The Nine Principles of Leverage

Today I have a treat for you.

My friend, Todd Tresidder, from the site Financial Mentor, is letting me publish an excerpt from his new book The Leverage Equation: How to Work Less, Make More, and Cut 30 Years Off Your Retirement Plan.

In case you recognize Todd’s name, it’s probably from making my list of the only five money books you need to read. He’s the author of How Much Money Do I Need to Retire?, the best retirement I’ve ever read.

BTW, Todd retired at 35, so he knows what he’s talking about.

The new book is, as you might imagine, about leverage. It begins with the following:

How can you lift a 7000-pound car without anyone to help you?

The answer is the same as how you can achieve financial independence well before your retirement age. It’s the same solution that will get more done in a day, with less effort. And it’s the answer to breaking free of almost any limitation you think you have – whether it’s time, money, skills, connections, or anything else.

Leverage is the strategic tool that expands your resources beyond your present limitations to produce greater results than you could generate on your own. Leverage gives you access to more capital, more technology, larger networks, greater knowledge, and smarter systems than you personally possess.

Now you might think he’s talking about financial leverage (i.e. borrowing money) and that’s ONE of the options, but there are five others.

We covered The Six Types of Leverage last month on Rockstar Finance and we’re building upon that today.

One thing I really love about this book is how it addresses the power of business and entrepreneurship to build substantial wealth rather quickly.

And even if working for yourself is not the path for you, as you read the book you’ll develop a sense that at least a side hustle should be a strong consideration as you work your way toward financial independence.

As you know, I’m a big fan of side hustles because they can get you to FI so much quicker than you can without them.

For now, let me turn it over to Todd with a quick overview of the topic and then a listing of the nine principles of leverage…

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Overview

Accumulating wealth comes from compound growth of personal capital and financial capital over time. The advantage of using leverage is it doesn’t have to be your personal capital or financial capital. That’s a game-changing difference.

Leverage allows you to separate your wealth growth from your return on equity equation, and it allows you to break the connection between your income and hours worked. Breaking these connections opens the possibility for entirely different financial strategies that can radically increase your income and grow your wealth while actually working less.

Leverage releases you from the limitations of conventional financial planning built around working a job, earning money, then saving what’s left over at the end of the month so you can invest in a conventional asset allocation portfolio of paper assets. This is a slow, low-leverage path to wealth accumulation, usually taking a lifetime to acquire financial security (unless you pursue extreme frugality).

The leveraged path opens up accelerated strategies using other people’s resources so that your wealth growth isn’t limited by your own time, money, skills, and abilities. These added resources are what frees your wealth growth from the return on equity limitations and your income growth from time-for-money limitations.

But it gets even better because leverage is also the tool you’ll use to overcome the obstacles that hold you back from greater success. Nearly every obstacle you face and roadblock standing in your way is overcome by one of the six types of leverage.

In other words, leverage is both a tool for accelerating your wealth growth, and it’s a tool for breaking through the constraints that limit your success. Best of all, it doesn’t have to be risky because only financial leverage both increases risk and return. The other forms of leverage can accelerate your results while reducing risk at the same time, giving you the best of both worlds.

In short, you either learn to master leverage or you’ll work far harder than necessary to produce far fewer results than you’re capable of.

The 9 Principles Of Leverage

1. Mathematical Expectancy

Your wealth compounds according to mathematical expectancy, which is probability times payoff.

Smart wealth builders tilt the payoff portion of the equation utilizing both leverage (to maximize gains) and risk management (to control losses).

Skilled payoff management produces the counterintuitive result that you can be wrong nine times out of 10 and still achieve extraordinary wealth.

Another advantage of payoff management is it’s within your control; whereas, probability is not because it’s dependent on an unknowable future.

2. Reciprocal Exchange

Trading your time for money, or trading your money for a product or fixed interest rate of return provides a limited payoff, which limits your wealth growth.

The constraint is your own personal resources because that’s all you have to exchange.

The solution is to shift your strategy from the reciprocal exchange model where you trade time for dollars, to trading value for dollars – because value can be provided in many different ways using leverage that frees you from personal resource limitations.

3. Opportunity Costs

Your personal resources of time and money are limited resulting in opportunity costs. Whatever you choose to spend time and money on means it cannot be spent elsewhere.

Eventually your financial growth hits a wall because you can’t trade any more time to produce any more money when you’re already working as much as you can tolerate.

The only way to overcome your personal opportunity cost limitation is to leverage other people’s resources so you can tilt the payoff portion of the expectancy equation.

4. Time Freedom

The fact that time is limited is what makes financial acceleration through leverage so incredibly important.

Leverage is how you buy back your time by achieving financial freedom faster, so less of your life is spent on money pursuits.

If you want to know how long it will take you to become financially independent, just look at how much of your limited time is spent in reciprocal exchange versus how much of your time is dedicated to leveraged growth.

5. Give Value And Solve Problems

Business is about solving problems – because people will gladly pay to leverage your solution to their problems.

Your goal is to grow beyond the reciprocal exchange mindset by figuring out ways to use leverage to create more value and solve more problems.

When you master this skill, your growing wealth becomes a measure of how much value you’ve given to others.

6. Make Yourself Unnecessary

As you pursue financial independence don’t try to be a super-hero and do it all yourself.

If your goals are wealth and freedom, then the only way you can have both together is with the help of others.

There’s always more to do than any one person can do so focus your limited time on just the highest value activities requiring your attention.

Then delegate or partner so someone else can do the rest.

This achieves more, better, faster results and also frees up your time and energy to focus on your highest leverage strengths.

7. Upfront Costs, Benefits Lag

Leverage seldom results in instant gratification.

There is always an upfront cost that must be paid in terms of time, training, or system development before you can benefit from the lagged results that will be produced.

That’s why wealth growth is the habit of delayed gratification.

8. Expand The Gap

Your objective for all leveraged growth and risk management strategies is to expand the gap between how much you earn versus how much you spend, thus resulting in equity growth.

In the traditional model, that equity growth translates through savings over time to become investment capital; whereas, in non-traditional assets like business and real estate, your equity grows geometrically as a multiple of the increased earnings without regard to savings or time limitations.

9. Financial Independence

Mastering leverage leads to financial freedom which gives you back your time, the ultimate scarce resource.

More time opens up more possibilities to embrace the adventure of life and live it fully, which is the real objective.

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As you might imagine, the book digs into these (and other) issues in detail.

It’s a bit of a heady read as Todd is an intellectual (in a good way) but well worth it IMO. The book might even be a candidate for my top five, but if not, certainly deserves recognition in my list of top money books worth considering.

Hope you enjoy it!