The Leverage Equation Read online

  Improvement: Knowledge can become obsolete very quickly, so it always needs to be improved and updated. This necessitates a knowledge archive with someone responsible for continually identifying outdated, irrelevant information and ensuring that it’s removed or updated.

  Leverage the accumulated knowledge and experience contained both inside and outside your business to create a competitive advantage. This increases your income and accelerates your wealth plan so you can achieve financial freedom faster.

  IN SUMMARY

  Personal knowledge and learning are limited by the time you have available and your ability to comprehend and internalize information. Experience results from gathering the relevant information and then applying it to master your desired skills. Remember: all knowledge is limited by the amount of time you have to commit to gaining the necessary experience, because there’s always more to learn than time to learn it. That’s why hiring an expert who lives and breathes the knowledge you require can be such an effective leverage strategy to save you time and accelerate your wealth.

  Alternatively, if your goal is to increase your hourly earning capacity, it might make sense to gather the knowledge yourself so as to become the go-to expert that others leverage.

  Regardless of which path you choose, knowledge leverage is a strategic way to reduce risk and increase return to accelerate your wealth growth.

  EXERCISE 1: LEARN SOMETHING NEW EVERY DAY

  This is really more about adopting a habit (or process) than completing an exercise (or task).

  It applies to knowledge leverage and it’s very, very simple.

  Learn something new every day!

  Make it a habit. Become inquisitive. Be a student of your profession, no matter how advanced your skills, because one idea can change everything.

  When you feed your mind every day with new knowledge and experience, you will become the go-to expert in very short order. In fact, in some professions, this can occur in just a year or two; and that’s because the habit of perpetual growth through constant learning is so rare.

  When you adopt this habit in your profession, it will lift your knowledge to rarefied territory, making your skill set so good that others can’t ignore it. This will give you pricing and negotiating power, resulting in a higher income for your wealth plan.

  Commit to learning something new every day.

  EXERCISE 2: WHAT IS YOUR COMPETITIVE ADVANTAGE?

  What specialized knowledge and experience do you already have, or can you develop?

  Think about how you can convert that specialized knowledge or experience into a competitive business advantage by listing your talents/interests and matching them with a list of opportunities.

  What problems can you solve with that knowledge or experience that people or businesses would gladly pay for?

  How could you expand your knowledge and experience to increase your competitive advantage so your services are even more valuable?

  Now reverse the process and also identify the areas where you have no competitive advantage, or possibly even a competitive disadvantage. You want to become equally clear about the areas where you have no edge, so you can define your business plan in a way that maximizes your strengths and minimizes your weaknesses.

  You want to know where to go, and what to avoid or manage around. Both are helpful as you develop your wealth plan.

  Always remember that your talent never limits you. What holds you back is a limited vision of the opportunities that match your talent.

  IMPLEMENTATION

  PUTTING IT ALL INTO PRACTICE TO ACHIEVE FINANCIAL FREEDOM

  The first rule of any technology used in business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.

  – Bill Gates

  If you feel a little overwhelmed by all the choices for applying leverage, you’re not alone.

  I’ve spent an adult lifetime gathering the ideas in this book into usable form and putting them into practice. I then deepened my learning by coaching others for two decades on how to do the same.

  Nobody is born with these skills; they can only be learned through careful application.

  EFFICIENCY FIRST, LEVERAGE SECOND

  The starting point is to realize that there’s a right and a wrong way to apply leverage. This is critically important because one approach will make you rich and the other will make a mess of your finances.

  Always remember that leverage is just an accelerator for whatever business process is already in place. It’s not a magic pill for whatever ails your finances.

  When you multiply an efficient operation through leverage, you increase profits. Conversely, when you leverage an inefficient operation, you multiply the losses. Leverage won’t convert a losing business model into a winner unless significant efficiencies are gained from increased scale. Otherwise, leverage will just multiply what’s already there.

  Financial leverage only makes sense when the return on investment capital exceeds the interest cost of capital. It’s a simple rule, but many forget it and end up leveraging results that aren’t already profitable. That’s a mistake.

  And when you delegate work using time leverage, the return on employee productivity must be greater than what the employee costs you; otherwise, you’re just magnifying a losing proposition.

  The same rule applies to technology automation or any other form of leverage in this course. It must already be efficient and profitable, because leverage will simply magnify what’s already there.

  With that in mind, the first rule is to always maximize the efficiency of your business process before you multiply it with leverage. Additionally, it must already be profitable, or made profitable through scale; otherwise, leverage won’t help you.

  You must pay the price upfront to raise your business to profitability. Only then do you introduce leverage to overcome the wall to future growth caused by resource constraints. That’s when you bring in leverage to expand those resources, blow through those constraints, and multiply your growth.

  Remember, it always starts with building a profitable, efficient business model. That has to come first. Leverage will not solve profitability problems or business inefficiencies.

  Think of it in two stages. The first stage is getting your business to profitability so that scaling growth through leverage makes business sense. The second stage is identifying the constraints holding you back from that greater growth so you can leverage your way through those barriers.

  A COMPLETE TIMELINE FOR APPLYING LEVERAGE IN ANY BUSINESS

  There’s a natural progression to growing your business and applying leverage.

  Prove the Model – In the beginning, your business absorbs all your time to get it rolling. That’s why business often seems hard at first; it requires a lot of effort to persist through the learning curve, figure it all out, and turn a profit. You know you’re at this stage of development because you’re working long hours, learning rapidly, and as soon as you stop putting in your time, the income will stop.

  Improve Profitability – After you’ve bootstrapped the process at a small scale to fully prove out your model, the next step is leveraging it up with any of the six types of leverage to grow profits. That means streamlining all operations into a tight, efficient business process that minimizes costs and maximizes revenues.Please notice that I use the term “business” in this discussion, but all of these rules are equally true for running a paper asset investment process or a real estate investment project. You want to master the model at a small scale to honor risk management principles before you leverage it up to multiply results. The key idea is to always fail on a small scale so that you minimize the inevitable losses that occur during the learning curve, and then scale up with leverage after it’s fully proven.

  Create Business Systems – The next step is to convert all the business knowledge you have developed into systems so th
ey can run everything instead of you. You might still be doing the work, or maybe you have an assistant, but the systems (or standard operating procedures) are what govern how things get done. It’s no longer about your knowledge because you’ve replaced yourself with systems.

  Hire and Delegate – This is the business development stage where you begin the process of eliminating yourself from the production equation. This makes freedom possible and converts the business into an asset, instead of just a job where you are self-employed. This also opens the door to overcoming skill constraints that hold your business growth back because you’re hiring people with specialized expertise. As the business continues to grow, it then becomes cost-efficient to leverage other people’s knowledge by building a team of legal, accounting, and other specialty advisors. Your goal is to hire the smartest people in each specialty to multiply the knowledge that runs your business.

  Eventually you reach the point where you’re red-lining the number of hours you can put into the business and bumping up against a ceiling of constraints. That’s when it makes sense to overcome those constraints to growth by applying the appropriate leverage tools using the following rules.

  The first rule is to be open to new ways to streamline your business processes even further. Just because you always did it one way at a prior stage of business development doesn’t mean there’s not a better way to do it as you expand. Your management and production processes will change with growth because the knowledge that got you where you are isn’t what’s going to jump you to the next level. Be willing to step outside the box of tradition, where “that’s the way it’s always been done” runs things, by looking for ways to reinvent your processes for greater efficiency at each level of growth.

  The second rule is to create synergy by layering systems to multiply the impact. Find the interconnectedness between your business systems and products to gain exponential increases in profit and growth that are greater than the sum of their parts.For example, my working at a hedge fund to master investing connected my financial goal to become a skilled investor with my need to make a buck and support myself. It was a multi-layered, highly leveraged strategy where I got paid handsomely to develop the skills I wanted anyway and would have gladly paid to learn.

  Another example is how all my educational products serve a single customer need (achieving financial freedom), so that all products relate to each other in a single sales funnel that creates back-end sales, thus increasing the lifetime value of each customer. The idea is to look for multiple points of leverage in your plans so that 2+2=7.

  The final rule is to value differences and take advantage of them. Your strengths will be different from the next person’s strengths. Know what you’re good at and maximize that asset. Once you’ve done that, then do the opposite by identifying those personal deficiencies that cause constraints to your growth – so you can overcome them with leverage. Your expertise will compliment another person’s different expertise. Seek out those differences and leverage them to your advantage.For example, in my business I don’t touch technology or design. Instead, I have a specialized team of experts that live and breathe those two subjects as their sole expertise. They can’t do what I do, and I can’t do what they do. Their highly specialized skills complement mine so that together we accomplish more.

  USING LEVERAGE TO LEVERAGE LEVERAGE

  As you become more adept at applying leverage, you’ll begin to see how one type of leverage connects or bleeds into the others.

  For example, you could argue that I’m leveraging my wealth to buy me enough time to build Financial Mentor, that leverages my knowledge into products using technology, so I can hire employees to do all the tasks I don’t know how to do, so I can acquire capital to leverage in real estate with mortgage financing that will then be leveraged into…

  I could go on, but you get the picture… it’s like one of those nested Russian dolls with a doll inside a doll inside a doll.

  Another example is how franchising is a combination of systems leverage, time leverage, and knowledge leverage. Ultimately they’re selling a business system with training that’s based on knowing what’s proven to work, which then leverages the time of each franchisee through fees back to the franchisor.

  This book is one part knowledge leverage, one part systems leverage, one part marketing leverage, one part technology leverage, and one part time leverage. But how can you separate the time leverage and the knowledge leverage? One couldn’t exist without the other. The same is true with the systems and marketing leverage. In fact, this book couldn’t exist if any one component of leverage failed.

  The point is: all six types of leverage work synergistically together. They are not mutually exclusive. Each is a tool in your toolbox that has its proper use in the right situation to remove a specific constraint to growth, and when the tools are applied together, they produce a compound effect.

  In addition, there’s a correct process for implementing leverage in your wealth plan, where you first prove the business model on a small scale, as previously described, before you leverage that model up to multiply your results.

  This makes leverage both a science and an art form. In other words, the principles are scientific, but the creative application of those principles to your wealth plan is an art form. That’s what makes building wealth creative and fun!

  So the relevant question to consider is: What proportion of your day are you spending applying the leverage tools available to you? Specifically, ask yourself:

  How many points of leverage does my wealth plan include?

  What are all the ways that I’m actively applying leverage on a weekly basis right now?

  How many new leverage strategies will I integrate into my wealth plan this year?

  Nobody gets rich without leverage. If you aren’t employing leverage in your business and wealth plans, you’re compromising the speed, time, and work effort necessary to reach each level of success.

  If you aren’t using leverage, you’re working harder than you should, to earn less than you could, and that isn’t going to make you wealthy.

  START SOMEWHERE

  You don’t need to master every form of leverage to succeed. You don’t even need to master the majority of the leverage strategies.

  Sure, the more you master leverage, the greater results you’ll be able to produce, with fewer of your own resources. But I’ve never worked with a coaching client who mastered all six types of leverage. Everyone has a weak spot… you and I included.

  Or said differently, we all have natural strengths that we tend toward, so it’s highly unlikely you’ll be naturally strong in every type of leverage. Instead, you’ll gravitate toward certain types of leverage while avoiding (or overlooking) other types of leverage.

  The good news is: That’s okay! You only need enough leverage to get the job done. Results are what matters.

  For example, I would rate myself as a 2 on a 1-to-10 scale for using network and relationship leverage in my business; whereas I’m a 9 or 10 for using systems leverage. I naturally think in terms of business systems, but I’m a bit reclusive so networks and relationships are something I’m less comfortable with and have to work at. It’s not a natural part of my being.

  The reason I share my own leverage weak points is so you don’t have to stress or feel incompetent if you don’t work all forms of leverage from the start. It’s okay, and it’s actually common.

  I started with systems leverage because it was my natural strong suit. I fell into financial leverage through my investment management business with no intention whatsoever; I just fumbled into it. I then fought my perfectionist tendencies and my need to do everything myself, in order to painstakingly add time leverage – exactly in the order I taught it to you in that chapter. Slowly but surely, the entire leverage framework came together exactly as you see it in this book.

  But the point is that success came through the application of small parts of this entire leverage framework be
cause it’s so powerful that you only need what’s absolutely necessary. Don’t worry about what you haven’t achieved; just focus on the constraints in front of you that limit your growth and apply the correct leverage tool for that situation. Over time, you’ll master more and more of the tools until progressively the entire framework becomes second nature.

  But in the meantime you have to start somewhere.…

  The main thing is: don’t be overwhelmed by all the information in this book. Instead, pick a few leverage strategies that excite you the most, and don’t worry about the others. Because they’re all interconnected, you’ll find that the more you work with them, the more types of leverage you’ll naturally include in your plans without any additional stress or worry.

  Again, just pick an obvious starting point for your plan and take action. As long as you’ve got enough leverage in your wealth plan to achieve your goals, it’s not a problem if other forms of leverage are ignored.

  With that said, obviously the more leverage you can successfully include in your plans, the better. But it’s more important to just get started rather than risk getting overwhelmed by perfectionism that causes you to do nothing. Instead, just move forward as best you can with whatever works for you now, and commit to constant improvement over time.

  Imperfect action is better than no action, and when coupled with constant improvement, you’ll master far more than you thought possible in far less time than you imagined.

  Your instruction on leverage is now complete. I hope everything you’ve learned helps you achieve greater financial results, in less time than you imagined possible, and puts you on the path to early financial independence with greater security for you and your loved ones.

  If you have taken the chapter on Knowledge and Experience to heart, and are ready to dive deeper into the strategies I teach, you may want to start with my training on risk management. This is a video course available at financialmentor.com/educational-products/risk-management-course.