Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
What’s more important to you, time or money? It seems as though we’re constantly trying to find a balance between the two. Could it be possible to earn more money while you save time?
My guest this week is Todd Tresidder, from The Financial Mentor, and author of the book, The Leverage Equation. Todd shares the six different types of leverage, and explains how each one can help us to work less, earn more, and help us retire earlier.
We discuss why traditional business and investment models offer limited growth opportunity, and how applying leverage can unlock that growth potential.
But with so many types of leverage, which one should you focus on first? Todd gives us the answer, right here, on The Maple Money Show.
Do you remember when you had to request your credit score via fax? I certainly do. These days, I receive my free credit report online on a monthly basis, from Borrowell, this week’s sponsor. These monthly updates are very motivating for any Canadian looking to improve their credit score. Get your free report from Borrowell today.
- Learn the six types of leverage.
- Why leverage is important in your wealth plan.
- The limitations of the time for money equation.
- Three asset classes to build wealth.
- The relationship between leverage and risk management.
- Not all business models have leverage opportunity.
- Your first point of leverage should be what your best at.
What’s more important to you, time or money? It seems like we’re constantly trying to find the balance when trading our time for money. What if we could create more of both? Todd Tressider from Financial Mentor and the author of, The Leverage Equation shares the six types of leverage that allows us to work less, make more and cut years off for our retirement plans.
Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. This show is brought to you by our sponsors at Borrowell. Last month I received my Borrowell email saying, “Congratulations, your credit score has increased.” In the past I’d fax in my request to get a free credit report by mail once a year but now I get my report and score for free online. And these monthly updates are very motivating for any Canadians looking to improve their credit score. Get your free credit score at maplemoney.com/borrowell. Now, let’s talk with Todd.
Tom: Hi Todd, welcome to the Maple Money Show.
Todd: Hey Tom, thanks for having me.
Tom: I wanted to talk to you about leverage. You’ve got a new book coming out this month so I want to just hop right into it with you. What do you consider to be different types of leverage that are available to us?
Todd: Well, that’s one of the important things on leverage. A lot of people think they understand leverage because they have a basic understanding of financial leverage or an intuitive understanding of time leverage which would be employees. Financial leverage might be mortgage financing on a house or on a business. So they think they understand leverage but they don’t because there are some underlying principles and concepts we’ll get into about leverage and how it works and why it’s important in your wealth plan. But basically, to answer your question, there are six types of leverage. You’ve got financial leverage. You’ve got time leverage, technology and systems leverage, communications and marketing leverage, networking and relationship leverage, and knowledge and experience leverage. So I’ve got these six categories of leverage. The point I want to make is, we have these categories for the sake of communicating what they are and how they work, but when you actually put them into practice what you’ll find is they’re kind of seamless. They bridge across each other and they interconnect. We can go further into that as we dig into the interview. But those are the six types of leverage.
Tom: I never really thought of it that way before. When I think leverage, I think it’s probably what you would consider the financial one where it’s simply borrowing money to invest. Would that basically be the financial one?
Todd: Well, actually there are three kinds of financial leverage. But yes, you’re right, that’s financial leverage which is borrowed money. That’s typically how it works. The unique thing about financial leverage and that’s where leverage gets a bad reputation. People think leverage is risky. As it turns out, financial leverage is the only type of leverage that cuts both ways. It makes the good times really great and it makes the bad times unbearable. What happens is, financial leverage cuts equally both ways but you’ve got the carrying costs of the finance—the interest costs of the financing that makes your gains less by the amount of the interest costs and it adds to your losses by the amount of the interest costs. It creates an asymmetric gain/loss relationship. So that’s financial leverage. Then there are other types of financial leverage but they still have the same characteristics. You can have contractual financial leverage. That might be an example of futures contracts or options contracts where you’re not technically borrowing the money but you’re still leveraged financially through contractual terms. Then you’ve got operating leverage which is a form of financial leverage, and that’s built into how you operate a business. For example, if a business runs a lot of debt financing then it’s going to have a higher level of operating leverage.
Tom: Okay. Can we go on to the next type of leverage? I think you said time was the next one?
Todd: Yes. But before we go in leverage type by leverage type, should we go into why people should even care?
Tom: Yeah, for sure.
Todd: Okay, because to me, that’s the important point. Why do you care what types of leverage there are in everything? What’s the benefit of even talking about this? It’s got a catchy title which is how to work less, make more, and retire 30 years earlier. So how do I stand up to that claim? The idea behind leverage is that what you’re trying to do is you’re trying to disconnect your wealth growth—the growth of your assets from your return on equity equation, and you’re trying to separate your income growth from your time for money equation. What happens is almost everybody listening to this is operating under what we’ll call “traditional financial planner” or “traditional wealth plan.” And what they’re doing is they’re working a job. They make money. They pay taxes. They pay their expenses. They try to save from what’s left over after they pay taxes and expenses. That results in savings and then they invest it in an asset allocation fund of some sort whether it’s passive or active. Then they try to compound it over time. And that’s what we call the “slow path” to wealth. If look at that path to wealth, you’re bound by, time for money. You can only put so many hours into working and you make money based on trading your time for your money in a conventional job. Different people get different rates for their time but nonetheless you’re limited. Even a professional doctor or an attorney is still limited to time for money equations. They just make more per hour but it’s still limited. Let me put it this way, it’s not how twenty-something millionaires become millionaires at 20 something—trading time for money, right? We intuitively know that. That’s why it’s laughable and yet we don’t understand how that works. There are mechanics to it, and that’s what’s covered in the book, The Leverage Equation. So you’ve got time for money but then you’ve got return on equity equation that’s built into this conventional formula too. You save money after you pay your bills and taxes. That becomes your equity. And that compounds based on that little tiny amount of equity until it becomes a bigger amount and it grows and grows and grows. Compare that to somebody who’s applying the principles in the leverage equation and what they do is borrow a million dollars to buy a million dollar apartment building, or buy a million dollar piece of business equipment that earns more than it costs to pay the interest costs on that purchase. Now they’re operating with a million dollar asset. They’ve got return on investment on that million dollar asset. They’ve got cash-flow built on that million dollar asset. Suddenly, you’re breaking the equation wide open. And that’s what we’re talking about with the leverage equation. We’re talking about getting out of a conventional financial planning framework where you’re stuck in a time for money on the income and you’re stuck in a return on equity equation in the growth of your assets. That’s the whole point of the leverage equation.
Tom: You touched a bit on the risk in leveraging with investing. What about investing in the business? You mentioned the million dollar piece of equipment. It’s great if it earns more than what you’re paying in interest but what are the risks there? Maybe you can’t even run a business properly? Things could go sideways pretty quick.
Todd: Oh, absolutely, it’s huge. It’s huge. Basically, there are three asset classes you can build wealth with. You can build it with business asset class, business entrepreneurship, real estate, or conventional paper assets which are what I was alluding to before about conventional asset allocation portfolios, stocks, bonds, mutual funds, ETFs—that kind of thing. So you’ve got conventional paper assets, business and real estate. Each has different risk profiles. Each has different characteristics. Going to the business asset classes you were just eluding, there’s a higher risk of failure. Asset classes are well documented by the data but it has a very unique characteristic in how you grow wealth that’s different from any other asset class. You can carefully manage—and this is covered in The Leverage Equation book when I talk about mathematical expectancy. You can very carefully manage the payoff equation. So, if you look at yours and my businesses, you started this podcast. You have very little risk on that. You’re mainly risking time. It could have a potentially lucrative payoff down the road. So you’re carefully tilting the payoff equation to the mathematically expectancy equation. The mathematical expectancy is what determines the growth of your wealth. The business asset class is unique in that you could fail if you’re really good at managing risk and you’re really good at applying leverage. You could fail 999 times out of 1,000 and still get as wealthy as you could ever dream of.
Tom: I’ve heard stories from various entrepreneurs who have gone bankrupt sometimes multiple times and now they’re successful. It’s kind of like the overnight success that took a lifetime.
Todd: Yeah, and what’s usually characteristic of these if you study them because I’m kind of a nut for this stuff—if you study these guys what you’ll find is that they’re very good at leverage. They’re very intuitive around leverage that’s taught in this book, but they’re very poor at risk management. That’s why they build it up and then they fail. They build it up and then they fail. Leverage and risk management are the flip sides of the same coin. What those two principles are doing is covering the payoff portion of the expectancy equation. Expectancy is what determines your wealth growth and expectancy is probability times payoff. We all, intuitively, get probability. We all understand the odds of something occurring. Where people mess it up and why a lot of people get confused on this wealth growth stuff is they don’t understand that wealth growth is determined by expectancy not probability. And, expectancy is probability times payoff. The unique thing about when you bring in the payoff equation is that outsized payoffs have disproportionate impact on the results. This is really notorious in the investment area which is where I come from so you’ll have different strategies that have very high probability of winning. They win often but they’re net/net losers over time because when they actually do lose, they lose so much that they carry a negative expectancy. A lot of options studies are notorious for that. They have what’s call a “fat-tail” risk. It’s a statistical term. It’s not in the business. It’s fat-tail risk. But business is the opposite. That’s the unique thing about the asset class when you’re talking about what’s the risk of failure? It’s really high. But, if you’re good at managing risk—I mean, I’m not advocating just going and borrowing a million bucks. What I teach in the book is that there’s a correct way to apply leverage. What you do first is build the positive expectancy in the model. You have to prove out the model and get it profitable so it’s actually working. Then what you do is you apply leverage to break through the barriers that hold you back– that’s another principle we should go into. Break through the barriers that hold you back and build it up, ramp it up. That results in a big win which tilts your payoff equation.
Tom: We’ve talked privately about this too where you kind of figure out what you want to make and then how to get to that point. That’s sort of where this business leverage could come in. If you know this is how your small little business looks right now but what does it take to hit that next step?
Todd: I think I’m getting you here which is reverse engineer from your end destination back to where you are now, right?
Todd: And how to figure out the path to get there?
Todd: I am an advocate of that. The thing about leverage is that some models have no leverage opportunity at all. Some have huge leverage opportunity. You and I are both in the online marketing space so there’s huge leverage opportunities, particularly in systems leverage and marketing leverage. There’s huge leverage opportunities in this business model. You could have a business model—let’s take a real estate broker as an example. It’s a very difficult model to leverage because it’s a personal service business. That broker’s expected to show the property and that broker is expected to service the closing of the property. And there is only so much time in which they can do that. So typically a broker’s goal is to go to higher-end properties because they get paid more for any given amount of time. That’s a typical strategy in the brokerage community. But it’s very hard to leverage. They can hire an assistant that helps with the paperwork but ultimately there’s only so many clients they can deal with. That’s a model that’s not easy to leverage.
Tom: I agree. The whole idea that if you’re in a business a career where you’ve got just so many hours, there’s only so much you can do with that. In our business, yeah, we can hire out for all sorts of things to free up some of that time. And maybe that goes to that second leverage type you mentioned which was time. Is that the idea, outsourcing?
Todd: Yeah. Time leverage is mainly other people’s time. You’re using other people’s time to accomplish tasks. The big principle in time leverage is that you’re trying to get yourself to the point of being unessential to the business. The way I teach it is, what you want to do is to treat everything that crosses your desk as a failure of your business systems so that, ultimately, over time, you replace all of your activities with either other people services or systems that run them automatically. That becomes the objective. But time leverage is basically where you find other people’s time to do it. Then time leverage crosses over into technology and systems leverage which is the next one.
Tom: I like that. Can we go into that one then? I’m interested in all the non-finance ones because, like I said, to me leverage was strictly how much are you borrowing for investing.
Todd: That’s why I wrote the book. That’s what everybody thinks. That’s why I wanted to start off the presentation with why it even exists—why does this book exist? It’s tremendously important to doing wealth planning in an intelligent and strategic way. You’ve got to understand these principals at a deep level. Otherwise, you’re going to work way harder than you need to get way less results than you can get. That’s why I wanted to open up that way. The other thing I wanted to say was that a lot of people think it’s just about making more money. Like you take a profitable model and leverage it up and it goes big. That’s one aspect of leverage. There’s another aspect that’s poorly understood and that is, you use leverage to break through the limits the old your business back. I know you didn’t want to be coached, but if you could think of an obstacle in your business that’s holding you back, throw it out because the answer is always leverage. It’s always one or another form of leverage that is the answer to obstacles that hold your business growth back. It’s a fascinating concept once you dig into it.
Tom: Yeah, one of the big ones I’m working on right now is what we’ve just covered. It’s hiring things out. This podcast for example. The recording I do with you right now is about all I do. I’ve got someone that edits it, someone that does graphics. It’s the most systemized part of my business yet because it’s the only way I could fit another thing on. I was busy enough with a day job and a blog and family and everything that to do this podcast I knew it had to be very minimal time for me.
Todd: Yeah, so those are all examples of leverage. You leverage getting the transcript done by professional transcript agency. You get the graphics done by an assistant of some sort. You get the editing of the audio done in posting of the video. The show notes get pre-written. You might go back and edit them but that’s about it. I know that because it’s the exact way I do mine.
Tom: Yeah, I still need to do that a lot more with other parts of my business. Even my life. We just had Miranda Marquit on talking about outsourcing different things. Not just for the benefit of a business or career but also just lifestyle—having someone to come in and do the cleaning so you can free up time to put elsewhere.
Todd: I actually have that right in my book where I talk about how I don’t do the art work. My wife doesn’t do the housecleaning. I don’t maintain my cars. I’m the exact opposite of those fire-bloggers who talk about frugality, build your own house and you do all these things. I’m the exact opposite. The reason for that is simply because there are people that are better at that stuff than I am. And my time is better used on those specific things that only I can do. I’m better of growing the business and paying other people to do those services. I don’t do them because I’m being generous or anything like that. I do it because it’s the most lucrative practice I can do to pay others to do those tasks.
Tom: Yeah, that makes sense especially when you have a business because you’re truly trading that time for money. If you’re not in a career or doing anything else then I guess you’re better off mowing you lawn and cleaning your house in your spare time if you’re not going to start some kind of side gig.
Todd: Yeah, it depends. In my business I have leveraged income sources. I geometric growth for my time that I put into the business. Whereas, if I do tasks around the house, that’s what I call reciprocal exchange. You’re exchanging value for value. There’s no geometric growth to it. It’s just a one-for-one thing. It’s like if you buy a bond you exchange a dollar, you get a dollar back plus interest. These are very limited avenues for growth. What you want to look at and pursue is geometric growth patterns.
Tom: Okay, so what was the next type of leverage? Where are we at now?
Todd: We were at technology and systems leverage. All I was trying to do is get to this idea that there’s another dimension to leverage which is breaking through the barriers that hold you back. It’s so important—it’s key. That’s what I was really trying to get in the interview here, technology and systems leverage. Another point I want to bring in this conversation is that you’re not going to be good at all of these so I don’t want people to get overwhelmed. We’re going to go through these six types of leverage and it might be overwhelming but don’t worry about it. I’m not good at networking relationship leverage. You know me, we’re friends and all that but I’m not some brilliant networker. I’m kind of reclusive. You can’t tell by the way I’m talking but I actually am. I’m kind of reclusive. I’m a writer. I like being in my office—whatever. So network and relationship leverage is something I struggle. Whereas, I’m a natural systems leverage guy. That’s just how I think. I think in terms of business systems. I think in terms of systems leverage. And if you look at how I run my business, everything is a system. Everything my assistant does is a business system run by standard operating procedures. It’s my thing. You start leveraged with the thing you’re best at. You’re going to have a natural way of approaching leverage that is your forte. From there, what you do is branch out. Because, as I said earlier in the interview, all these forms of leverage are actually interconnected. As you start working with systems leverage they will naturally take you over to time leverage. And that will naturally take you over networking relationship leverage. They all interconnect. So just enter leverage wherever you’re best and then branch out from there into the ones that you’re less good at. To make a short story long, technology and systems leverage is where you apply other people’s business systems to run your business. A great one would be a franchise. That’s a business system that you can buy into. Or you and I, we have email service providers. That’s a business system that we’re applying in our business. We’re using WordPress, that’s a business system. It’s a content management system. These are all different systems. Another one could be standard operating procedures where you have an assistant that does a certain tasks according to a standard operating procedure that she always follows.
Tom: I’ve seen some of your standard operating procedures. You showed them to me and they’re very detailed. Did you originally start doing that? Let’s say someone’s in their own business and they’re doing a task do you just take notes of what you’ve done?
Todd: What I do is figure it out—and again, I teach this in the book. I figure it out round one, two, and three and by about three rounds I’ve got it figured out, then I hand it over. Then my assistant, part of her job is to maintain the business and updates it as things change. That’s part of her job function. She always operates from the business system and if anything comes up that doesn’t fit within the business system that she can check with me on it. Because again, that’s a failure of the business system. So it crosses my desk, we decide how we want to operate it she learns from it. She’s got great judgment so a lot of times she’ll just do it and then check in with me later and say, “Is this how you want it done?” It depends on the gravity of the decision. So I figured out after the first couple rounds how I want it done and then document the whole thing in an outlined Microsoft Word document outlined document, hand it over and let somebody else run with it.
Tom: I think that’s a great setup for anybody with a business to take advantage of to get it all down. I’ve tried a little bit with screen shares and stuff in our job. But even someone with a non-online business could certainly be documenting this stuff and handing it over.
Todd: This connects back to time leverage. I’m trying to make that point again about how these all interconnect. One of the things that you want to pay attention to is task oriented items that you leverage out versus processes. Processes are very high leverage activities because they repeat over and over. For example, the effort of training somebody for half a day, you can get the activity done for two, three years. Compared to a task, you could spend half a day teaching somebody the task, figuring out the metrics, putting the whole thing together, and you might get two, three, four, or five days of leverage out of it, but nothing compared to multiple years. So the first point you want to leverage, on systems leverage, is processes that repeat over and over in your business.
Tom: Okay. So you define a process as something that recurs where a task has more one-time?
Todd: Yeah, a task is a one-off.
Tom: Okay. That makes sense. I certainly have things in my business where you think you can do it better yourself than you could trade it off to someone if it’s just that one-time thing.
Todd: Also, sometimes this goes into knowledge leverage. In knowledge leverage, I have a kind of a rule; if it’s pretty sophisticated knowledge, I’ll leverage it out because it takes too long to learn it. And, somebody who lives and breathes that knowledge is going to be a deep expert. So an example of that is programming. The flipside of that is, I do basic programming. Because I have to do certain HTML and certain basic code work as part of just running the site, and if I don’t learn that basic skill it’s going to take me too long to communicate everything to a programmer. It’s just going to be too cumbersome to operate. Simplistic stuff like basic HTML, I might learn because I have to do it all the time. Whereas sophisticated stuff like programming my membership site for my course, that I’m going to farm out.
Tom: Yeah, there are certainly a lot of people in an office situation where they’re able to use Excel but it doesn’t necessarily mean they’re an expert in Excel. That can get a little bit more detailed so that’s something they can hire out.
Todd: I have a trading system I developed about two years ago for managing a portion of my assets and I run the whole thing on an Excel spreadsheet that has to download data and has to do all this stuff. And so I had to farm that out. I don’t have the Excel sophistication. I’ve got basic Excel skills so I had to farm that out and get that programmed for me.
Tom: So what types of leverage do we have left?
Todd: Alright, I think we kind of touched on knowledge and experience leverage. Me writing a book is an example of knowledge leverage. That’s where I’ve taken a certain type of knowledge and given it form in a book and leveraged it out through the book. And we talked about hiring programmers so those are examples of knowledge and experience leverage. We have network and relationship leverage. That’s kind of intuitive. A lot of people understand that. You’re accessing other people’s resources, other people’s networks. Then you’ve got communications and marketing leverage. So, let’s use this podcast as an example. You’re leveraging my knowledge (as a guest) to provide an interesting interview. And I’m leveraging your reach network as well as it’s a marketing strategy that reaches out. These are examples of marketing and network leverage crossing over.
Tom: For sure.
Todd: These are all the different forms of leverage. Again, the book goes into it in a lot more detail but the idea is that none of these forms of leverage carry more risk. I don’t carry any risk being on your show. None of these forms of leverage necessarily increase risk but they increase results. I could talk to one person about the book or I can talk to thousands through your show.
Tom: Yeah, exactly. That makes sense.
Todd: That’s an example of the leverage form of communication. When you start thinking about this, the whole point is to really think in terms of leverage and about how you can get more out of the time you’re putting into stuff. Now you can create more income with less of your own time.
Tom: With all these different types of leverage, you’ve touched on how they intertwine a bit. But is there a big picture view of this? What’s the end result? That you’re earning more money and saving time?
Todd: That’s the idea. If you think about it, if you’re stuck in the return on equity equation or you’re stuck on the time for money equation, what happens is the more successful you become the less freedom you have. You start getting bound-down. And so the whole idea of this is that when you start thinking in terms of leverage principles the more successful you become—the more free you become because you can leverage more and more out of what you do so you have more time and more money. Again, the example we used with the real estate broker is a great example. They go through these cycles of ebbs and flows in the real estate market. They’ll get busier and busier and try to hang-in. They’ll almost get burning out and then the market goes through a downturn and they’ve got time on their hands. The market turns down and they don’t have that same transaction volume. The more successful you are, the less time you have and the more bound-down you become. Take your and my business for example. We keep leveraging up by finding more and more resources to do more and more of the work, so we become more successful because we have more income in the business to buy the services.
Tom: Yeah, I’ve always treated my business that way. I’m very risk averse. Almost everything I’ve put into my business has been earned from the business, first. I never really went out of my way to truly invest in the business with my own money or with borrowed money.
Todd: Yeah, so that’s an example. You did not apply financial leverage, therefore you never increased the risk profile. You applied other forms of leverage to ramp up the business without increasing the risk profile.
Tom: Well, thanks for being on the show. Can you tell us where people can find you and about this new book?
Todd: Yes. My site is, financialmentor.com. That’s the hub of everything. You can find it social media outlets as well but I’m really focused on the website so that’s where you want to go. You can find the book in the sidebar. We’re recording it before it’s published. Or you can get on any book outlet. It will be available on Amazon, Kobo, Apple—all the different book outlets. Just search for Todd Tressider or search for leverage and it will appear.
Tom: Great, thanks for being on the show.
Todd: Alright, thanks Tom.
Thanks to Todd Tressider for coming on the show. If you want to hear more about leverage, check out his new book, The Leverage Equation. You can find the show notes for this episode at maplemoney.com/toddtressider or check out all the episodes at maplemoney.com/show.
I’d love to know what you want to hear more. Feel free to reach out by email at [email protected] with any topic suggestions or guests you think I should have on the show. Thanks as always for listening. We’re heading into the holidays so I’m going keep up my schedule forcing a new episode every Wednesday. So be sure to tune in.