UNDERSTANDING LEVERAGE AND THE $16,000 QUESTION
The $16,000 Question... The scenario: Your rich uncle comes to you one day and says he needs a big favor. He has $400,000 burning a hole in his pocket. He needs you to hold it and keep it safe for one year. You can protect it in whatever way you choose. You can do whatever you want with it. However, in exactly 12 months you MUST return to him every penny of the $400,000. What would you tell him?
No thank you to free money? Believe it or not, many people would actually answer no to that request citing their reluctance to take on the extra work and responsibility demanded (especially since they'd just have to give back all that money at the end of 12 months). If they can't ultimately keep the money anyway, why bother? Wrong answer!!!
If ever presented with this kind of opportunity, I would snatch that money out of my uncle's hand before he had the chance to change his mind. I would then park his $400,000 in totally secure, FDIC insured, interest bearing savings and/or checking accounts so that I knew his money was completely safe and would earn interest. A year later, after having done absolutely nothing for 12 months, I would very happily and gratefully return his $400,000 while pocketing the more than $16,000 in interest that had accumulated (assumes the money earned a 4% annual interest rate).
My favorite aunt and uncle...
Well, unfortunately in the real world, I don't have a rich uncle and, if I did, I'm quite certain that he would never make this kind of an offer (after all he's rich for a reason right?). However, using the simple strategy I began implementing 8 years ago, I am now able to leverage my strong credit rating into a yearly routine that simulates this rich uncle scenario. In 2007 my wife and I were able to leverage $372,000 of completely borrowed money (thank you Uncle Chase and Aunt Citibank) and convert it into over $15,000 of passive interest income. In reality we made nearly double that by taking advantage of a few opportunities throughout the year where we bought discounted assets and then resold them at significant margins.
Cash goes a long way toward motivating distressed sellers to part with their assets at a fraction of their true worth (we will eventually cover this very lucrative strategy but later in this site as it is more sophisticated and must be approached with extreme caution). For now, let's make sure we understand how to make multiple thousands of dollars in passive income without taking any risk. The book Rich Dad, Poor Dad offers a wonderful real-life example of how the power of leverage helped one savvy family with limited means grow truly rich and leapfrog past others who started with much more. It is not only inspirational but thought provoking. In fact, it is one of a short list of books that helped catalyze the strategy that we implement today. Unless you absolutely hate to read or already have more money than you care for, you should absolutely, positively check this one out from your local library if you can find it there. Credit Card debt? Yes please! While most classes of debt should certainly, and at all costs, be avoided, debt used as leverage to purchase assets can be instrumental in creating wealth. Most people we know are hopelessly trying to scratch and claw their way out of bad debt. Conversely, we are doing everything we can to get ourselves into as much "good" debt as we can. We are almost halfway to our goal of being $1 million in debt. If we ever get there, we will bump that goal up to $2 million. Quite frankly, we wish there was a way to get ourselves $1 billion in debt.
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