One of the biggest financial challenges many persons face today is the need to earn more money to make ends meet and achieve their goals. As most people obtain their incomes by selling their time for dollars, their ability to increase their remuneration is severely limited by the number of hours in a day.
Many employees and self-employed persons neglect to pursue earning options from sources that are not wholly dependent on their physical efforts. They believe that work security lies in their own ability to complete a task and receive a payment for it. In reality, this is not a very secure way of earning, as circumstances such as pay cuts, job loss or illness can derail expected income.
One solution to this problem is to create a passive income source that pays you repeatedly without your continued personal effort. As your earning potential is not completely dependent on your time, it is easier to make more money to supplement your regular pay cheque and channel excess money to invest in long-term goals.
Passive income is vital for attaining true financial freedom. The ability to earn from additional sources can allow you to decide when and where to work, and to spend more quality time with your family or in other pursuits. The ultimate benefit of passive profits is to supply retirement income that will continue to fund your lifestyle when you choose to stop working.
Learning about leverage
Last week we looked at ways of earning residual income by focusing on creating and selling items that people will want to purchase repeatedly, or investing in assets that will supply continuous income. Today, let’s consider how to apply the concept of leverage to earn more money.
Throughout the ages, humans have progressed by using inventions to make it easier to carry out important tasks. One device that has transformed our lives is the simple machine called a lever. A lever works by placing an object on a turning point called a fulcrum, which then transforms a small work effort into a bigger force. Think of using a hammer to pry a nail out of a board, and you will understand the power of leverage.
Most of us have been taught about the value of hard work and personal diligence; and as Genesis 3:19 states: “by the sweat of your brow you will eat your food.” In today’s economy, unlike in our forefathers’ time, our individual effort will probably never be sufficient to meet our basic needs, much less to create wealth.
In the same way that it can be used to move a substantial object with little physical exertion, leverage can be applied to multiply the results from our work efforts. As one of the major deterrents to earning more is limited time, what if we could find a way to leverage other people’s time to increase our output and consequently our income?
Other People’s Time (OPT)
Leveraged income comes from working in conjunction with other people in order to improve your overall work effort and the resultant earnings. The idea is to multiply your personal input into a massive force that creates much more value than you can accomplish on your own. In fact, your employer uses leverage by hiring several persons with different capabilities to carry out all the business tasks.
Let’s use our previous example of earning extra money by mathematics tutoring. A linear income source (one which is solely dependent on personal effort) can be gained by setting up classes after work and teaching some students yourself. If you produce and market a math-training DVD, then you can earn residual income. If you hire other persons to tutor additional classes, then you will be utilising leveraged income.
Here’s another example of leveraging other people’s time. On the weekends, you can earn JMD$2,000 each time you mow a lawn in your community. However, you can only service two properties each day. You decide to buy two more lawnmowers and pay two persons JMD$1,500 for each lawn they cut, but you still charge your customers JMD$2,000. With leveraging, instead of making JMD$8,000 over two days, you now have total earnings of JMD$12,000 with the same amount of effort on your part.
Apart from hiring people to increase your work effort, you can reward persons who sell your products and services. In our math tutor example, increased sales can be made by offering commissions to persons who market both the DVDs and the classes. This strategy, called affiliate marketing, can be a more effective method of increasing revenue as against traditional advertising.
For entrepreneurs, franchising a business is the ultimate form of leveraged income. By allowing other persons to purchase the rights to use your business model and earn their own income, you can exponentially increase sales of your products and/or services.
Next week we will look at a method of creating passive earnings that combines the concepts of residual and leveraged income.
About the Author
Cherryl Hanson Simpson is a financial consultant and money coach, and founder of Financially S.M.A.R.T. Services. She is currently writing her first book, “The 3 Ms of Money: How to Manage, Multiply and Maintain Your Money.” Financially S.M.A.R.T. Services is Jamaica’s number one source for practical, down-to-earth and independent answers for all questions relating to personal finance. Get more smart money advice at www.financiallysmartonline.com and and www.financiallysmartadvice.com .
Copyright © 2010 Cherryl Hanson Simpson.