in Entrepreneurship

The Principle of Financial Leverage

I came across a fantastic answer by Charles Tips on Quora the other day that I have to re-post.

It’s a financial experts answer to the question: What is the best route (or tips) for a 25 year old who is focused on becoming financially free?

I’m re-posting this because it’s poignant and simple, while still being a powerful reminder of how we can really create (financial) wealth. Here it is in it’s entirety:

The only way to get rich rapidly is to understand the principle of leverage.

Financial leverage works this way. You spot widgets for sale in bulk for only a dollar. You know where you can sell them for two dollars. You’ve got a hundred dollars, so you buy a hundred and make back $200. If you had borrowed $100 from your banker, paying back $110, you could’ve bought two hundred and made $300 for your total outlay of $100 plus $10 in interest, quite a bit better return on your investment.

Leveraging your time works this way. I hired a window washer for my store for the customary $20 out of petty cash. It took only twenty minutes to complete the job, so that represented a lot more than the $7/hour I paid my sales clerks, but the idea was, he provided his own tools and supplies which he had to lug around and spend time selling his services.

The next time he came to wash my windows, he was in a suit. He took the $20 bill and left his associate behind to do the work. As I walked around downtown, I could see as many as three of his associates working at one time. Let’s say there were just three. How does this work?

Working for himself, if he really humped it he could land twelve jobs on a good day, or $240 [=$600 in 2014]. By hiring workers and focusing on sales himself, they could each handle fifteen or more jobs a day. He’s paying them $7/hour or about $4 per job, which means he’s clearing $16 per job for himself, or $720 a day, cash [=$1800 in 2014].

What do you do with all that money when savings isn’t paying? Buy things that will appreciate in value. When you can leverage your time and your money and then put your money to work, you are on the road to riches. Many people make the mistake of looking for a high rung to catch onto, a position worthy of their education and experience. Something as humble as window washing, leveraged, is a surer road to financial security.

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Header Photo Credit: Mukumbura via Compfight cc

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