The Concept Of Leverage
By using the laws of physics you can use the lever as a simple mechanical tool to transmit the required force for accomplishing a given work task. The advantage in using a lever is that it can substantially increase the effectiveness of the energy-force being supplied to a specific job. A teeter-totter found on a children’s playground is a prime example. Here we have a lever braced across a fulcrum. Two people set on this lever, one at each end. If they are of equal weight and at an equal distance from the fulcrum, nothing happens. They cancel each other out as they maintain a state of equilibrium. If one person outweighs the other, or if one person is further from the center than the other person, then he/she gains a mechanical advantage. With the force of gravity pulling him/her, he/she will drop to the ground as the lighter person, or person closer to the fulcrum is elevated. By taking obvious advantage of this toy, a thirty-pound child can easily send a football player skyward. The child has multiplied its force many times over.
Financial leverage is based on the same principle, and offers the same advantage. Let us assume that we have a certain level of business activity which we wish to reach. That level is now resting low on the lever. At the opposite end is our financial net worth, exerting a certain pressure as it strives to send business activity up. But the energy required to lift the business activity is greater than that exerted by the net worth pushing on the opposite end. This situation might be linked to someone whose net worth is not great enough to get a new business off the ground. He/she needs more money, or needs to apply more leverage.
There are basically two variables in the application of leverage which might add weight to net worth, providing it with enough force to accomplish the task. First, the size of the new worth itself can be increased until it out-weighs the resting force of the business. Second is the position of the fulcrum in relationship to net worth and business activity. If the fulcrum is moved towards the business activity, then net worth will be able to increase its effective power; or, if the distance between the fulcrum and the pressure-point of net worth is increased – by extending the length of that portion of the lever – the effective force of net worth on business activity will also grow.
Another excellent example of application of leverage can be found in the investor who wants to buy an apartment building for one hundred thousand dollars, but only has ten thousand dollars of his/her own funds available for the investment. He/she must, if he/she is to get the building, multiply the weight of that ten thousand. His/her answer is to approach various lending institutions and arrange the use of OPM (other peoples money) to execute the venture. His/her net worth and credit rating can be effectively used to gain the balance necessary. When he/she has succeeded in obtaining these funds, he/she has, in effect, used the leverage of his/her ten thousand dollars and credit standing to multiply the initial force of his investment reserve by ten, giving him/her the total amount necessary for the purchase. Again, we can see the practical use of financial leverage.
What if you don’t want to borrow, or can’t borrow money. In today’s economy, there are types of leveraging that is just as effective. You might approach the seller with the idea of taking over an existing loan, and paying monthly payments back to the seller on his/her equity. You are using your ability to sustain the existing loan, which assist the seller in keeping good credit, as leverage to acquire the property. Use your clout to apply pressure or leverage on existing conditions.
Putting Leverage To Work For You
We will now go through a simple exercises in money multiplication. Our first exercise will demonstrate the simple appreciation in value which can be obtained through a holding or the ten-percent factor in ganging wealth, which most people simply can’t visualize as viable in the use of their money.
First rule: 10% belongs to you. That’s right, ten percent of everything you make belongs to you. This is over and above living expenses. You must budget your spending to include this ten percent. I can’t stress this enough. DO NOT SPEND YOUR BABY. This is your ticket to wealth, retirement and peace of mind. Through out your working years, you must take ten percent and leverage it for your prosperity. If you are true to anything in life be true to this concept. The ten percent is for your security. It’s like making payments on your future. You pay into social security why not personal security? Pay your personal security account every payday, without fail.
Learn about money management and place that ten percent where it will best be leveraged into one thousand percent or ten thousand percent. Pay attention, keep your eyes open. Look at what happened in 1979 to gold. The price of gold skyrocketed from thirty eight dollars per ounce to today’s six hundred dollars per ounce.
In 1984 it was obvious the owner of DOS would be extremely wealthy. Today Bill Gates and his counterparts are the wealthiest people on earth. Had you been watching you could have boughten into Microsoft with your ten percent and. Most probably been very wealthy today.
Just following Warren Buffet’s investments could have and still could make you a millionaire. No, not overnight or in a month, but by constantly paying your ten percent into well chosen investments, you will be secure in your retirement.