As women, we are experts at using leverage to juggle the many areas of our lives. When you plan your activities around being in a particular area of town, you are leveraging your time. The same can be said for getting a manicure while also getting a pedicure, or enjoying your workout routine while also listening to a financial course on your audio player.
Are you also leveraging your money? Leverage occurs when you have control of an asset with a capital outlay that’s a fraction of the asset’s value. In essence, you are using OPM, or “other people’s money”. During the years leading up to the financial crisis, many people became over leveraged due to easy and frivolous lending. Using leverage wisely, however, can help you grow money exponentially.
Purchasing real estate is a perfect example of leveraging money. Unless you own your home in full without a mortgage, you are using leverage to allow you to enjoy your home; you can control a $500,000 piece of property, for example, by using only a percent of the property’s value as a down payment.
Another example of leverage can occur when you own your business. If you borrow $25,000 to fund a small business, and you earn $75,000 from that business, you have used leverage to generate income.
As you can imagine, being smart about leverage is crucial since it involves debt. Debt is certainly a dual edge sword. Here are seven keys to smart leverage:
- Know your market. When it comes to using leverage to buy real estate, be vigilant about the pricing cycle. Don’t fall in love with a property; whether considering a home or a piece of rental real estate as an investment, know if the market is at the highest or lowest level in years, or somewhere in between those two levels.
- Analyze the cost of the property in relation to other comparable properties that have sold. Avoid the most expensive property on the block.
- Look at the numbers with a worst case scenario when using leverage. Certainly don’t expect it, but know that you can handle whatever comes your way while staying on track to maintain or exceed your current lifestyle and reach your financial goals.
- Always gather unbiased information from someone other than the person making money from ANY financial transaction, whether this is a banker or some sort of financial advisor or broker. This can easily be done by using a consultant or taking a related financial course.
- Remember that as odd as it may seem, in the U.S., our tax system offers benefits for debt, or leverage. Be sure to factor this element into the equation.
- If you are considering leverage for your business, test, test, and then test your market even more in a low cost method; this is known as lean testing. Refine and know your market before going into debt to serve it.
- Consider the cost of leverage at any given time. Ask yourself where interest rates are based on historical levels.
Is it bold for me to be writing about leverage at this time? I think it probably is, but the reality is that the vast majority of Americans are already using leverage if they are “homeowners”. Let’s recognize this reality, and consider the strategic use of leverage.
Regarding the use of debt, everyone makes mistakes, but make sure you know your numbers to the point that you are certain that you can rebound from any potential errors, whether this relates to an investment, your home or your business. This allows you to live with financial peace and also achieve those things that really matter that money provides.