The Need for Financial Leverage

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The book, “Rich Dad Poor Dad” by Robert Kiyosaki talks about the difference between how the wealthy use their time and resources compared to the poor and the middle class.

In particular, the book defines how the rich invest their resources into building assets that generate passive income, many times over, whereas those stuck on a financial treadmill of trading time for money end up in a state of “getting by” rather than being financially free – meaning they have the time and money to fully enjoy life.

 

Gratification

One of the most important principles to consider when trying to amass wealth, or reach a state of financial freedom is that of immediate gratification versus delayed gratification.  

The majority of “employees” are focused on the here and now, meaning they want an instant reward for the effort they are putting in today, like a sausage machine, they want to put a few hours in and get a few dollars or pounds out, which they can spend at the weekend.

The wealthy, however, are happy to build systems that might mean they have very little money in the present, and might even take a number of years to become revenue-producing, but when the systems they have created do start producing revenue they do so insubstantial and more importantly sustainable ways… just like a fruit tree that keeps on producing fruit.

 

The Wealthy Mindset

The person with a wealthy mindset might be just as tempted to buy a nice car, as the person with an employee mindset – indeed, both might visit https://www.auto.loan/ but the wealthy person will think of ways to leverage the nice new car and use it to increase his or her income-generating ability (e.g. it might make sense to buy a new car if showing people around properties as an estate agent) whereas, the person with an employee mindset treats themselves as a gift without thinking of their financial future.

Kiyosaki suggests there are four categories of people when it comes to how they make money; employees, small business owners (i.e. self-employed), big business owners (i.e. those creating a business or system that is greater than swapping their time for money in that it utilises the principle of time leverage), and investors.

 

#1 Employees

Employees are clearly the most common demographic, yet unfortunately, they are usually the lowest paid yet the highest taxed.  They get a raw deal for such a popular choice, but in many ways, they are the backbone of modern society. Being an employee has its benefits, in that it is a stable and consistent paycheck that creates the sense of certainty and stability many people crave.

If you’re wanting to get wealthy, however, then employment is not the option for you as there’s a limit to how much you can earn in the system of employment as you are essentially swapping your time for money… and as there are only so many hours in each day there’s an intrinsic limit to how much you can actually make.

 

#2 Small Business

Small business owners suffer the same problem, as they are often stuck in the same trap of directly trading their time for money; for instance, most self-employed people such as personal trainers, hairdressers, graphic designers and so on are simply trading time for money.

In this case, the same limitations apply, as there’s a limit to how much people are willing to pay for each hour you work, and there’s only so many hours in the day.  Also, when you stop working (i.e. due to sickness or vacation) then your money stops.

 

#3 The Big Business Owner

The big business owner, on the other hand, and this doesn’t necessarily refer to a business magnate like Richard Branson (www.virgin.com), has leverage.  For instance, a window cleaner who is self-employed is swapping their time for money, whereas a window cleaner that has five employees now has leverage.

Let’s say a window cleaner charges $20 for cleaning windows.  

The cost to clean the windows is minimal, let’s say $1, and the staff cost of the window cleaner is on average $9 per job.  

That means, the profit is $10 per job.  

Now, as the self-employed window cleaner, you might prefer to make the full $20 for cleaning the window… yet, as the “big business owner” you are employing the principle of leverage – as you can only physically clean so many windows in a day, yourself, let’s say 10 ($200) whereas if you have 5 employees, then you can clean 50 windows a day, making a profit of ($500)… more important than that, you’ve stopped trading time for money, as you are now managing a business.

The most important concept here is that if you were now sick or on vacation, the business could still turnover the same amount of profit because you have built a system with financial leverage.

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