The truth is, you can’t create wealth without leverage.
Remember that wealth is having enough passive income coming in to cover your lifestyle expenses. As Robert Kiyosaki succinctly puts it “ Wealth is the number of days you can survive without working while also maintaining your lifestyle.”
Working income is when we trade our time for money and passive income is where we leverage assets to create income without working. Of course we need to invest some of our time to maintain our passive income but it should be a minimum amount of effort.
If you want to build your wealth and stop working one day then you need to create leverage for yourself. This means you invest in assets like property or businesses that don’t also create a full time job for yourself.
So the question is – are you leveraging… or being leveraged?
If you own a rental property where the rent is greater than the expenses of the property then you are leveraging the property to create passive income. If you are paying rent for your house then you are being leveraged by someone else to buy the property.
One great thing with property is the leverage you get by using other peoples money or the banks money. To buy a property on a buy-to-let mortgage, you only need to put 40% down whilst your banker puts the other 60% of money for you but you keep all the capital gains – now that’s a good business partner.
Lets take an apartment worth £100,000. You only need to put £40,000 down and your banker will put £60,000. By renting out the property, your tenant will be paying off your loan for you – this is called leverage. Furthermore if your apartment appreciates in value to £120,000, that is profit for you as your bank will want none of that. You will also get a tax advantage too – instead of paying capital gains tax of £80,000 (sale price of £120,000 – your ‘original purchase’ of £40,000), you only pay capital gains on £20,000 (£120,000 – £100,000).
It’s also interesting that if you are losing money on your rental property because the rents don’t cover the expenses then you are being leveraged by someone else. Your tenant is actually paying less rent than what the property is worth which means they are leveraging you to subsidize their living costs. Property investors make a positive cashflow from their rental properties (as opposed to property speculators who hope that the value of the house will rise and they’ll make money then).
A business owner leverages a product and employees to create a passive income for themselves. If they want wealth then the goal is to create a business that does not rely on their input. This is definitely easier said than done but is achievable… Richard Branson controls over 400 different companies that are part of the Virgin Group.
Many business owners struggle to own more than one company because they create a business that relies on them. This is seen in classic self employed fields like lawyers and accountants but can also be seen in big businesses as well. These self employed people don’t own a business but instead own a job – the money will stop flowing in the moment they stop working. Building a business that can run without you is no easy task but a profitable company is a great form of leverage.
If you are working for a company then you are being leveraged. Your employer is buying your time in order to build their business. They are using your skills to build their wealth. The key is to be an employer and build a big business for yourself. There’s a saying that goes – if you don’t build your dream, somebody else will hire you to build theirs – always remember this.
But being leveraged isn’t necessarily a bad thing. Most self-employed business owners would probably find themselves making more money working for someone else because a bigger company is more effective at leveraging their talents. But many people start their own business because of the freedom it provides and there is nothing wrong with that.
If you are happy working for someone else, then it is usually a good idea to look at how you can leverage the money you earn to create passive income. For example you can invest in real estate or run a part time business on the weekends. The path for each person is different and there is no absolute road to wealth that everyone should follow.
The point is you need to be aware of the choice. If you want to create wealth and financial freedom for yourself then you need to look at how you can create leverage for yourself. There are a lot of different methods out there so it’s important to find a smart way that makes the most of your skills and abilities.
And keep asking yourself in each area of your financial life… am I leveraging? Or am I being leveraged?