The Law of Leverage

The Law of Leverage

Leverage is one of the most used word in the field of business and finance. It refers to any technique used to either multiply gains or losses. It often involves the borrowing of money from a bank to buy more assets to expand the business with a belief that the income generated from the assets bought will be more than the cost of borrowing or the interest of the loan.

The word ‘leverage’ came from the French word ‘levier’ which means to elevate or to raise, to give a minimum input that achieves maximum results, or the ability to gain more with less resources. This can be seen in the simple machines that we often use to make our lives easier, referred in Science as a lever.

A good example is a water pump. If you tried to use a water pump, you would notice that the longer the handle of it, the lesser effort you need to exert to fill a pail of water when pumping water.

Leverage is not only applicable in business and finance, and through the use of simple machines. It encompasses almost all successful endeavors of human life; in pursuit of business alliances, in dealing with our neighbors, and in accumulating wealth.

Law of Leverage

Principle of Least Effort

Since the Law of Leverage involves achieving maximum results by exerting the least effort, it is often referred to as the Principle of Least Effort.

Take for example a real estate developer who needs someone to excavate a land field measuring one hectare with a depth of two meters. For this job, he is willing to pay 300,000 pesos. There are two applicants in this job. One who is willing to do manual labor with the use of a shovel so he can pocket the whole amount for himself. The other one spent 50,000 pesos and rented a heavy equipment digging machine.

In one week, the one who leveraged the use of the machine finished the job and is ready to accommodate other excavation jobs. The other one who used manual labor may or may not have finished it in one month but ended up very tired and exhausted.

Principle of Multiplier Effect

The Law of Leverage is also being called as the Principle of Multiplier Effect because it also involves duplicating your self using other people’s time, effort, and resources.

In this principle, duplication or multiplication of yourself is crucial. You must be able to successfully multiply yourself through other people. If done correctly, you can easily multiply your income beyond your expectations.

Let’s take for example an entrepreneur who just started a business. He selects, hires, and trains his employees so he could multiply himself through them. Because of his good management, employees did well and the business expanded. Thus, he opened more branches.

He then hired more employees and focused himself on selecting, hiring, and training these employees. Years later, his business multiplies with more branches producing more income for him everyday until such time that it now only needs little of his time and effort to oversee the business because he has multiplied himself through his employees.

He was able to successfully multiply himself by using other people’s time, other people’s work, other people’s experiences, and other people’s ideas as a leverage to multiply his income and wealth.

On Network Marketing Business

Traditional businesses were not the only ones who use the Law of Leverage. Even non-traditional ones like a network marketing business employ it.

In a network marketing business, you start by introducing the business to interested individuals and invite them to be one of your business partners. These new business partners may invite more others so they can have their own business partners, and so on. Through duplication or multiplication of yourself, your time then is compounded and their time becomes your time, and it would trickle down to everybody else in the group. Over time, this will establish a mutual leveraging and will allow you and the rest from your network to earn more by employing the least effort.

The Law of Leverage is not as simple as it is. It requires great amount of time and effort in multiplying yourself to other people by passing them the skills and knowledge that you have so that you can finish the work with the least effort.

Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

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