The Power of Leverage | Marvin Germo

The Power of Leverage

By: Marvin Germo | May 9, 2014

Leverage is great in business and investing.  Allow a good friend and #ICON2014 speaker, Carl Dy to expound more on what this is and how it can help you make your money work hard for you.

Leverage

In the world of science, lever is a bar resting on a certain point that multiplies the force you exert making it easier to move or lift objects using less force. In the world of investments ,to leverage is the act of using various financial instruments or borrowed capital in order to increase the potential return of an investment. According to my financial mentor, Leverage is one of the most powerful concepts that differentiate the rich from the average. Leveraging allows you to grow your wealth faster.

There is one thing that both the rich and the poor have equal amounts of. That is time. We all have 24 hours in a day, and how much money you make (and save) in that daily 24 hour cycle will determine how early you will be able to reach your financial goals. Leverage is also what allows businessmen to become wealthier faster over a regular 9 to5 employee.

To help you understand this better, let me illustrate,

Johnny is a businessman trading apples, He has a P900 working capital. Every day at 6am he would go to the market and buy 100 pcs. of apples for P900. He makes a P5 profit per apple and can sell 100 apples a day. In a day, he is able to pocketa P500 profit. Johnny’s family’s daily expense is at P500, so his profit for the day is just enough to cover for a day’s expense. He repeats this routine daily of buying apples at the market and selling the same to make a P500 profit. Without leverage, Johnny will always be “man at work”. The day Johnny stops going to the market to buy and sell apples is the day his income also stops.

If Johnny knows how to leverage, he can borrow P900, increasing his working capital to a total of P1,800, enabling him to buy twice the number of apples. At a loan rate of 10% per annum, he pays the bank 90 Pesos per year or a mere 25cents a day as interest on his loan.

With his newfound capital, Johnny now has a P1,000 profit per day after leveraging on other people’s money to buy twice the amount of apples while paying only 25cents daily for a 10% loan interest, growing his net profit to a total of P999.75 per day.

Now that Johnny is making more profit, he can decide to hire an assistant for P250/day to help him sell apples. This cuts down his profit to only P750/day, but by using manpower leverage by hiring an assistant to buy and sell the apples; this enables Johnny to keep his existing business of selling 200 pcs of apples per day even if he is physically not doing the work.

Now, although Johnny has cut his profits down to P749.75 from his initial P1,000 per day, he is now free to enjoy his life a little more. He can decide to wake up a little later, or better yet, Johnny can, spend his new found free time to open up another apple store. Johnny, using leverage of loan and manpower has now achieved both “man at work” and “money at work.”

To make things a little more interesting, let’s pretend that Johnny repeats this process in another location. Leveraging a new loan amount of P1,800, enabling his 2nd location to buy and sell another 200pcs of apples. After paying for a 2nd assistant, and paying 50cents per day for the interest on his loan, Johnny now takes home a profit of another P749.50/per day on the 2nd location.

If Johnny continues to recreate the same business model and expand his selling location to 5 more stores he would have accumulated a total of P3,747.75 profits/ per day. Johnny using leverage has increased his income from the initial P500/day to more than seven times at P3,747.75 in the same amount of time.

Leverage is one of the fastest ways to financial prosperity. Leverage allows you to take other people’s money, use other peoples’ 24hours and make it work for you. If you are creative enough, you can also leverage your knowledge to create wealth. This means that the sky is the limit in using this technique to earn millions and reach your financial goals early.

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