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DIGEST THIS! THE ESSENTIAL IDEA:
“When a man tells you that he got rich through hard work, ask him: “Whose?” (Don Marquis)
The Leverage Equation is the book of working smarter not harder. Like using a lever to generate a larger force through a small amount of effort, learn how to do more with less – through the power of leverage. Going it alone limits your impact – harness other people’s time, wealth, knowledge and networks to catapult you to greater success.
- Own your life – gain freedom from your business instead of letting it own you.
- The core aim of leveraging – do more with less.
- To get bigger results faster, you will need to leverage other people’s resources.
- How do you get more than 24 hours in a day? By leveraging other people’s time.
- How do you get more customers? By leveraging other people’s audiences.
- How do you buy your life back? By leveraging other people’s money, helping you to live your best life earlier by getting you to financial freedom faster.
- Leverage is an accelerator. It magnifies the good, it magnifies the bad.
- Leverage is more than money, it’s about value.
- You leverage every single day, without even realising it.
6 TYPES OF LEVERAGE
- FINANCIAL LEVERAGE
- TIME LEVERAGE
- TECHNOLOGY & SYSTEMS LEVERAGE
- COMMUNICATIONS & MARKETING LEVERAGE
- NETWORK & RELATIONSHIP LEVERAGE
- KNOWLEDGE & EXPERIENCE LEVERAGE
ALL ABOUT LEVERAGE
- “Leverage is the strategic tool that expands your resources beyond your present limitations to produce greater results than you could generate on your own.”
- “If you aren’t using leverage, you’re working harder than you should, to earn less than you could”.
- The core aim of leveraging – “do more with less of your own resources by expanding the resources at your disposal”.
- Leveraging is “responsibly applying other people’s resources to overcome obstacles that limit your success so you can achieve greater results with less personal effort”. So that your success isn’t constrained by your own limited time, money, skills and resources.
- There is a lot of overlap between the different leverage types – and they can be used together.
- When you leverage, you use resources to generate more than just a reciprocal exchange – e.g. trading time for money, trading money for a product, trading your money for a fixed rate of interest. Unlike with leverage, the result you get from a reciprocal exchange is capped – it’s not scalable.
- “Leverage is just an accelerator” for any process you already have in place – it is like a multiplier, so if you leverage an inefficient process, you will multiply your failures.
- “Business is about solving problems … people will gladly pay to leverage your solution to their problems.
- You are already leveraging everyday of your life when you benefit from using someone else’s resources. E.g. – a credit card (someone else’s money), your smartphone (you may own the phone but not the software used to complete a multitude of tasks), a book (someone else’s knowledge), a savings account (someone else’s system).
- The key now is to learn how to consciously, intentionally and strategically leverage the right resources to generate greater resources for yourself that allow you to live the life you truly want.
- 10x Exercise: Think of a goal. Now think of the same goal but with 10x the results. E.g. your first goal could be to open a restaurant, 10x that would be to open a chain of 10 restaurants. What would you need to leverage to get those results? The aim is to stop you from limiting your success and vision simply because you don’t own the resources that would enable you to get there.
LEVERAGE AND WEALTH
- Leverage allows you “to break the connection between your income and hours worked”, therefore allowing you to grow your wealth whilst actually working less.
- The majority of people who went from zero to multi-millionaire in their 20s and 30s did so through setting up businesses or through real estate – as these provide multiple opportunities for leveraging allowing them to grow their wealth faster.
- Leverage provides an alternative and faster process to growing wealth than through frugality and saving (gaining compound interest over time) to gain wealth. It allows you to generate greater wealth earlier in life and therefore enjoy it for longer.
- No approach is better than the other – it’s about assessing the trade-offs with each and identifying the path that best suits you. Financial leveraging can deliver greater wealth faster than saving but involves greater risks. But remember, “typically, 80 to 90 percent of your time is used just to get by in life, leaving just 10 to 20 percent to produce something truly extraordinary”. Generating wealth faster through leveraging can give you more time to deliver even greater impact, of real significance to the world.
WHY LEVERAGE IS IMPORTANT
- You don’t have unlimited time on this earth to achieve everything you want to. If you did, you could choose to save with the smallest savings rate that would “eventually compound to a magnificent fortune”.
- This sets a deadline that means accelerating the growth of your financial wealth to gain financial independence – giving you the time and freedom to do all you want to in life – is so vitally important. Leverage is the tool that will get you there.
- “Leverage is the tool you use to buy back your life by achieving financial freedom faster.” “The successful application of leverage gives you the freedom to do what’s important to you in life and what aligns with your deepest values … without worrying about money.”
- Having “both time and money … opens up possibilities for your life.”
WHAT’S STANDING IN YOUR WAY?
- Instead of trying to maximise success, tackle the real problem at hand – identify and eliminate the obstacles in your way. Focus not on your destination, but on the tackling the roadblocks to your destination.
- This is similar to tackling the most limiting factor in your system.
- By defining the constraints that prevent you from achieving your goals, you become aware of the opportunities to leverage the resources of others. Leveraging gives you “access to the resources and skills that you lack.”
- Don’t have enough money? Can you use someone else’s?
- Don’t have enough knowledge? Can you employ an expert?
- Don’t have enough time? Can you delegate to someone else?
- “Relying on yourself only hinders your success.” “Time and money spent in one place cannot be used elsewhere” – that’s why you need to use the resources of others.
1. FINANCIAL LEVERAGE
- “Nobody gets rich without leverage.”
- Financial leverage is using other people’s money to increase the capital available to you, with the aim of increasing profits. The cost of the increased capital is typically in the form of interest payments.
- Financial leverage is not the same as investing. Investing your own money in stocks, for example, is not financial leverage as you are not incurring debt nor the associated cost of the debt.
- With risk comes rewards … assessing the risk of financial leverage is important because leverage will magnify your gains, AND will magnify your losses when things go bad.
- Financial Leverage Gain Example:
|HOUSE PURCHASE USING OTHER’S MONEY|
|Mortgage (financial leverage)||£180k|
|Yearly Interest (6%)||£10.8k|
|TOTAL COST AFTER 1 YEAR||£210.8k|
- You purchase a property for £200k by paying a £20k deposit with your own funds and leveraging the other £180k by securing a mortgage, at an annual cost of 6%.
- You sell the house after a year for £250k, the debt costs you £10.8k and so your profit is £39.2k. (The example is simplified, ignoring any taxes, costs of refurbishment, conveyancing fees etc).
|HOUSE PURCHASE USING YOUR OWN MONEY|
|Mortgage (financial leverage)|
|Yearly Interest (6%)|
|TOTAL COST AFTER 1 YEAR||£200k|
- Now, if instead you had bought the property fully with your own funds, your profit would have been £50k.
- Although your profit is higher in the latter case, your return on investment (= net return/cost of investment) is lower. £50k/£200k gives you a ROI of 25%, compared to £39.2k/£20k = ROI of 196%. This shows that using other people’s money can give you a higher rate of return – i.e. for every £1 of your own money invested, you get more back than if you had invested your own money – in this case you got £1.96 for every £1 you invested, compared to £1.25 for every £1 invested when you only used your own money. The rewards are greater using financial leveraging when things go right as you put less of your own money at risk.
- Of course, using your own money carries less risk and gives you total greater profit as there is no cost of debt to pay, however it also means your money (£200k in this case) is tied up in this one property, and cannot be used elsewhere, e.g. to fund the purchase of other properties which could generate further wealth, or other goals you want to achieve.
- Financial Leverage Loss Example:
|HOUSE PURCHASE USING OTHER’S MONEY|
|Mortgage (financial leverage)||£180k|
|Yearly Interest (6%)||£10.8k|
|TOTAL COST AFTER 1 YEAR||£210.8k|
- This is the same as the previous example, but instead of selling the property for £250k, it sells for £150k – you make a loss.
- If you had financed the purchase fully yourself, you would have made a loss of £50k on the purchase price of £200k, and a ROI of -25% (=-£50k/£200k).
- However, with leveraged finance as above, your loss is £85.8k. This equates to an ROI of -304% (=-£60.8k/£20k). That is, for every pound invested, you lost over 3 times as much.
- Therefore, it is clear to see that with financial leveraging, when things go well, you stand to benefit more. But when they go badly, you will suffer greater losses. Leveraging magnifies the loss.
- The fact that leveraging amplifies loss does not, however, mean you always need to make a profit on every investment. As highlighted in Thinking in Bets, those who are successful simply win far more than they lose. The aim is to win big and lose small. You can lose as often as you like as long as when you win, it is far greater than the losses sustained. You need to win when it counts.
- When you are trying to make a financial decision involving an uncertain future, you are essentially betting on the future and can use the mathematical expectancy equation to help you ascertain the likely financial impact of that decision (read the book to find out more on this): Expected Value = (Probability of Win * Average Win) – (Probability of Loss * Average Loss).
- Risk management is therefore key when undertaking financial leverage. Always assess risks and have a contingency plan and exit strategy to remove leverage for the worst case scenario e.g. you can diversify your portfolio of real estate properties by having properties in different areas – if a natural disaster occurs in one area, the others aren’t affected.
- In general, avoid high financial leveraging when the income stream derived to pay off any debt is volatile as there is less room to absorb setbacks. E.g. the revenue stream for airlines is seasonally based, and as we have seen recently, the business model is highly sensitive to (unpredictable) environmental changes – natural disasters, pandemics … Any debt must be repaid regardless of any fluctuations in income. Instead, if you are leveraging a lot of debt, you want a consistent reliable income source to cover the interest payments whilst generating profits from that debt.
- “Borrowed money should only be used to fund an income producing asset, and never for consumption”. Borrowing to consume rather than produce, just increases your current spending capability, satisfying instant gratification rather than growing your wealth to benefit your future self.
- You may not need to leverage as much money as you think to start your business. 25% of the founders of Inc. 500 companies started with less than $5,000 and half with less than $50,000. “Clearly money is not the obstacle to building wealth”.
- Get the book and find out about another type of leverage relating to finance – operational leverage.
2. TIME LEVERAGE
- Time is more precious than any other resource – you can’t make more of it, you can’t get it back. It’s the most valuable non-renewable resource you have.
- Increase your day beyond 24 hours by leveraging other people’s time.
- The aim is to “release your income growth from the boundaries of time”.
- Traditional employment – by trading time for a salary – puts a cap on your income as there are only so many hours in the day.
- For example, as outlined in Sack Your Boss, even self-employment can be limited e.g. working 1-1 as a coach, instead of 1-to-many.
- Put another way, our success can become the limiting factor in our system. Greater success can result in us working even harder to maintain that success e.g. we attract so many clients we work harder to keep up with demand.
- By having the concept of leverage at the forefront of our minds, we can instead adopt a more strategic approach e.g. creating digital products, webinars, books and courses – created once but accessible to an unlimited number of people. You do less and gain more.
- How can we leverage time?
- Be truly productive
- Increase the amount of time you spend each day being productive (i.e. doing work that achieves results and moves your life forward rather than just being busy or maintaining life (e.g. checking emails, running errands, sleeping, bathing etc). Productive time will look different depending on the nature of the business but involves creating processes that produce more with less and that continue to deliver value beyond its production – e.g. producing a training guide with FAQs for employees that reduces the amount of time you need to spend responding to questions.
- Ask yourself “What percentage of your day is spent trading time for money? Now, how much of your day is spent creating leveraged growth?” The aim is to increase the latter percentage – the higher this is the faster the path to financial independence. “If you want to know how long it will take for someone to achieve any goal, just look at how much of their time they dedicate to that goal”.
- Your aim is to make yourself unnecessary for tasks that do not maximise your highest value so you have more time to do the things you are best at or have greatest significance for you e.g. spending time with family.
2. Delegate tasks
- Use other people’s time to deliver what you want – delegate tasks to release time for you to deliver what you are best at (activities for which you are irreplaceable) and to allow you to work on growing your business. So you can work on your business rather than in it.
- You want to “hire up” by finding people who are smarter than you at that particular skill-set as they will get more done in less time than you could.
- Delegation is profitable when you can make more money (through using the time saved on tasks to attract more business) than the cost of delegating the tasks to others.
- “There’s always more to be done than any one person can do” – you’ll slow your progress by trying to do it all yourself and you also place a ceiling on how successful you can become by doing so.
- Assume you can delegate everything until you are proved wrong – start tracking every activity you get involved in, every question you are asked and use these as an opportunity to develop a system, Standard Operating Procedure or FAQ list to limit your ongoing input. “Treat every task that crosses your desk as a failure of your business systems”.
- Delegation of tasks can be to other people, or to systems (as outlined below). It can also take the form of partnering with someone else.
3. TECHNOLOGY & SYSTEMS LEVERAGE
- You can increase the amount of time you have by employing systems as much as possible.
- “You set up your scalable business model once and your systems do the work thousands of times.”
- Franchising is an example of a scalable business model.
- A quick method for determining how scalable your business is – take note of all the places in the business where your time is required.
- If you work in an industry that involves some form of personal service (such as dentistry, teaching, nursing) although your contribution is of significant value to society, your income may be capped by the amount of hours you can work and/or market limits on salaries. To increase your wealth, you may need to expand your remit to employ business models involving leverage e.g. write a book that leverages your expertise, produce educational videos, courses and products, set up a tutoring business or a referral business recommending dental practices.
- Systems allow you to own your business rather than letting it own you. Implementing systems allow you to gain freedom from your business – you want “your business systems [to] run the business, not you”.
- The aim for the leveraged business owner is to remove themselves from the “production equation” of the business, from the daily operation of the business, so the business can run itself in their absence.
- A key area where systems can be used is where you have processes or tasks that are repetitive.
- Develop Standard Operating Procedures (SOPs) that any individual can follow and that consistently produce required results. If one person leaves, another can deliver as required, because the standard procedure remains the same. This makes your business “system dependent” rather than “individual dependent”. You can transfer responsibility for maintaining SOPs to employees so they become responsible for updating them with improvements and changes over time.
- Use technology to automate tasks without requiring your involvement e.g. an automated series of emails to new subscribers, a self-scheduling calendar where clients can book their own appointments.
- Add controls and audit checks to ensure your systems are self-correcting. Alike a car dashboard with warning signals that alerts you when the gas needs filling or there is a need for a minor repair.
- “Leverage seldom results in instant gratification”. At the outset you may need to invest money and time to set up these systems, so you will need to practice delayed gratification before realisation of results such as greater time, wealth and freedom. You may need to take a job – trading time for money – in order to pay your bills and provide funds in the “lag time” between setting up systems (that will scale in time) and the delivery of wanted results.
- The upfront cost does not always have to be monetary – it could be based on sweat equity e.g. many have created profitable internet businesses, taking the time to develop the necessary skills but requiring minimal upfront costs.
- In a sense, systems and technology democratise accessibility to the world of business and wealth. Due to the power and affordability of technology, a home-based business owner can now compete with larger businesses. E.g. local musicians can now create quality music with a laptop, editing software and some hardware, eliminating the need for expensive studio time and sound engineers, thus broadening accessibility beyond the reach of the larger recording labels.
- Using technology and systems can apply to your everyday life e.g. using “Save the Change” apps to automate savings, or robo-investment apps to invest money without you even realising it.
4. COMMUNICATIONS & MARKETING LEVERAGE
- Use other people’s audiences to communicate to and attract new customers to your business.
- This could be via podcasts, trade magazines, radio shows, and gaining access to databases.
- Leveraging in marketing is particularly effective when focused on employing strategic methods to gain more from existing customers. You derive greater and longer-term results with minimal additional marketing costs. It includes:
- cross-selling (purchase of complementary products)
- upselling (purchase of a higher-end product)
- back-end selling (sales made after the initial purchase)
- recurring revenue from each sale e.g. Netflix monthly memberships, a weekly delivery service of bottled water rather than a single bottle sale.
- affiliate marketing (gaining revenue by marketing products by other brands of interest to your customer base).
- “The easiest sale is a satisfied client who has already bought from you.” You have already gained their attention, and established some trust and affinity for your brand and products.
- “Research shows it’s 10 times more expensive to land a new account than to serve an existing account”.
- Therefore, consider providing an end-to end service or product line for your customers that provides everything they need and solves all of their problems within your niche. Package holidays are an example of this.
5. NETWORK & RELATIONSHIP LEVERAGE
- Benefit from using other people’s connections. “Your success is dramatically impacted by the people you know”, in effect – your success lies in your “social capital”.
- This is based on the exchange of value (rather than money).
- Value could include – contacts, resources, referrals, support, encouragement, experience, advice, problem solving.
- Your network could be based on friendships, professions, education, funding, hobbies, customers, mastermind groups, etc.
- This type of leverage is important because “the root of all business is human relationship”. So, knowing how to harness those relationships ethically to deliver value can help you grow your business faster, with less risk and less of your own resources.
- Think about how you can deliver value as well as receive value. Are you solving a problem for the person from whom you are leveraging value? What are the mutual goals that can furthered through your relationships rather than resources?
- Remember that “people do what is in their best interests” – if a person supports your plans to leverage their time and resources it needs to benefit them in some way.
- Building your network of strategic alliances with the right people can take time, perhaps years.
- Perhaps you take a job not because you want to exchange your time for money, but because of the network you could potentially build, or the opportunities for further growth it could generate.
- The result of network and relationship leverage should be to provide a greater benefit to all involved than by working alone – possibly more than the sum of individual efforts.
6. KNOWLEDGE & EXPERIENCE LEVERAGE
- “Knowledge is what converts resources into something with economic value”. E.g. “most of the value of manufactured goods is in the knowledge behind the manufacturing processes that create them”.
- Use the knowledge and experience of others who have already taken time to develop expertise in an area, and save yourself time and learning.
- When you leverage on the experience of others, you not only gain knowledge, you also potentially gain access to their contacts and resources.
- You can’t know everything – if something involves specialist technical knowledge it’s probably best to gain that help than trying to do it yourself. Let other people shine by demonstrating their expertise.
- Knowledge is not only gained in-person, it can be gained through books, courses, podcasts, etc.
- Note that knowledge is different to and more valuable than information – knowledge is the application of information– gained from real life experience. It is the difference between someone who has read about rock climbing and someone who has actually rock climbed – who would you trust more?
- Intellectual capital is often undervalued but is often noticed when it goes away e.g. a staff member who leaves taking away valuable and unrecorded knowledge.
- If knowledge is the starting point for generating revenue, sharing knowledge throughout your company is beneficial. You can leverage knowledge through training, producing written guides, SOPs, etc. Ensure that intellectual capital is captured and retained within the company regardless of the departure of employees.
- Physical capital depreciates over time – “it gets consumed through use” whereas intellectual capital appreciates – it delivers more when used. A team of waiters having in-depth knowledge of your restaurant’s menu (ingredients, new recipes, food provenance) will return greater revenue through higher customer satisfaction than a team with little knowledge or interest.
- To summarise, there are 3 ways to leverage knowledge and experience 1) by hiring others with expertise, 2) by leveraging your own knowledge e.g. writing books, and 3) leveraging the knowledge already inside your organisation.
Read the book to find out more about leverage, including operating leverage, risk management, mathematical expectancy, and other principles that underlie the 6 leverage tools.