What is leverage?

I did a Google search for definitions of leverage to see if I could find one I liked to serve as a starting point. Most definitions involved making money using borrowed funds, which makes sense as this is what one typically associates with the word.

Wikipedia, god bless it, had perhaps the best definition I saw on that page:

Leverage is using given resources in such a way that the potential positive or negative outcome is magnified.

It doesn’t have to be money. You can leverage business contacts, you can leverage goodwill, and you can leverage people. Not everyone has access to the same resources that can be leveraged, but before the end of this article I’ll talk about one very powerful resource that can be leveraged that EVERYONE has access to.

You’re probably leverage

Do you have a job? Well, the owner of your company is using you as leverage. Rather than do the work that you do himself, the owner of the company pays you to do it. Why would he do that? Is he an exceptionally nice guy? Well, he might be, but that’s not why he’s paying you money. He does it because you make him more money than what he’s giving to you.

The difference between what you get paid and what you make the company may be a large amount or it may be a very small amount. If it’s a very small amount, it’s likely the owner has leveraged many people just like you. If it’s a very large amount, the owner of the company may only need to find a small number of people to leverage.

Screw this! I want to be the leverager, not the leveragee

Now you’re talking! The first step is to find out what you can leverage. Make a list! Do you know a lot of people? Do you know one person with exceptional amount of resources? There’s always money that can be leveraged, got any of that?

As stated, business owners are in a prime position to take advantage of one of the most powerful resources: people. But not everyone has the entrepreneurial spirit, the desire to run their own company. If you do, fantastic. You’re probably already familiar with the concept of leverage. If not, no big deal. Be honest with yourself when making your list.

Okay, I made a list. I have two things I can leverage: jack and squat!

Ahhh…but you’re so wrong. There is one thing that everyone has plenty of and can leverage. If you haven’t figured it out yet, I’m talking about time. The best thing about time is that everyone, even the poor, has access to it. What’s interesting is that typically the more scant a resource is the less valuable it is. But despite everyone having access to time, it’s still very valuable. It’s so valuable that your boss wants to leverage it.

Okay, fine, I have time. Whoopteedoo. How do I leverage it?

There are many ways. Going to school to learn new skills is a great way to leverage your time. If your time is currently worth $20/hour, learning how a new skill can double the value of your time. But I really want to focus on a way to leverage your time that requires little effort on your part.

The first thing you need to understand is that we - meaning you, me, the guy next door, even Bill Gates - earn a finite amount of money in our lifetime. That’s important, so I’m going to say it again: We earn a finite amount of money in our lifetimes.

We don’t often look at things this way. In fact, when spending money we know we shouldn’t spend we might think, “Well, I have a paycheck coming in another two weeks, I’ll be fine.” While that’s true, you have to remember that every single dollar you consume today is subtracted from that finite pool of money you will have access to over your lifetime. If you consume that dollar today (meaning you’re not investing it in some way or leveraging it), it’s gone for good from your pile. Got that?

Now, take a look at the box below. That box will hold $1.5 million dollars, which is exactly the amount of money you’ve decided you’d like to have when you retire at age 64.

So, how are you going to fill it? Well, let’s set a few other ground rules for our analysis first. You’re 24 years old. You run the numbers and figure out that if you invest $4,964 each year until you are 64 and earn 8% on those investments, you’ll be able to fill that box.

Notice that you’ll have four complete decades before you reach your retirement age. Now, if you take the $4,964 that you’re investing each year and multiply it by ten years you’ll see that each decade you invest $49,460, or $198,560 over the total 40 years. So, just under $200,000 somehow becomes $1.5 million by the time you retire. This, of course, demonstrates the power of compounding.

This also tells us that the dollar you spend today is not only worth one dollar today, but it also has another value - a future value. A dollar is not just a dollar. You must consider all measures of value of the money you spend today. They have much greater future value than the dollars you earn at age, say, fifty-four.

Still with me? Let’s take a look at some pictures to help flesh this out a little better. Let’s go back to our retirement box. This time, however, let’s show it filled up.

You’ll notice that it has been filled in a color-coded fashion. What do those colors mean? Well, you can probably guess, but let’s go into the detail.

• (1) This represents $844,063, over half of the $1.5 million retirement nest egg. This money came from the $49,460 invested from ages 24 to 33.
• (2) This represents $390,964. This money came from the $49,460 invested from ages 34-43.
• (3) This represents $181,092. This money came from the $49,460 invested from ages 44-53.
• (4) This little, teeny tiny sliver of money represents $83,881. This came from the $49,460 invested from ages 54-63.

So there you have it, while the sum total of the present day amounts of each decade are identical, the future values of the amounts invested each decade are drastically different. Yes, you’re leveraging your money, but it is your leveraging of time that makes the all the difference.

You may not have access to as many resources to leverage as the superstar businessmen of the world, but I’ll bet you have more than you know. Spend some time and think about it. At the absolute very least, you know you have time and when it comes to money, time is a very precious resource. Are you leveraging yours?



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