If reading is more your thing, I have additional books available for purchase on my website or on Amazon.com. I recommend How Much Money Do I Need To Retire?, financialmentor.com/educational-products/ebooks/how-much-money-do-i-need-to-retire which takes you beyond the scientific façade of conventional retirement planning with refreshingly straight-forward, easy-to-understand, and concise advice on how to retire wealthy.
No matter which path you take to further your education, please remember that building wealth is an adventure in personal growth. The money is just the carrot. Who you become through the process is what really matters. I hope you enjoy the adventure!
Todd Tresidder
www.financialmentor.com
Quick Reference
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.
PRINCIPLES: THE 9 PRINCIPLES OF LEVERAGE
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.
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.
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.
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 leveraged growth.
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.
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.
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.
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.
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.
STRATEGIES: THE 6 TYPES OF LEVERAGE
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 at minimal cost then correct and adjust messaging until the 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 objectives.
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.
IMPLEMENTATION
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 so that you control for risk of loss before ever applying leverage. 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.
Bonus Content
This book has been about taking action, so I encourage you to take action now. To make it easy we’ve provided a complete set of printable templates, forms, and reference guides to help you, completely free of charge. It includes:
2 sample Standard Operating Procedures
101+ Leverage Hacks
A Printable Exercise Workbook
And an accountability chart for implementation
; You can get immediate access to all of these resources at: https://financialmentor.com/free-stuff/leverage-book.
Acknowledgements
First, I need to thank Erin Millard, my assistant. The rule is to always hire people better than yourself. Erin defines that rule. Without her constant support, this book wouldn’t be in your hands right now.
Second, I’d like to acknowledge Julie Broad and her professional publishing team at Book Launchers. Their support and assistance with editing and designing took my rough draft and polished it into the book you hold today.
Finally, I’d like to acknowledge you, the reader. It is your passion for learning that feeds my passion for teaching. Thank you.
About the Author
Todd R. Tresidder’s financial writing has been featured in the Wall Street Journal, Smart Money Magazine, Investor’s Business Daily, Forbes, Yahoo Finance, Inc., USA Today, and more. He is a former hedge fund manager who “retired” at age 35 to become a financial consumer advocate and money coach. In his spare time he’s an outdoor recreational enthusiast with varied interests from backpacking and adventure travel to endurance running and cycling. He writes nine months of the year from his home in Reno, Nevada while his kids are in school, and he plays the rest of the year. You can learn more about Todd at
financialmentor.com.
Additional Books by Todd Tresidder
How Much Money Do I Need To Retire?
Don’t Hire A Financial Coach! (Until You Read This Book)
The 4% Rule and Safe Withdrawal Rates in Retirement
Variable Annuity Pros and Cons:
The Leverage Equation Page 15
