How To Create Wealth

Leverage is everything. Understanding leverage and how to take advantage of it is the first step to understanding your finances and to amassing wealth.

So what is leverage anyway? "Leverage" can be defined as "positional advantage" or "power to act effectively." As social creatures, we all use leverage to our advantage. Let me give you an example. Those of you who know me, probably know that my son plays youth soccer and I am perhaps one of the best youth soccer coaches that ever was.

As a coach, I am tasked with figuring out how to turn a bunch of five to seven year olds into a winning team. The key is to building a winning team is to fit the children to the right position - be it goalkeeper, back, forward, or sweeper. This involves assessing each child's strengths and assigning the children to positions that take advantage of their natural abilities. Some of the kids have the ability to run fast, some have excellent coordination and ball skills, and others have a good understanding of teamwork and the rules of the game. Few have more than one of these natural abilities, but many have none of them. Some skills are coachable and others are not.

By assigning the children to positions that "leverage" their natural talents it allows the child to excel at the game, to enjoy and get a sense of accomplishment out of the game, and to win games and boost my ego. This is exactly the kind of leverage that one must understand and employ to reach their financial goals.

So you might be asking what leverage has to do with finances. The answer is simple. Leverage is how one creates wealth.

There are numerous resources that can be leveraged to create wealth. Most people leverage their time, knowledge, skills and abilities as employees to earn a salary. The greater the time, knowledge, skills or ability the greater the salary. Most people also leverage part of their salary and time - via compounding interest - to amass a retirement nest egg. The greater the investment and time the greater the nest egg. Many entrepreneurs and business owners leverage the time, knowledge, skills and abilities of employees or they leverage scarce resources, government contracts, or technology to earn a profit. Real estate investors leverage other people's money via mortgages to generate a stream of rental income and inventors leverage their creativity and our intellectual property laws to generate a stream of royalty and licensing income.

Once you figure out what you are currently leveraging, you can then start planning on ensuring that that leveraged resource will continue to be around in the future and you can work on increasing the payout for that resource. If you are leveraging your time as an employee to generate a salary and leveraging part of that salary to grow a retirement nest egg, it makes a lot of sense to take steps to ensure that your salary continues to come in and to take steps to increase your salary. The same principles apply if you are leveraging the time and skills of your employees to generate a profit or if you are leveraging other resources to generate income or profits.

By figuring out what you are currently leveraging, you can also begin thinking about other resources that you might leverage to help achieve your financial goals. The more leveraged resources that are working for you, the greater your chances of amassing wealth and, ultimately, realizing all of your financial goals.

As a financial planner and as a youth soccer coach, it is my job to help people understand what leverage they are taking advantage of, to take steps to protect those resources, and to help them recognize and harvest untapped resources that are available to them.