or two excellent team members having the same morals, values, and work ethic as you. Perhaps one is a very good contractor with some management background looking to become an investor, and thus get away from the "swapping hours for dollars" game. The other might be an investor that is fairly new, but that is willing to dig for deals and is willing to act as project manager to help coordinate repairs, marketing, etc. Both these team members need your expertise and financial backing, and in exchange they're willing to let you keep half or better of the profits. You work with them on several deals and work closely with them to develop winning guidelines to control the rehab process, and then you are able to invest perhaps 10% of the amount of time on a given opportunity as before, and yet you're realizing 50% of the profits. You've effectively leveraged your time through others resulting in a 500% improvement in the yield you're receiving from the same activities as before. The examples of the use of time leverage are practically infinite, ranging from the building of a business with contract or salaried employees to the hiring of a painter to paint your house while you improve your leverage systems. If you are to achieve significant wealth, you must not only focus on the use of financial leverage, but must also focus on finding creative ways to leverage the time of others in win-win fashion, resulting in positive financial returns.

    In addition to time and financial leverage, it is also essential to employ the knowledge of others. This is not only through study of others' knowledge through books, tapes, and seminars but is also through the use of others' talents to achieve greater output that you can personally generate. When teaching seminars, I often express with great sincerity the need for my students to find a great team of people with whom to surround themselves in order to take maximum advantage of the knowledge of others.

    There is an interesting story regarding Henry Ford, an entrepreneur that few would deny understood how to develop significant wealth. During an interview, a reporter trying to show that Mr. Ford was not very intelligent kept asking him technical questions. When Mr. Ford couldn't answer the questions the reporter started to heckle him about his lack of knowledge. Mr. Ford responded by picking up the phone and asking one of his employees the question. After another question he did the very same thing. Then he turned to the reporter and said. "I don't need to know all of the answers to run a successful company. I have hired people to answer these questions for me so I can concentrate on steering the ship."

    If you're going to achieve maximum wealth and success, begin carefully looking out for those people with whom you need to surround yourself in order to leverage their knowledge for greater growth.

    Finally, in order to achieve true financial independence, it is absolutely essential that you take advantage of the incredible leverage opportunities presented by modern technology, especially the Internet. Technology allows you to operate much more efficiently that you could otherwise operate and it vastly increases your ability to network with others. And, if you are familiar with business, networking is one of the most important aspects of growth and survival. Without leveraging the power of technology to assist you in this regard, you are placing yourself at a distinct disadvantage. Interestingly, the leverage opportunities presented by technology depend on your ability to effectively use technology for your advantage, which in turn requires understanding, which unfortunately takes time to develop. If you are not making efforts to increase your understanding and ability to leverage the power of technology then you must make conscious efforts to do so right away.

    Likely you're aware of the young billionaires, individuals that have achieved incredible states of wealth even before they've reached the age of thirty. Interestingly, many of these individuals have achieved this state of wealth through technology related activities. This is in part due to the power of the shift occurring in our society. Look through history and you'll find that whenever major trends occurred, such as the shift from an industrial based society to an information based society, those who realized the trends and took advantage of the trends, realized far greater success than those who remained oblivious. In fact, the trend can push you towards success more than you might realize, and if you employ leverage successfully, in tandem with a powerful trend, the results might indeed surprise you.

    It is impossible in a short discussion of this powerful topic to truly raise your awareness. Let this article cause you to imagine, seek, and find ways you can employ leverage, in all its many forms. Find ways to combine leverage strategies, as in the example given of using team members to assist in increasing the amount of rehab investments you can pursue. Usually the majority of highly successful people employ leverage in almost all of their work or career related activities. If you wish to achieve great wealth and success, leverage needs to be the number one tool in your wealth toolkit!

    To purchase Ron's exciting book entitled "Leverage: A Key to Success and Wealth", visit your favorite online bookstore.

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