Thursday, March 4, 2010

What is Leverage?

Billionaire John Paul Getty said, “I would rather have 1% of 100 people’s efforts than 100% of my own”. As highlighted by John Paul Getty, it is better to earn a small amount on the efforts of a large group of people than earning 100% on your own efforts.

Leverage is a financial term that means the ability to generate more and more income with less and less works. If you are just using other peoples’ time to earn money, basically you are leveraging.

Let me quote an example of how leveraging work. In a company, a senior sales manager is training his team of 20 sales executives. After training, for every successful sale that his sales executives make, part of their commission will be given to him. The senior sales manager is leveraging on his sales executives to make money.

However this is not a very good form of leveraging. The reason is once the senior sales manager no longer works in the company, he will not be able to earn any commission.

Today, instead of just leverage on people, you can also leverage on technology. There are many leveraged tools being created which include computers, internet, wireless devices and many more to help us generate more with less. If you want to achieve finance freedom, you will need to understand the power of leverage and learn how to use these leveraged tools. People who do not learn how to use leveraged tools to create passive income may miss the chance to escape from the rat race.

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