Leverage: Think of it as **using “other people’s money” to make money more quickly**. Probably another topic that is best explained with an example.

Greg has $1,000 a year to invest for 10 years. Assuming a rate of return of 10%, at the end of 10 years he will have **$17,531**.

BUT, we know from the post on the magic of compound growth that TIME has a large effect on growth. **The philosophy is that if you could instead take all that $10,000 over 10 years and just put it in now, you will have more money than by putting it in over 10 years.**

Okay, let’s look at a simple use of leverage: **Greg only has $1,000/year, so he can afford a loan payment of $83.33/month (That’s $1,000 per year).** First we have to figure out how much of a loan he can get. Assuming a 6% interest rate, $83.33/month for 120 months (10 years) will allow him to borrow $7,530.89. **So he isn’t starting with $10,000 since we have to compare apples to apples (in the form of how much cash flow he is willing to dedicate to his investment savings).**

Okay, so now let’s calculate how much $7,530.89 will grow to if invested and assuming the same 10% rate of return… My trusty financial calculator tells me **$19,533.** So in this case he has roughly **$2,000 MORE through the leverage** than with the yearly savings (which yielded him **$17,531**).

**Now before you go out and get a loan to invest, remember that a lot of people get burned on leverages – as they magnify RISK as well as return.** In Part II of “Leverage” I’m going to look at a negative scenario.

You know, the topic of leveraging is a big one – I envision that I could easily write a 10 part series of posts on it, and probably will. It’s glamorous, but **please make sure to consult with a professional before getting one! This post is in no way meant to be taken as advice to get an investment loan.**

Having said that, if you own a house and have a mortgage – you already have a leveraged investment! :) You have borrowed money to buy an appreciating asset.