Leverage: Using Other People's Time And Money, And Feeling Good About It
When I first started playing this game and heard about leverage, parts of it somehow seem so wrong to me. Everybody were talking about using other people's time and other people's money to build their own businesses. And it sort of repulsed me. It didn't click.
Other People's Time
I was thinking: I could hire some nice person to do some work for me. I could pay them enough so they wouldn't complain, and could go on living their lives. That's what an employer does, right?
But in the back of my mind was this: Why doesn't that nice person perform exactly the same task, for him- or herself, and make heaps more?
I felt like I would be tricking people and taking advantage of them, if I hired them to do some work for me.
I felt like that for months. But then it hit me how flawed my thinking had been, in every possible way.
First, that nice person wouldn't be doing exactly the same task without me. In fact, the reason why the task existed in the first place, was because I had organized everything around it!
Second, that person would have traded risk for less money. I think this is even more important than the first point. That person probably didn't want the risk of doing the business for him- or herself. When someone does the work and gets paid, there is very little risk involved. And most people like it that way! So I would have given the something they want, the opportunity to exchange some time for some money. I would be doing them a favour!
Other People's Money
Now what do people mean when they say that you can use other people's money to build your business? Well, from my viewpoint, this means one of two things.
1. You take up a loan. Do you know the difference between good debts and bad debts?
Bad depts are depts that just keeping taking money out of your pocket. Like when you take up a loan to buy a new family car.
Good debts are debts where you have paid for something that puts money in your pocket, like a rental property, or a business.
So if you take up a loan to start your business, you are using other people's money to make money for yourself. This gives you leverage, in that you can do more with all that money than you could if you only used your own money. But remember that leverage can go both ways -- you stand to lose more, as well, if your business doesn't run properly.
2. You sell something before you buy it. Yes, I mean it, and it's perfectly legal and ethical. Let's say you spend $1000 to buy the option to buy licencing rights from a company for $100,000. Then you sell these right in several smaller portions, say to 10 people for $25,000 each. You collect the money from your buyers, buy the rights from your licencer, and you've just made $150,000 with only a $1000 at risk. And where did you get these $1000 dollars? Well, if you didn't have them lying around, maybe you borrowed them from the bank (or used your MasterCard).
In both instances, everybody's happy, because everybody is making money. The bank makes a living letting you use their money. And the businesses in example two have full confidence that they will make money with the product you sold them licences for.
More Leverage!
Leverage is everywhere, of course, but sometimes it takes a little practice to spot it. Leverage can be using other people's talents, skills, contacts, credibility and resources, as T. Harv Eker says. It is using the media to gain exposure, new technologies to save time and slash costs, it is time managment skills. Leverage is to get more results with less of your own resources. Leverage is vital to understand, and to start using, if you want to follow me on this track to financial freedom.
Love,
Sten
