Leverage Points

March 07, 2024

Leverage is a powerful concept. With leverage, a relatively small input can create a disproportionately large output. The Greek mathematician and inventor Archimedes memorably captured this idea when he said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

This idea of leverage applies to many of our most important endeavors. Education is great example. According to the United States Bureau of Labor Statistics, workers over the age of 25 without a high school diploma earn an average weekly wage of $682. With a high school diploma, that increases to $853. However, with a bachelor’s degree, the average weekly wage increases to $1,432—almost 70% more than workers with only high school diplomas. Magnify that difference over the course of a career and you can see what I mean about the impact of leverage.

This kind of leverage also applies to personal finances and building wealth.

Ever wondered why some people become wealthy, while other equally-talented and well-positioned people just get by? Luck may play a role, but I agree with Ernest Hemingway, who said we tend to make our own luck. Small daily decisions create conditions which allow us to create and retain wealth. Some decisions are especially potent; I call these leverage points.

Planning is foundational for every success, including building and maintaining wealth. However, the power of a plan is leveraged when you combine it with an irrevocable commitment to follow it. Of course, life happens and plans change, but having a deep commitment to your plan means that any changes you make will be weighed carefully beforehand. Building wealth requires intentional action. It often requires deferred gratification, which is rarely easy. The leverage point of all-in commitment is where most fall short. It separates winners from dreamers.

Living within your means is another leverage point. Continually spending more than you make will dig you into a deeper and deeper hole. If you want real wealth, you must avoid frivolous debt at all costs. Frivolous debt is the debt that accumulates when you lose discipline on your spending. Dave Ramsey talks about achieving a gazelle-like focus when it comes to avoiding debt. If you’ve ever watched a nature video of a gazelle trying to outrun a cheetah, you understand what he’s talking about. During the chase, the gazelle has only one thing on its mind—escaping the cheetah. Likewise, if we want to build wealth, we need to focus on getting out and staying out of debt.

You gain leverage in your financial life when you develop financial resilience. Financially resilience means you have the ability to deal with unexpected shocks without losing your financial footing. If you are living paycheck-to-paycheck, with no emergency reserve, a small financial hiccup can become a significant reversal. If you don’t currently have an emergency reserve, start small. Anything helps, but your first step should be to building a reserve of at least 3 months’ worth of core living expenses. As your wealth accumulates, grow your reserve to 12 months.

If you are serious about building wealth, you need to be smart about investing. Fear and greed will compromise your ability to make sound investment decisions, so you need to keep your emotions under control. This can be very difficult to do, especially when it comes to your own money. It’s even harder during volatile markets. This is why many wealthy people work with trusted advisors, who understand the markets and know how to structure portfolios consistent with their clients’ goals. A trusted advisor—often a fiduciary—is a key leverage point.

Financial success usually takes years to achieve; you will face many ups and downs along the way. Your ability to stay the course when things get difficult will determine your success. This is another area where your advisor can help leverage your efforts. As you and your financial advisor keep your plan updated and actionable, your advisor can help you implement regular habits that will keep you moving toward your goals.

Please see important disclosure information here.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.