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Naval Ravikant, in his widely famous tweetstorms, advised that to be successful; you need to use leverage. That leverage could be across wealth, knowledge, technology.
The power of leverage is often not understood in the domain of managing individual finances. It is argued that leverage is terrible, and we should be shunning it altogether. However, that could be as far as possible from the truth.
The advisors who say this often look at first-order impact only of debt. Example, you buy an iPad on EMI and then use it to read books that are almost infinite leverage, OR you buy a home and then feel relaxed that is endless leverage.
Not saying that financial prudence is not needed but the real impact of leverage is often in second-order effects.
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If you asked the man on the street, he would probably tell you there are five different bubbles going on right now. There is some truth to that, but also some untruth to that.
One is that the lifestyle of legitimately wealthy people inflates the aspirations of lower-income families, pushing them towards funding an equivalent lifestyle that can only be achieved with ever-growing amounts of debt. This is true for everything from houses to cars to college degrees.
A leverage point is where a small difference can make a large difference. Leverage points provide kernel ides and procedures for formulating solutions. Identifying leverage points helps us: create new courses of action, develop increased awareness of those things that may cause a difficult before there are any obvious signs of trouble and figure out what is causing a difficult.
Robert Kiyosaki, echoes this message in Rich Dad, Poor Dad, one of the most popular personal finance books ever. The premise of the book is that the author’s “poor” father is poor because he works a nine-to-five job while his “rich” father is rich because he owns businesses.
But this is only partially true. The real reason why his poor father is poor has little to do with his job and everything to do with his failure to invest his money in income-producing assets. If his poor father had taken his earnings throughout his life and invested it in stocks and bonds, he would have ended up far better off.
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