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Monday, July 12, 2010

The 8th Secret - Leverage

The eighth secret of the 9 Secrets of Achieving Financial Freedom is the Secret of Leverage. Archimedes said, “Give me a lever long enough and a fulcrum on which to place it and I shall move the world.” The right use of leverage can accelerate your success for just about any goal you have. Thinking of the investment arena for a moment, there are numerous ways leverage is used to magnify success.


One of the simplest forms of leverage is compound interest or as Albert Einstein said, “Compound interest is the eighth natural wonder of the world and the most powerful thing I have ever encountered.” Simply stated, compounding is the effect of earnings on both your principal and interest. In other words, if you invest $1,000 at 5% interest, you’ll earn $50. By reinvesting your interest along with your principal, you are now earning 5% on both your principal AND your reinvested interest.

You can also create leverage through tax planning. For example, our government has passed tax laws that encourage certain behavior such as deferring income into your company 401k plan. Doing so avoids immediate taxation on income and defers taxes on earnings until funds are withdrawn in retirement. Whether it’s tax free interest on municipal bonds, depletion allowance on oil and gas exploration, depreciation on real estate and business assets, each strategy allows you to leverage your returns.

Donald Trump became a billionaire by using financial leverage to buy real estate. He’s not alone. Financial leverage has created more millionaires than just about any strategy. You put a down payment on a piece of real estate and a bank or other lender will loan you the balance. Here’s an oversimplified example: You pay $100,000 cash for a rental property and it produces a $10,000 profit, earning you 10% on your money. However, if you invested $10,000 and borrowed $90,000 and earned a $10,000 profit, your return would jump to 100%. Now that’s leverage!

Clearly leverage can be a ‘two-edged’ sword as we have seen millions of good folks lose their homes and businesses to foreclosure because of declining values and revenue. However, when used judiciously it can truly accelerate your success. With any goal you have, ask yourself this question, “How can I use leverage to accelerate my success?”

So how have I used leverage in my Ultimate Fitness Quest? It started with a demanding goal…to lose 20 pounds of body fat over 40 days. I then got great advice from a team of experts in the field of health and fitness. I knew I would need leverage to inspire me to success so I did three things. First, I asked for support from my wife and co-workers, the people I would be spending the most time with. Next, I recruited a Support Partner, someone who would encourage me and hold me accountable. Finally, I told someone…excuse me…EVERYONE what my plans were. You want to create leverage on yourself? Try setting an audacious goal and then tell a bunch of people! So far I’ve lost 15 pounds in the first 30 days!

If you’re ready to set some audacious goals for your personal finances or health and fitness, sign up for the 9 Secrets to Achieving Financial Freedom or the Ultimate Fitness Quest at www.StewartWelch.com.

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