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Financial Leverage: Refresher Course First

Understanding Investment leverage

“Give me a place to stand, and I shall move the earth with a lever”– Archimedes.  It is most likely an exaggeration but the point is that you can almost move impossible things using less force through the principle of leverage.

In this posting I refresh your minds on the Principle of leverage and then from tomorrow we apply it to wealth creation.

Leverage is defined as a small force placed in a strategic place that can bring extraordinary movement. It is a mechanical form of the principle of multiplication. In principle, a lever allows you to use less force to lift or move objects.

We may not know it, but this theory is applied in a lot of the everyday objects we use such as scissors, bottle openers and even doors. Lets look at simple classes of levers and how they occur in everyday life.

Classes of Levers

Class One occurs when the Fulcrum is located between Load and Effort. If the length of the effort arm is greater than the length of the load arm you use less force. The opposite is also true. The more leverage you have the less effort you exert to accomplish your goals.

A pliers is an example of class One lever. When I was a practising dentist I used to struggle with my staff because often when doing a difficult extraction you need a forceps with longer handles so that you apply effort to deliver a greater force BUT often they did not get it and so they would bring me a short handled forceps. This made me work harder to achieve the result.

In Class Two the Load is located between Effort and Fulcrum. In this case the length of Effort Arm is greater than the length of Load Arm; therefore, we use the least effort in the Class II lever. This is the best form of leverage.

In Class Three Effort is located between Load and Fulcrum. The length of the Load Arm is greater than the length of the Effort Arm; therefore, we use the most effort in Class III lever. So when you use this kind of leverage you work harder.

After this refresher course we realize that the principle of leverage is universal. We can apply the principle of leverage in everything that we do in our life. We can start on a personal level and leverage on our mind. When you invest in yourself through self development you use the principle of smart leverage. My father used to say, “If you do not use your head, your limps will suffer.” Put simply the less you think the more effort and hard work you put into your problems solving and wealth creation system. I would rather use leverage. The average African prefers to sweat to feel that he is working. The more fort spent the better they feel they have worked. We are learning slowly to use leverage and sweat less.

With regards to money, we can likewise use the principle of leverage to accelerate our financial goals. When properly understood and intelligently applied, leveraging will allow us to create more wealth less effort.

This is called financial leverage. In general, it simply means using other people’s money and making it work for us. The principle of leverage is probably the fountainhead of wealth.

When we simply rely on our own capability to save money, then it will take some time before we can invest and accumulate wealth.

Tomorrow I will give some practical examples of financial leverage in your wealth creation journey.