Six Types of Leverage
The following is an excerpt from the book The Leverage Equation: How to Work Less, Make More, and Cut 30 Years Off Your Retirement Plan. The book is written by Todd Tresidder who writes at Financial Mentor. He's a big-thinker who retired at 35 and has been living the FI life since. He's also the author one of my all-time favorite books How Much Money Do I Need to Retire?, the best book I've ever read on retirement. In this excerpt from his new book, Todd lists the six types of leverage and explains each of them. This serves as a great overview of the book, so if you like what's below you will certainly want to grab a copy of the book. ---------------------------------------------
Financial Leverage – Utilize other people’s money so you’re not limited to your own net worth.
Financial leverage comes in three different forms: (1) borrowed money, (2) contractual leverage, (3) and operating leverage. It’s a valuable tool for your wealth plan because it eliminates any excuse for money being an obstacle to your financial growth. However, financial leverage is the one type that both increases potential rewards and decreases the odds of survivability. It makes the good times great, and the bad times unbearable. That’s why the following risk management guidelines are essential for financial leverage.
- Don’t over-leverage because the best plans will still experience temporary setbacks, at a minimum. Sometimes worse.
- Always have an exit strategy to remove leverage and preserve equity so you’re prepared with clear action steps should adversity strike.
- Only leverage assets that provide positive cash flow net of debt service and expenses.
- Avoid using financial leverage when the income stream supporting the assets is volatile.
- Financial leverage is most appropriate when your goal is maximum wealth growth, but is inappropriate when your goal is security and stability.
- Avoid financial leverage in deflationary economic environments.
Time Leverage – Employ other people’s time so you’re not limited to 24 hours in a day.
Time is your ultimate scarce resource. The fact that you can’t save it or create more of it is why leverage strategies to accelerate your financial freedom are important. It’s how you recover your limited time from being spent on unsatisfying drudgery. The goal of time leverage is to release your income growth from the boundaries of time, and to get more stuff done without using any of your time. You achieve these two goals through a progressive four-step process:
- The first step is to increase the proportion of truly productive time in your day. You want to recover those marginal hours that will literally double and triple your total productivity.
- The next step is to delegate projects so you can multiply the amount of time working toward your goals, thus accelerating your progress.
- Next, increase your time leverage from linear project leverage to the more valuable process leverage. Identify all repeating functions in your business that don’t need your active involvement and delegate them.
- Finally, you can further increase leverage by replacing human time from the production equation with scalable business system automation using technology and systems leverage.
The goal is to get more work done so you can create more profit while working less.
Technology And Systems Leverage – Set up a scalable model once so the systems can do the work thousands of times
If your goal is to own your business (rather than letting it own you) then you need to remove yourself from the production process. Convert all activities required to run your business into scalable, efficient systems that aren’t dependent on any individual.
- The starting point is to process map repetitive tasks into standard operating procedures so that reliable, high-quality, efficient results are produced every time with a minimum of mistakes.
- The next step is to integrate technology leverage so that you start replacing human labor with machine labor, further reducing costs and improving results.
- Finally, design audit controls with checks and balances into your systems so they’re self-correcting.
It costs time and money to get systems leverage working for you, but those resources are well spent because the result is greater wealth, less risk, and more freedom. And that’s a goal well worth pursuing.
Communications And Marketing Leverage – Access other people’s audiences through magazines, newsletters, and databases so you can communicate with millions for the same effort as one.
Communications leverage is the bridge that creates marketing leverage out of networks. It has three main advantages:
- Low marginal cost for each touch point because it’s generally priced as a fixed expense allowing you to cost-effectively increase the frequency and breadth of communication.
- Builds brand loyalty and trust by using technology to cost effectively deliver value through articles, courses, videos, and other educational resources.
- Gives immediate data feedback so you can test offers in minutes for minimal cost then correct and adjust messaging until conversion rate proves cost-effectiveness.
There are many tactics to increase communications leverage (upsell, cross-sell, referral systems, joint ventures, automated sales funnels, continuity sales programs, media outreach), but they all boil down to two principles.
- Find new customers.
- Increase the lifetime value of existing customers.
The key to success in communications leverage is knowing how to cut through all the information noise with a meaningful message that serves your customers. Give them something valuable so you’re not just adding to all the noise that already clutters their lives.
Network And Relationship Leverage – Employ other people’s connections and resources so you’re not limited to your own.
Network leverage is based on relationships that exchange value instead of money. The value exchanged might include contacts, resources, strategies, experiences, referrals, support, or any other form of value that costs the giver nothing but makes a big difference for the receiver. The reason relationship leverage is important is because the root of all business is human relationship. When you know how to leverage those relationships ethically, you’ll create more business, faster, with less risk, and with less of your own resources. The four steps to building a network that multiplies your wealth are:
- Decide who you want in your network.
- Connect with those people.
- Build the relationship over time by giving and paying it forward – never using. Be the first to offer up your contacts and resources before making any demands on the relationship. Play the long game.
- Finally, when the time is right, you can ask for an appropriate level of help.
Building a strong professional network of strategic contacts is something that can take years. It requires effort, but strategic alliances with the right people can make or break your wealth plan. The key is who you know, what you know, and how you ethically apply those resources.
Knowledge And Experience Leverage – Utilize other people’s expertise, or leverage your own expertise
Knowledge is the foundation of all wealth-generating processes because it converts resources into something with economic value. Stated another way, physical capital owes most of its value to intellectual capital. Unfortunately, the ability to learn and grow intellectual capital is limited by your time and ability to internalize information. There’s always more to learn than time to learn it. That’s why hiring an expert who lives and breathes the knowledge you require can be such an effective leverage strategy to save you time and accelerate your wealth. Alternatively, if your goal is to increase your earning capacity, it might make sense to gather the knowledge yourself so as to become the go-to expert that others leverage. Regardless of which path you choose, knowledge leverage is a strategic way to reduce risk and increase return to accelerate your wealth growth.
Nobody is born with leverage skills so don’t get overwhelmed if these leverage strategies felt foreign or unusual. The good news is there’s a strategic way to implement leverage, regardless of your current skill level, that will best capitalize on your existing strengths and minimize any weaknesses. The first point to remember is leverage is just an accelerator for whatever business process is already in place. When you multiply an efficient operation through leverage, you increase profits. Conversely, when you leverage an inefficient operation, you multiply losses. So the first rule is: bootstrap your way to profitability before ever applying leverage to control for risk of loss. Think of it in two stages.
- The first stage is controlling risk to minimize losses while developing a profitable model.
- The second stage is multiplying that profitable model with leverage to create a huge win that tilts the payoff portion of your expectancy equation.
The second rule is: all six types of leverage work synergistically together. They are not mutually exclusive. Each type provides a unique tool for removing a specific constraint to growth, and when the tools are applied together, they produce a compound effect. So just start with whatever leverage tool is most immediately appealing and don’t worry about the rest because they’ll naturally fit into your wealth plan in the fullness of time. The goal is to accelerate your wealth growth and save your time because if you aren’t using leverage then you’re working harder than you should, to earn less than you could.