The power of leverage is possibly one of the most neglected areas by the average person. However, if you were to look at some of the most successful people around you, one fact will always be crystal clear; Truly successful people fully understand the principle of leverage and use it to maximum effect in their life.

Leverage in real life works much like the “lever principle” in engineering, like using a lever to lift, move, or pry open an object. How does it really work in real life?

Let’s take a hypothetical example just to illustrate the power of financial leverage. Let’s make a couple of assumptions here to strengthen our case. Suppose you have inside information that ABC Company’s stock price is going to take off and go up 100% in 3 months when they announce a key new product. You also know for a fact that real estate prices will increase by 50% in the next 6 months. However, he only has $50,000 in cash in his bank. Where will you put your money?

When I paint this scenario to a group of people I spoke with some time ago, many of them chose to invest their $50,000 in ABC Company stock. When asked why this was so, I received several responses such as, “With $50,000, I can’t afford to buy a house, so I’m going to put it in stocks!” or “Stocks are more liquid and I’ll get my money back faster!” Almost all the time, there will be more people choosing the stock option, especially when you consider that the stock price will double in 3 months when real estate prices will only go up 50% in 6 months. And this is the case of how most people will think.

Ask a really successful person this very question and the answer will almost always be to put their $50,000 in Real Estate. So how do I buy a house with only S$50,000 unless I take a loan from a bank? That’s exactly it, take a loan from a bank, a financial institution or your friend, but regardless, use the concept of OPM (Other People’s Money).

Here is the reason why. When you put the $50,000 into ABC Company stock, you will get a 100% return on investment when the stock price doubles in 3 months, so your profit is $50,000. However, depending on where you are, you only need to put down your $50,000 as a down payment on real estate. In some areas, you can make a down payment as low as 5% to 10%. Let’s conservatively assume we use a 10% down payment. This means your $50,000 could be a down payment on a $500,000 home. In 6 months, when your Real Estate price rises 50%, you would have made a handsome profit of $250,000 in just 6 months! If your down payment had been just 5%, you would have bought a $1 million real estate and made a $500,000 profit in just 6 months. The picture becomes much clearer when you compare a $50,000 profit in 3 months versus a $500,000 profit in 6 months. By investing in Real Estate and using the Power of Financial Leverage, your profits are 10 times more despite a Real Estate percentage price movement of only half that of Stocks.

Why is this so? Well, the reason is that in the case of real estate, you have 20:1 leverage for a 5% down payment (10:1 if the down payment was 10%) compared to no leverage in the case of Actions. In recent decades, financial instruments such as margin and options trading have become very popular, allowing you to also take advantage of investments in certain selected stocks.

The above is an example of financial leverage. In daily life, there are 4 other areas of leverage that we can capitalize on.

First, there is the time leverage. In this world, we are all born with different talents. Some are smarter, some are more handsome, while some are taller and some are fatter. However, there is only one thing in life that we are all born equal to and that is time. We all have 24 hours a day and about 40 years of working life (from 20 to 60 years). Therefore, it goes without saying that in order to have great success, we must seize the time. A factory production line is a good example of time efficiency. A worker can only have 24 hours a day. If you hire 10 workers, you basically have 240 hours a day!

The second is the leverage of knowledge. Successful people almost always don’t know everything. Bill Gates probably doesn’t know what’s going on inside his Microsoft Windows programs. However, he has great vision and draws on the knowledge of this team of programmers to develop Microsoft Windows. He takes advantage of his marketing team to market his products. There are hundreds of areas in a company that he needs to know about, and the successful CEO’s job is to find someone who has knowledge that he can leverage.

Third, we need to look at areas of technology leverage. Technology allows us to do things faster and more accurately than ever before. The computer and the word processor is a good example of taking advantage of technology. Before the advent of the word processor, documents were typed and corrections made with correction fluid, which was slow, cumbersome, and messy. The word processor changed all that and is capable of producing professional-looking documents with graphics in less than a quarter of the time it takes to use a typewriter. Product robots can assemble a car faster and more accurately than any human. The Internet and mobile phones are changing the way we live, work and play, and we can all do it much more effectively.

Last but not least, we can look at the network leverage area. There is a saying that goes: “It’s not who you know, but who knows you!” One can never underestimate the power of networking and “selling yourself and your abilities”. When successful people have a project on their hands and are looking for the right people to help them achieve their dreams, they will almost always choose those they know to lead senior managers. They may not know you personally, but at least they will know the skills and reputation of the people they hire. Similarly, when you are successful and need to tap into the knowledge of others, you will first look to the pool of people within your existing network.

This article serves to highlight the power of leverage and how it can help you achieve the same level of success as many others. Leverage requires you to go beyond your comfort zone, working with people you don’t know well and thinking in ways you never thought possible. No successful person ever succeeded without leverage. There are many skills to learn on the road to success, but if I have to pick one to be successful, the leverage skill will be at the top of the list for sure.