CONSIDERATION 8: FINANCIAL LEVERAGE Well, there is no way but to use LEVERAGE. Without leverage, it is practically impossible to build wealth. And most “experts” on TV tell us not to use it, yet the affluent tell us they cannot do without it. They are right. The numbers prove it all - and their wealth proves it too. Financial leverage can be good and bad. It can work for us or destroy us financially. However, once you know how to use it and manage the risk, it can MOVE us to the right hand side of the Wealth Formula. In fact, some of the affluent have said that it’s impossible to build wealth without leverage. Now you see why. The numbers prove it. What does leverage do? Again, used right, it moves us to the right side of the Wealth Formula. Leverage is to the wealthy as candy is to kids. We position ourselves on the receiving end of inflation. That means as inflation rises, we benefit. Leverage positions us on the receiving end of interest and opportunity cost as well. Here is another analogy for leverage. Instead of having just one $10,000 growing in a compounding environment and in a tax-advantaged environment, we can first replicate the $10,000 four more times, and each of those placed in a compounding environment and in a tax-advantaged environment. Now we are working with $50,000 to start with, and more for the people that know how to use leverage effectively! The key to financial leverage is to have the interest rate on the leverage to be FIXED for a long time, and less than inflation rate. Interest Rate < Inflation Rate So think of financial leverage, used right, is a REPLICATING process. Let’s put everything together. We started with $10,000 cash. Now we will replicate it several times (using leverage). So we expanded the $10,000 to $50,000 instantly in this example. No waiting for a gazillion years! We now place each of those sets into a compounding environment. We then make sure we place all that in a tax advantaged environment. We make sure we minimize or eliminate fees. And then because we are using leverage, inflation works to our advantage. Each set can return less than the 16.67% return we calculated above, but the sum across all sets should easily beat that, which allows us to know we are actually building wealth.
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