Chapter 13

Surprising Ways Rich People Get Rich with Leverage

Archimedes the Greek, usually given credit for the discovery of the principle of the lever, once said, “Give me a big enough lever and a place to stand, and I could move the world.” He understood that a lever was a tool for multiplying your strength beyond its natural limits. He also knew that the bigger the lever, the greater the increase in strength.

Unfortunately for the uninformed, the lever can be another cliché, a two-edged sword. Used unwisely, the wrong kind of leverage not only can multiply your upside, it can work with equal efficiency on the downside and can increase your risk.

Most people who think they understand leverage think it applies only to the use of borrowed money to buy stocks on margin (dangerous) or using a mortgage to buy a home or investment real estate (safe). My father is my Exhibit Number One on the dangerous side of leverage (see Chapter 11), but his story doesn't invalidate my premise that if you want to be Really Rich, leverage is critical to your get-rich program.

Remember, a lever is only a way to multiply your strength. There are three forms of leverage that count, and you should use all of them wisely: money leverage, people leverage, and time leverage. I defy you to show me a rich person who didn't use at least one of them. (I am ignoring movie stars who get $20 million a picture and athletes who make millions of dollars a year for a few years. They don't count, because you aren't one of them.)

NO LEVERAGE?

Most people have no leverage in their earning picture, and that is the probable reason they are not rich. Is there a difference between a $6-an-hour McDonald's counter clerk and a $300-an-hour lawyer? Not as much as you think. In both cases, if they don't work, they don't get paid. Their income is limited by how many hours they work.

And it's even worse than it looks; personal income is taxed at the highest tax rate imposed on any kind of income. If you depend on personal income from your own labors only, you are like a salmon swimming upstream carrying a barbell on its back. One facet of the get-rich strategy is to be personally poor or in modest circumstances, making the smallest amount possible of highly taxed personal income, while controlling enterprises that produce fat profits at much lower tax rates.

If you employ leverage wisely, you will work less and earn more. You will make money even if you can't work, because your money will work for you, your employees will work for you, your partners will work for you, and your money will do double-, triple-, and more duty for you.

Now let's look at the various forms of leverage.

Money Leverage

The old cliché says that it takes money to make money, and that's true, but it doesn't mean it has to be your money. Everyone uses leverage when they take out a mortgage to buy a much nicer home than they could buy out of their savings. Rich real-estate investors couldn't get rich unless they could borrow money to buy properties. Banks are not just in the money business, they also manufacture levers, and the government is your friend in this case. Unlike buying stocks on margin, no government agency enforces real-estate margin-call rules against you. If real estate hits a soft spot and the appraised value of your home falls below the balance owing on your mortgage, you don't have to put up more money to protect the lender. Make your payments, and it remains yours. This is because of effective lobbying by the real-estate industry.

And how about rich businessmen like Bill Gates? He used lots of leverage, increasing his earnings and the safety of his business and the value of his assets. He raised a lot of investor money by selling some of his stock, and used that leverage to grow his company. His corporate stock is the vast majority of his $60 billion wealth. That's leverage. When Ted Turner was asked how rich he was, he said, “I must be really rich; I owe a lot of money.”

There is good debt and bad debt. Consumer debt is always bad debt. Business debt is good debt if you use it properly. Way back in Chapter 4 I said it was OK to borrow money to buy assets that produced enough cash flow to service the debt and then some. So let me elaborate on the rules for deciding whether a debt is a good debt or a bad debt.

Bad Debt

• Money borrowed to buy something that flits out of existence as soon as you use it—such as a vacation—leaving only the debt.
• Money borrowed to buy a money-eating alligator. It could be a vacation or a motor home, or even the bigger, better home you live in (which is the best argument for buying a smaller home than your credit score would qualify you for, because it means lower mortgage payments, property taxes, and utility and repair bills). If you redefine an asset as something that produces positive cash flow, then your home is not an asset, as it is a negative-cash-flowing alligator.
• Money borrowed to buy a generally depreciating item, such as a car or boat. I'm talking about real depreciation here, meaning true loss of market value, not phantom depreciation, like the tax deductions you can take on an investment property when it is really appreciating.

Good Debt

I won't make a list, because there is only one kind of good debt—borrowed money that goes to work for you to build income-producing assets and that produces enough cash flow to pay the interest and systematically reduce the principal. Rich people always use debt as a business tool.

More Money Leverage

Borrowed money is not the only kind of money leverage. When entrepreneurs sell some equity to finance the company by selling some corporate stock in a private placement or going public in one of the ways I describe in Chapter 18, they are using money leverage, but that's always a financial calculation. If they can sell 10 percent of their companies and thereby produce cash that will double the sales and/or profits, it's a good deal, and they would be fools not to do it. They are then richer, because the value of their remaining stock becomes greater than it was when they owned 100 percent of the stock, and they have working cash to invest in their companies. Such cash is a lever that increases their strength.

People Leverage

I have met businesspeople who still work 12 to 15 hours a day because they don't trust other people to do their job right. That probably reflects more on the entrepreneur than it does on the staff. If staff members are competent, let them do their jobs; if they aren't, get rid of them and hire those who are. Such entrepreneurs don't understand the principle of people leverage. Smart entrepreneurs will hire people to do all the things that they can do better than they or that wouldn't get done if they didn't have the time to do it, so they can spend all their working hours doing only the things that they can do better than their staff, plus providing the leadership and strategic direction for companies that only they can provide.

Not only is people leverage profitable, but the lack of it can sign the death warrant of a company. No one can do everything. If they try, they will burn out, drop a ball they didn't have time to secure, miss something that will slip through the cracks and ruin the company, or be so bogged down in detail they can't stay up to date with developments in their industry and thereby miss opportunities.

THE CEO MENTALITY

Businesspeople who use people leverage by assembling a complementary team of real executives who know their stuff in their specialties and are allowed to use their skills can become very rich in short order. A real chief executive officer (CEO) will tell his or her team what the business objectives will be, set the policies and the battle plan, and get their concurrence with the plan. Then he or she will let the team go to work within the guidelines and budget he or she approved, while monitoring their performance very carefully and helping them make course corrections as necessary. The CEO's monitoring tools are budgets and financial reports.

One reason I liked George W. Bush in the 2000 election is that he has shown he knows how to act as a CEO. The president of the United States is the CEO of the biggest enterprise the world has ever known. Bush had been the CEO of an oil company and a major-league baseball team. I knew he would pick a blue-chip cabinet and team of gifted advisors, get their agreement on the policy objectives of his administration, set up the monitoring systems, and then let them do the jobs for which they were better qualified than him. His political philosophy is not the issue here; it's his management style. Only time will prove if he is an effective CEO, and the intractable issues he has tackled may infuriate enough people to sink his presidency, but, as this is written, so far, so good.

Compare this with the failed presidency of Jimmy Carter. He was a fine Christian gentleman with a good heart, and was very bright. He could immerse himself in the smallest details of government and policy as well as anyone, but he forgot that he had been hired by the electorate to be the CEO of the biggest enterprise the world has ever known. The big picture got away from him and created the worst combination of high interest rates, inflation, and unemployment in our history, and that sank his presidency. To his credit, he has been a pretty good ex-president, with his Habitat for Humanity program. He can hammer a nail with the best of them, as the media have never tired of showing us, but we hired him to be our CEO, not our building contractor.

I have been the founder and CEO of one network marketing company and the top distributor of another. That's where I learned this principle of people leverage. If you built a team of distributors who were always building their teams, you were making money you didn't have to earn with your own sales. You had passive income whether or not you worked yourself or made sales. I personally don't like doing multilevel marketing. It takes a kind of temperament that I don't have, but it's great for the right kind of person and a great way to learn to apply people leverage. But I believe in the principle of people leverage with a passion. It's an essential strategy you must use if you ever want to be rich and secure, especially if you want to earn more and work less.

LEVERAGE IN A NUTSHELL

Let's sum up the principal of leverage. Leverage means making money from the use of money contributed by others or loaned to you, and also making money from the efforts of employees, partners, and business associates. It means making money you did not have to earn by the sweat of your own brow, earning money by the sweat of other people's brows as they work hard to make you rich.