The term “Financial Leverage” can be easily explained by three simple concepts:
- Do more with less.
- Make money work for you.
- Keep more of what you earn.
Money management is often one of the hardest parts of adult life and household management. Many of today’s adults grew up in homes where budgeting and paying the bills was a parental responsibility, but the parent(s) never took the children under their wings to teach them about money.
Money skills are actually fairly basic and straightforward, but they need to be learned. They don’t come naturally. If you grew up in such a household where finances were shrouded as a “private” topic not to be shared with the kids, at some point in your adult life it suddenly became your burden to see that money is earned, spent, saved, and invested wisely. It may have quickly become overwhelming. After all, the options for spending, saving, and investing are endless–and often confusing. Fortunately, there are many simple ways to leverage your money, to make your money work for you so you get more out of it in the long run.
Get More from Your Money via Financial Leveraging
In bygone years, especially in those following the Great Depression, many people had a distrust of financial institutions. They found all sorts of creative ways to store their money. (Notice, we said store– not save!) They resorted to tactics like putting in or under their mattress, stuffing in tin cans and burying it, tucking it into the family Bible or other books, etc. And while creative, and often great finds for later generations, these hiding spots didn’t offer any benefits. Money tucked away under the floorboards or cash budgeting in envelopes earns no interest. It does not work for you. In fact, it loses value over time, due to inflation eating away at its purchasing power.
Today, there are many ways you can make your money work harder for you. You can do more with less by leveraging your money effectively. In fact, done properly, your money can work to produce additional principal which can be used to accelerate paying off debts. The best part: Financial leverage can be achieved simply by changing the path of your cash flow, rather than having to buy anything or pay for financial services.
Tips & Tools to Help Financially Leverage your Cash Flow:
The few tips below are a beginners-level, starting point on how to do more with less and keep more of what you earn. The Finanical Acumen Course® teaches strategies on these topics in substantially more detail, as well as helps you work through the process of financial leverage using your actual, unique numbers and financial situation.
Late fees are painful to pay, and late payments can do serious damage to your credit score. Take advantage of automated payment, investment contributions, deposits, etc. and set them so that payments, deposits, and transfers are made on the same day as your paycheck or direct deposit goes in your account.
Create Specific Financial Goals
Determine how you want your money utilized, make an achievable plan, then stick with it. Be sure these goals benefit you now as well as in the future.
Open a High-Yield Savings / Checking Account
Traditional savings and checking accounts barely pay any interest. In fact, most checking accounts pay 0% interest– they’re simply a “holding” account from which to make payments. High-yield savings accounts, on the other hand, often accrue interest which may be comparable to some investments. Consider the following: At the time of publishing this post, the typical regular savings account pays .08% interest on deposits (national average). But Discover Bank’s high-yield savings account is paying 3.30%. Meanwhile, Vio Bank’s high-yield money market savings account is paying 4.01% APY. Want a wakeup call to put it in perspective? Vio bank’s 4.01% is 5,012.5% MORE than the national average of .08%. And these accounts compound interest daily, paying the interest monthly.
How can leveraging work for you in this case? Consider this: Say you earn $50,000 per year at your job. Suppose you direct deposit your paychecks to a high-yield savings account, earning 4% compounded daily. Also, suppose you automate a transfer once or twice per month to your checking account to pay your bills, and your bill payments are likewise automated from checking. (High-yield saving accounts typically allow up to 6 withdrawals per month without penalty, so by batching money twice per month from savings to checking, you avoid penalties and can pay your bills from checking).
Here’s the effect of leveraging (in our example): By simply changing the direction of your cash flow (as described above), you bill payment money is continually being replenished each payday into your savings account. At 4% APY interest, you end up earning about $2,000 per year on your paycheck. Your money suddenly is doing more work for you, with ZERO effort on your part. And your automated transfers and bill payments save you time while making the process mistake-proof! It’s a no-brainer. Want to learn more? Improve your financial literacy!
Rewards Credit Card
Find a credit card without an annual fee that rewards you for purchases, then pay it off every month. This not only improves your credit score, but it also means you are using the lender’s money instead of your own. The key is paying it in full every month!
Find a Way to Create Passive Income
Whether it is from starting a blog, renting out a room in your home, providing storage or parking space in your garage, investing in the stock market or other route, find a way to earn money without needing to spend long periods of time on the endeavor while still earning money. There are plenty of ways to monetize your hobbies or create a simple business to create an additional income stream.
Get out of Debt
Until you have minimized and eliminated your debt it can be challenging to fully utilize your money. After all, it is difficult to get ahead when you are spending money on credit card interest, loan fees and late payments. Remember this: Interest does not exist until the passage of time creates it. In other words, if you can pay off your debts sooner, you’ll pay less interest on the money you owe. This becomes particularly powerful if you were to apply the $2,000.00 of interest (created in our high-yield savings account scenario, above) towards the principal balance of your mortgage or your credit cards.
Suddenly, you could be paying off your debt faster using money you earned without expending any extra effort. You’re doing more with less. You’re keeping more of what you earn by cancelling interest owed on debts. And you’re making your money work harder for you. In a nutshell, you’re applying the skills of financial leveraging!
Learning how to make your money work for you is far better than storing those extra bills in an envelope in the dresser. Get “money smart” and put these simple concepts and strategies to work for you. If you’re financially leveraged, you can pay off your debts and not give up your lifestyle’s “nice-to-haves” along the way. Learn more!