KLE 83: Pulling Levers!
What use is a ‘magic formula’?
Well, nothing and everything!
Nothing – if you don’t do anything with it, a formula is a meaningless, artificial construct.
Everything – if you actually use it to understand – then make – something concrete. In this case money; more specifically, your Number.
So, how do you use such a formula to help you reach your Number?
Simple:
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You use the formula to help you decide what levers you need to pull.
One of the reasons why the vast majority of people don’t make money – serious money – is because they don’t know how. Sure, they know how to get a job, increase their pay, maybe even do some basic investing.
But, they don’t know exactly what to do to make sure that they will actually become wealthy … they don’t know exactly what levers to pull.
But, thanks to the $7 Million Dollar Formula, you now know exactly what levers you need to pull to maximize your chances of reaching your Number, in the time-frame that you have allowed yourself.
You see, for you, the formula has only two variables – call them ‘levers’ if you like. Here’s the formula, again:
W = C X T.
You want your (W)ealth to at least equal your Number in the (T)ime that you have already allotted, which is your Date.
So, that only leaves two levers for you to pull to maximize your chance of success:
1. Your access to Capital, and
2. The X-Factor.
We’ll deal with the X-Factor later, for now, you should concentrate on yanking as hard as you can on the Capital ‘lever’.
What is Capital?
1. Cash or goods used to generate income either by investing in a business or a different income property.
2. The net worth of a business; that is, the amount by which its assets exceed its liabilities.
3. The money, property, and other valuables which collectively represent the wealth of an individual or business.
Capital is primarily the cash that you can use to build your investing ‘war chest’, and you have already examined some ways to increase it:
i) You already Pay Yourself Twice (KLE27), and
ii) You have a plan to Pay Yourself Three Times (KLE77) within the next few months.
Given that one of the keys to your financial success will be to maximize your investing Capital, let’s now take a look at some other ways to increase it:
Conservation
You already have more money passing through your hands than you apply to your investing strategies; clearly you earn money and spend the bulk of it. Of course, you already have a plan to Pay Yourself Twice, and a schedule to increase that amount over time. If you find ways to spend less and accelerate your timetable, you will amass more Capital, sooner.
Reinvestment
Another clue is in the second and third definitions of Capital: your available (C)apital is always a subset of your (W)ealth. That means, as you do start to invest and build your Wealth (as measured by your current Net Worth), you have the choice as to where you place that additional wealth: you could buy a larger house; pay off debt; leave the money in cash “for a rainy day”; or, you could increase your investing Capital. This is one reason why the First Rule of the Rich is to always be investing at least 75% of your Net Worth.
Concentration
Even if you think you have maxed out your ability to save and avoid spending, you may have more Capital available than you think: most people subscribe to the notion that you should diversify your investments. So, they keep a little in cash, a little in a managed fund, a little in stock, and maybe a little in a more ‘risky’ investment such as real-estate or a business.
But, if you take a look at the returns that most of these investment choices will provide against the one/s that can help you reach your Number, doesn’t it make sense that you should actually concentrate your Capital, making more of it available to your primary investing strategy?
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We’ll look at some other ways of increasing your Capital in the next KLE.
In the meantime …
Task 1: Can you increase your Capital, quickly, by using any of these methods: Conservation, Reinvestment, or Concentration? If so, which ones will you employ (and, why)? How much additional Capital do you think you can raise to help fuel your primary Growth Engine for reaching your Number?
