Financial Leverage

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Summary

There are some basic ways to leverage what you currently have that may allow you some breathing room or free up funds to expand your resources into new adventures.  

Businesses use leverage to launch new projects, finance the purchase of inventory and expand their operations.

For many businesses, borrowing money can be more advantageous than using equity or selling assets to finance transactions. When a business uses leverage—by issuing bonds or taking out loans—they can maintain full ownership in the company, unlike when a company takes on new investors or issues more stock. 

Leverage can be especially useful for small businesses and startups that may not have a lot of capital or assets. By using small business loans or business credit cards, you can finance business operations and get your company off the ground until you start earning profits. There are often credit cards with zero interest for a limited time, usually 12-18 months where you are using the bank's money for free.  This is a great way to keep your personal cash free or invested, making you money while you can grow your business.  

When it comes to your personal finances, you may be surprised at how often you use leverage. Whenever you borrow money to acquire an asset or potentially grow your money, you’re using leverage. You might use leverage when you do the following:

Buy a home: When you purchase a house with a mortgage, you are using leverage to buy your family's dream home, or maybe it’s an investment property that gives you monthly rental income while appreciating year over year. Over time, you build equity—or ownership— in these homes as you pay off more and more of the mortgage. This is how you earn a return on your investment in real estate.

Take out student loans: When you borrow money to pay for school, whether it be college, vocational school, or other specialized training, you’re using someone else’s money to invest in your education and your future. This boosts your earning potential, and the higher salary lets you recoup your investment.

Purchase a car: If you need to buy a car, you can purchase with a car loan. I will encourage you to use this type of debt very carefully.  Cars are typically assets that depreciate, which means their value decreases rather than increase like real estate. However, typically a car is not bought as an investment and more as a need for transportation so if you go into it knowing that you will likely not earn on your investment you will not be disappointed and owning a car may be necessary for you to earn an income.

Inspirational Quotes

Full Transcript

Do you know people that appear to be more financially flush than you would ever imagine they would be?  Maybe it seems that you never have the same advantages financially that your friends do…even though you are certain you should be in a better position than most of them.  You have worked hard to get to where you are.  You did all the right things.  So why does it seem that there is never as much extra as you would like when great opportunities become available?  Sometimes this is as simple as how different people leverage what they do have.

We all know that financial comfort and freedom are not the answer to happiness. We have been told that for years.  Have you noticed though, that it is usually those that don’t have it and are trying to convince us that money is bad, that are spreading that message?  Some of you are probably ready to start a debate with me here, and that’s ok, but please stick with me and let’s see if we can come to a neutral platform.  

We do know that deep down It is about who we are and how we show up every day for those that we love and care about.  That might be friends and family or clients and co-workers.  I get it and intuitively I understand it.  I do know and have personally been in amazing financial situations where life should have been all champagne, roses and 5 star chick flicks…but it wasn’t.  On the reverse side most of us have experienced times when our finances, for lack of a better word, really sucked…but I won’t lie some of those times were amazing, and joyful.  Literally some of the best memories can be from those times of financial struggle.  Maybe it is because we learn to make do and get creative.  However, given the choice I will choose to make memories having more money.  That may sound really selfish and crass, but we all know that it’s easier to live a big life and share with others and spoil those around us if we have money. More money is just better and easier. If you are someone that was raised or has lingering beliefs that money is evil then this video will likely not change you, but I challenge you to look deep at where those beliefs came from and what voices are still telling you this.  Money never made anyone bad…It is an inanimate object with no emotions.  It cannot persuade you to do anything.  I think you will have to admit it probably goes a little bit deeper than that.  I believe that you can still love those around you when you have financial security…and in fact it likely will put you in a better place emotionally since money frustrations lead to a ton of stress and the largest percentage of relationship failures.  

So, if that is true and I believe it is then we better know how to utilize Financial leverage…yep, learning how to leverage what you have and work with what others have, can be the key to being able to grow your wealth and expand your financial security when great opportunities present themselves, whether it be in real estate investing, the stock market, business partnerships or equity buy ins.  The list is endless.

Now full disclosure, I am not a financial advisor nor am I an accountant.  So please use this as a reference and always check with your financial professionals when making decisions.  Everyone’s situation, needs and goals are different so there is never a one suggestion that fits all.

Maybe you own a company.  Leverage has slightly different meanings in personal finance, investing and business. But in both scenarios, leverage is the use of debt to help achieve a financial or business goal. 

That being said, there are some basic ways to leverage what you currently have that may allow you some breathing room or free up funds to expand your resources into new adventures.  We will talk about 3 ways that leverage can open up some wonderful doors for you.

1. Leverage in Business

Businesses use leverage to launch new projects, finance the purchase of inventory and expand their operations.

For many businesses, borrowing money can be more advantageous than using equity or selling assets to finance transactions. When a business uses leverage—by issuing bonds or taking out loans—they are able to maintain full ownership in the company, unlike when a company takes on new investors or issues more stock. 

Leverage can be especially useful for small businesses and startups that may not have a lot of capital or assets. By using small business loans or business credit cards, you can finance business operations and get your company off the ground until you start earning profits. There are often credit cards with zero interest for a limited time period, usually 12-18 months where you are using the bank's money for free.  This is a great way to keep your personal cash free or invested, making you money while you are able to grow your business. An example is a real estate investor that flips homes.  I have personally witnessed many investors purchase a home, get an interest free credit card to do the improvements and sell the home and pay off the card before any interest has accrued…sometimes before the first payment is due.  Now let’s be clear I am not encouraging you to do this, or guaranteeing the same results…it’s just an example so don’t go crazy and go buy 6 houses and rip them all apart next week.

Another great thing is that when you take out a loan or a line of credit, the interest payments are tax-deductible, making the use of leverage even more beneficial.  Again, please consult your tax advisor for your specific deductions.

When evaluating businesses, investors consider a company’s financial leverage and operating leverage.

Financial leverage is the best indicator of how much debt a company has in relation to the amount of money its shareholders invested in it. This figure is critical to know because it is a good indicator if a company could repay all of its debts through the funds it’s raised. A company with a high debt-to-equity ratio is typically going to be a riskier investment than a company with a low debt-to-equity ratio.

2. Leverage in Personal Finance

When it comes to your personal finances, you may be surprised at how often you use leverage. Whenever you borrow money to acquire an asset or potentially grow your money, you’re using leverage. You might use leverage when you do the following:

Buy a home: When you purchase a house with a mortgage, you are using leverage to buy your families dream home, or maybe it’s an investment property that gives you monthly rental income while appreciating year over year. Over time, you build equity—or ownership— in these homes as you pay off more and more of the mortgage. This is how you earn a return on your investment in real estate.

Take out student loans: When you borrow money to pay for school, whether it be college, vocational school or other specialized training, you’re using someone else’s money to invest in your education and your future. This boosts your earning potential, and the higher salary lets you recoup your investment.

Purchase a car: If you need to buy a car, you can purchase with a car loan. I will encourage you to use this type of debt very carefully.  Cars are typically assets that depreciate , which means their value decreases rather than increase like real estate. However, typically a car is not bought as an investment and more as a need for transportation so as long as you go into it knowing that you will likely not earn on your investment you will not be disappointed and owning a car may be necessary for you to earn an income.

There are other ways to move your money and your loans around to benefit your end of the year financial situation as rates change on various credit opportunities and should carefully be evaluated to ensure that you never put yourself in a compromising situation of not being able to meet your financial obligations.  However, always analyzing where you are at, what you owe and to whom you owe, is financially responsible and should constantly be on your radar in terms of how to improve your financial standing.

3. Investment Leveraging

Leverage is key in offering investors a powerful financial tool to increase the return on their investment. Investing using leverage comes with risk and investors need to utilize tools that help them ensure the risk is worth the reward.  Leverage in investing comes with potential for great loss and new investors need to really incorporate the advice of financial advisors and experts in whatever field they are investing in to make sure that they have taken into consideration all the pros and cons.  That being said, learning about investment leverage is a fantastic way to feel that you have some ability to change your long-term financial situation, whether it be for long term wealth, sending kids to college or retirement.

I hope that this has given you some useful information and at the very least some things to dig deeper into when looking at your financial future.

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