The Leverage Equation Page 5

  That all sounds good in theory, but it’s really hard to do in practice because of the upfront cost and lagged results.

  PRINCIPLE 7: UPFRONT COSTS, BENEFITS LAG

  Consider the two scenarios: I could have a nice six-figure coaching practice working part-time, or I could spend years working full-time for nothing while I develop the educational curriculum, pay for employee support, pay for all the systems development that delivers Financial Mentor’s products, and produce the marketing systems to sell the product – all before a single dime is made.

  The issue is lag. When I trade time for money as a coach, there is no lag. But with leverage, you pay upfront long before the benefit shows up down the road. That lag frequently leads to the incorrect conclusion that you can’t afford to delegate, when the truth is that you can’t afford not to delegate. Lag is just a required part of the process that you have to endure.

  I call it “bridging.” You have to bridge the lag by trading time for money as you hustle to build leveraged sources of income that can scale. It takes time, and you have to remain solvent during that bridge time.

  But there really is no other choice because without delegation, the alternative is that life will just get harder and harder – because the more successful you become, the harder you must work. In my case, I was taking on too many coaching clients as the demand rose and I was burning out.

  However, with leverage, life gets easier the more successful you become – because you’ll do less and less of the work as you increase your leverage, until you’re only doing what is specifically required of you based on your unique skills and abilities.

  Staying with this same example, I produce my books and courses once and I pay all costs upfront; but then I can sell them over and over, using systems leverage to deliver the value. It sounds good, but always remember that you must be willing to pay the price upfront in order to enjoy the benefits down the road – because of the principle of lag.

  IN SUMMARY

  Leverage seldom results in instant gratification. Instead, there’s typically a price to pay upfront before you can enjoy the benefit later (otherwise known as lag). And there’s never a convenient time to pay that price. Never.

  If your goal is wealth and freedom, then you need to develop the habit of delayed gratification. You must embrace paying the price upfront and enduring the lag.

  That requires you to bridge the lag. You must figure out how to pay your bills and get all the regular work done upfront before you see the benefits down the road. This usually means trading time for money temporarily while you build the leveraged sources of income that can scale.

  EXERCISE: DELAY GRATIFICATION

  Identify one wealth-building activity that involves delayed gratification, an activity that will benefit your life but that you’re not currently implementing.

  Maybe it’s as simple as saving money. Or maybe it’s as complex as creating new leveraged operating systems in your business that require specialized software expertise.

  If you can’t come up with an idea, then download 101 Leverage Hacks: A Cheat Sheet for Quickly Implementing Leverage in Your Wealth Plan. It will give you lots of ideas to pick from (https://financialmentor.com/free-stuff/leverage-book).

  Rinse and repeat, creating a list of all the different ways you could create leverage and grow wealth through delayed gratification. Focus on two categories of ideas:

  Easy to implement

  Scares you to think about implementing it.

  Pick one idea from the “easy to implement” category and get it done now. Then pick another one so as to develop the habit of delayed gratification.

  Next, look over your list of “scares you to implement” and choose the one idea that has the biggest potential payoff (remember the concept of ‘expectancy’ mathematics).

  Develop a thorough risk management plan to implement that high-value strategy. Solve all the problems that stand between you and that big payoff.

  Rinse and repeat until you develop the habit of delayed gratification.

  EXPAND THE GAP

  Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

  Charles Dickens

  The next leverage principle you’ll want to apply in your wealth plan is expanding the gap between how much you earn and how much you spend, so it grows geometrically instead of arithmetically.

  There’s a natural progression to widening this gap. Most people start out as an employee – the producer in a reciprocal arrangement of time for money. The next stage in business development is usually self-employment, where you essentially buy yourself a job by doing most of the production. Unfortunately, this business model also lacks leverage.

  PRINCIPLE 8: EXPAND THE GAP

  The leveraged business owner removes himself from the production equation, so the business runs itself in his absence. You achieve this goal by converting everything you do into a step-by-step, connect-the-dots system that anyone with the right skills can follow. If one employee leaves, a new one with similar skills can be plugged into the system. Standard operating procedures and employee expertise control the daily operations so the owner is free to work on business development or even take an overdue vacation.

  Another way to think about this principle is to reposition your work responsibilities from those of a producer to being the conductor of the orchestra. Your employees are band members in your orchestra, and if they all did their own thing, you’d have a cacophony of noise. It’s up to the conductor to bring the different sections of the orchestra together at just the right times so as to create beautiful music.

  The business owner does the same thing by directing the various members of his team toward a common goal to produce geometrically growing results. You, as the owner, strategically decide what needs to be done and when, in order to achieve maximum growth, and you delegate to your employees and to your business systems so they produce the desired results.

  The ultimate goal is to design your wealth plan so you can leave for three months at a time with the knowledge that your business, real estate, and investment portfolio will all grow in value during your absence. This challenge is not easy. Most businesses fail and the few that “succeed” limp along for years as glorified self-employment. Probably less than one percent of businesses successfully utilize leverage to attain true freedom.

  But when you correctly apply leverage, it’s possible for you to geometrically widen the gap between revenues and expenses so that equity grows exponentially rather than arithmetically. I’ve done it several times, and it’s absolutely worth the effort.

  It’s not easy to do, and I don’t want to deceive you by implying that it is. But it’s also not any harder than the alternative of working an entire lifetime for financial mediocrity.

  IN SUMMARY

  You want to accelerate your wealth plan through geometric growth rather than arithmetic growth. The way you seed that growth is by expanding the gap. In paper assets, the gap between income and expenses results in savings for investment; and in business, the gap between income and expenses results in geometric growth of equity as a multiple of earnings.

  The greatest potential for expanding the gap is through leveraged growth of income because expense reduction is inherently limited. Income growth is unlimited, and leverage is the accelerator.

  EXERCISE: TIME TRACKING 3

  This exercise goes the next step beyond categorizing all tasks as either essential or delegable. It’s specific to business owners and the goal is to make yourself unessential to the daily operation of the business so you can multiply income growth geometrically.

  In this exercise, you assume everything is delegable until it’s proven that it’s not.

  Start by tracking every activity in your day that requires your attention.

  For example, every time your team emails you to solve a problem, make a note of that. Every time a
n employee or virtual assistant asks you a question, note that as well.

  In short, every time your work effort is required, treat that as an opportunity to create a system or standard operating procedure to replace your involvement.

  For example, in my Financial Mentor business, I used to complete every aspect of publishing every article on the website. Now the team has a standard operating procedure that governs how articles get published, and each person on the team has a specific role. This system has completely replaced my involvement.

  The goals of this exercise are: 1) to progressively make yourself unessential for day-to-day operations so you are free to take time off whenever you desire with zero impact on your business; and 2) to work exclusively on business development during the time that you do work so you can expand the gap by growing income.

  Again, the key to this exercise is tracking absolutely everything you do daily in your business and treat those things as a failure of your systems. Try and replace every requirement of your time with some form of leverage until you are completely free.

  THE ULTIMATE LEVERAGE

  There can be no real individual freedom in the presence of economic insecurity.

  – Chester Bowles

  I’m trying to be 100% transparent in this book. I don’t want to sugar-coat the instruction with motivational cheerleading that encourages you to do something without full awareness.

  Leverage may sound great, and it truly is amazing when it’s working for you. In fact, you’ll pinch yourself because the results defy intuition. But the truth is, it can be a tough slog to get there. The goal is valuable, but the journey can be a lot of work filled with difficult challenges that have to be overcome.

  But there’s no other choice that makes sense when your goal is financial freedom. Expectancy math necessitates that you spend your limited time pursuing big wins, and big wins come through leverage.

  Besides, there’s no tougher life than working away all your years to achieve financial mediocrity… or worse. If you’re going to spend all those years working anyway, then you may as well design your work with leverage so it can lead to outsized wins that result in financial freedom. No other alternative makes sense.

  PRINCIPLE 9: FINANCIAL INDEPENDENCE

  Life is an adventure; embrace it and live it fully. Who cares if it’s hard? Comfort and ease are overrated. Just go for it by playing smart with careful risk management to control losses while pursuing big wins with leverage.

  It’s literally that simple. Even though the high leverage alternatives that I pursued throughout my career were universally more difficult, there was never really another choice because nothing else made sense for my plan, given my goals. It was the only path worthy of my scarce time.

  And this brings us to our final principle: financial independence is the ultimate leverage in life. When you’re financially independent, your passive income exceeds your expenses, giving you the freedom to create whatever you want with your life. The bulk of your waking hours that were previously spent earning money, managing money, worrying about money, and spending money are suddenly available for anything you choose, and time is your ultimate scarce resource. Not only that, but you also have the money to do whatever you want with that time. It’s that rare combination of both time and money that opens up possibilities for your life. No other goal opens up more possibilities for fulfillment.

  Financial freedom gives you the opportunity to serve others without worrying about how much it pays. You can volunteer your time for worthy causes that are personally fulfilling, or you can pursue creative interests in the arts, music, or theatre – even if they never pay you a dime. You can even try that crazy business idea lurking in the back of your head – the one that’s personally motivating because it honors your values, but you know it may never pay well.

  You can leverage your money to buy the best education available for your children, giving them a solid start in life, and you can free your spouse from having to work for money so you can both pursue a fulfilling life on your own terms.

  Financial freedom is the ultimate leverage because it gives you the time and money to live the life you want to live. Nobody ever lay on their death bed wishing they had lived more selfishly or spent more time in the office, so use leverage to free yourself from economic bondage and buy back your time. Once you become financially independent, you can use that time and money to live a full and creative life that gives back to others.

  IN SUMMARY

  The 9 Principles of Leverage govern how the 6 Types of Leverage operate in your wealth plan. They are the “how” and the “why” that drive every strategy you’ll use to overcome the resource limitations you face and to break through the constraints that block your wealth growth. By understanding the 9 Principles, you keep yourself from becoming over-worked, distracted, hampered by limited resources, or tempted into risk beyond your tolerance.

  It’s about getting the fundamentals right so that you’re building on a solid foundation. If you’re a kid and your goal is to be in the NBA, you need to master the fundamentals. The best players have unbelievable practice discipline to remain at the top of their game. Like an NBA player, you have to focus on drilling the fundamentals of your leverage game. Don’t worry about specific outcomes or short-term gains. Play the long game by focusing on the process that reliably produces results and the outcome will be inevitable.

  To recap, the fundamental principles of the leverage game are:

  Mathematical Expectancy: Disproportionate payoffs can make you rich if you maximize gains through leverage when you are right and control losses through risk management when you are wrong. Even if you’re wrong 9 times out of 10, or even 99 times out of 100, you can still profit by tilting the payoff portion of the expectancy equation.

  Reciprocal Exchange: Trading your time for money, or trading your money for a product, is limited by your personal resources because that’s all you have to exchange. Shift your thinking from the reciprocal exchange model where you trade time for dollars, to trading value for dollars – because value can be provided in many different ways that free you from personal resource limitations.

  Limited Resources: When you limit yourself to your own resources, you’re completely without leverage. You have to rely on your own time, contacts, experience, money, and other resources, and this severely limits your ability to tilt the payoff portion of the expectancy equation.

  Time Freedom: Everyone is allotted the same 24 hours. Successfully applying leverage gives you the freedom to do what aligns with your deepest values so you can pursue fulfillment.

  Give Value and Solve Problems: Business is about solving problems – because people will gladly pay to leverage your solution to their problems. When you master this skill, your growing wealth becomes a measure of how much value you’ve given to others.

  Delegation: Identify what things have to be done by you, and not by anyone else. Then delegate or partner, so someone else can do the rest. This achieves more, better, faster results and also frees up your time and energy to focus on your strengths and your gifts.

  Upfront Costs, Benefits Lag: There is always an upfront cost that must be paid in terms of time, training, or system development before you can benefit from the lagged results that will be produced.

  Expand the Gap: The objective for all leveraged growth and risk management strategies is to expand the gap between how much you earn versus how much you spend, thus resulting in equity growth. In the traditional model, that equity growth translates through savings to become investing for geometric growth; whereas in non-traditional assets like business and real estate, your equity grows geometrically as a multiple of the increased earnings, thus resulting in financial freedom.

  Financial Independence: Life is an adventure. Embrace it and live it fully. Mastering leverage leads to financial freedom, which gives you back your time and opens more possibilities for personal fulfillment.

  STRATEGIES:

  THE 6 TYPES OF L
EVERAGE

  THE 6 TYPES OF LEVERAGE

  No person will make a great business who wants to do it all himself or get all the credit.

  – Andrew Carnegie

  Imagine trying to build a house with only a screwdriver and a hammer. That’s what building wealth with only time and financial leverage is like. To build a house you actually want to live in, you also need saws, tape measures, chisels and levels, so you can use the right tool in every situation. Each tool has a specific function, and it must be applied correctly.

  Building wealth is just like building your house. You’ll need all six leverage tools to overcome the constraints you’ll encounter on your journey toward financial freedom – because each tool unlocks a specific limitation that holds you back.

  Time and financial leverage are the two most common types of leverage. However, there are four other types of leverage that are less commonly understood but equally valuable. More importantly, each of the six types of leverage delivers a specific solution to a specific type of constraint in your business and financial plans.

  For the purposes of our discussion, we’ll organize all of the varied leverage tools into the following categories:

  Financial leverage – Other people’s money so you’re not limited by your own net worth.

  Time leverage – Other people’s time so you’re not limited to 24 hours in a day.

  Technology and Systems leverage – Other people’s technology systems where you set up a scalable business model once and your systems can do the work thousands of times.

  Communications and Marketing leverage – Access other people’s audiences through magazines, newsletters, radio shows, podcasts, and databases to communicate with millions of people.