LEVERAGE - What is it?

Let the blogging begin again.  With winter coming on, it looks like a good time to resume posting.  This morning I was thinking random thoughts - a regular occurrence for moi.  And it always leads to interesting random connections in my mind.  This morning my thoughts veered to leverage.  What exactly is leverage?

If you look up the dictionary definition in Websters, leverage is 1) the action of a lever or the mechanical advantage gained by it, 2) effectiveness, power.  Okay, not very helpful when you consider all the uses of leverage in our society, but it’s a beginning.

Checking a thesaurus (I used those from Princeton University and Collins Thesaurus) you find synonyms such as purchase, leveraging, influence, authority, pull, force, hold, strength, grip, grasp, weight, rank, clout, and purchasing power.  Leverage can provide an advantage or bargaining chip.

LEVERAGE - How do we use it?

If you think about it, you use leverage all the time.  Have you ever opened a jar using a rubber lid opener?  Leverage.  Used ski poles to push off down the hill?  Leverage.  Have you purchased a home by using a mortgage?  Leverage.  Purchased anything on credit?  Leverage.  Put some muscle into using a long handled spade to turn over your garden?  Leverage.  Called an old colleague about possible job connections?  Leverage.  Asked a friend for an introduction to someone they know who is knowledgeable in an area you want to pursue further?  Leverage.  I think you get the idea.

LEVERAGE AND WEALTH

We use leverage constantly in our daily lives.  But the leverage I want to address is financial leverage.  Financial leverage can be good or very very bad.  The Great Depression was leverage gone very wrong.  The economic meltdown of 2008 was leverage gone very wrong.  The rise of the US stock market through the 1980s and 1990s was leverage that helped a lot of people amass wealth.  And the rise of the housing market until the latter part of 2007 was also leverage working its magic for homeowners and real estate investors.  Great stories of riches gained were common during these periods.  The technology industry was a great user of leverage in the 1990s.  That is until the bust came in 2000.

If you think about it, our economy is built on leverage.  How many people do you know (and maybe see in the mirror in the morning) who have used credit cards to leverage their income into a buying machine?  How many people used disastrous variable rate mortgages to leverage their assets and income into a home that they couldn’t otherwise afford?  How many people used the equity in their home as an ATM?  We Americans thought the party would never end.  At least those who hadn’t been through the Great Depression thought so.  But the party did end because the use of leverage was out of control.  I could write a post longer than you are interested in reading on all the causes and influences that created the mess we’re in now, but I’m sure you have your own ideas about that.

USING LEVERAGE IN THE FUTURE

So do we just stop using leverage to improve our financial condition?  For most people, that’s not possible when you consider the cost of real estate or vehicles and other big ticket items or the cost of building a business.  Some leverage is needed to allow people to grow into their future income and take advantage (leverage) of the positive factors that are available right now.  But to use leverage effectively, you have to have a good foundation to stand on.  Pulling on a lever in quicksand doesn’t work well at all.  That foundation is what has been lost in our society as envy grew and people felt they were “entitled” to what their neighbor had too.  Maybe the neighbor is in debt up to his eyeballs and about the declare bankruptcy.  Someone looking in over the fence doesn’t know that.  Or maybe the neighbor is the millionaire next door who lived a frugal life for decades to be able to live very comfortably later in life.  Delayed gratification.  Something we all need to grab onto to build that great foundation.

WHAT NOW? 

Things happen for a reason.  If the economy hadn’t failed in 2008, it may instead have failed in 2010 or 2012.  It was going to happen because of the leverage being used in ways it never should have been.  The entire economy was caught up in using financial leverage to have it all now.  But something good happened along the way.  People took it as a wake up call.  The savings rate in the US has increased dramatically.  With no equity left, homes were no longer an option for spending.  People are just trying to hang onto their homes in many cases.  But the frugal people still DO have equity.  Some own their homes outright.  Their frustration is that we are all paying for the foolishness of those who wanted it all now without any thought of how they were using leverage.  We will get through this and those who were wise enough to spend less than they make and have money to invest will be the ones who get to take advantage of the opportunities for wealth that the current market presents.  Our country is full of opportunities if you look for them, but it takes hard work, a willingness to sacrifice rewards in the present for those in the future, and having goals for the future so you are already looking in the right place when opportunities arise.  It’s not magic; it’s being intentional.

READ!

If you want to find those opportunities, you have to educate yourself in areas that will help you create a contented future.  A future that is free of financial fear and is one of hope and satisfaction is possible.  Look around and find a path that fulfills your desire to have a good life.  People move themselves out of dire situations all the time when they have the will to make their life different and aren’t willing to let obstacles get in their way.  Desire is a powerful motivator.  Combined with common sense and a frugal outlook, you can move mountains.  Reading books that will improve your skills and listening to and reading about people who have “made it” and share their stories can give you ideas on what your path should be.  Leverage your mind to increase your knowledge and a whole new world will open up.  Leverage can be a very good thing when we use it to improve our lives now for a lifetime of happiness later.

It’s a new month and about to be a new year.  America is still the land of opportunity.  We have over 200 years of leverage working for us.  It’s not over yet!

Recently I read an article that discussed a new paradigm occurring when people can’t pay everything and decide what bills to pay.  More and more they are choosing their credit card bills over their mortgage.  But isn’t homeownership sacrosanct?  Don’t you keep a roof over your head first?  This doesn’t appear to be the case for a growing number of homeowners.  The reasoning behind the latest statistics is interesting and easy to understand.  With 1 in 4 homeowners who have a loan on their home being underwater (they owe more than the house is worth), with fears about job security, and with a low savings rate in the USA, maintaining credit is important to people who do not feel financially secure.  Therefore, they are letting their mortgage payments go and paying their credit card bills first so that they can keep that credit line if they need it.

With the banks so overwhelmed with foreclosures and short sales, many homeowners going through foreclosure get to stay in their homes for many months after they are notified they are in default.  It takes time for the process to work.  Waiting for eviction, not knowing when it will happen, and being locked out of your home is not something people want to experience, but it is happening as mortgage payments aren’t being made.  With credit cards, borrowers can lose their ability to use credit within 60-90 days if they do not make payments.

The sad thing is that many homeowners who are in default never talk to anyone to see if they can be helped.  The government HAFA program, which provides payments to the investors who provide mortgages and homeowners who are in default moves forward in April, 2010.  If you know someone who needs help, have them talk to a real estate agent who is a CDPE designee and understands what options may be available to a financially distressed homeowner.  They may be able to help lift the burden of an underwater home from the homeowner’s shoulders.  I have a team of CDPE agents who work with me and continually educate themselves on all the changes surrounding these issues.  Let us know if we can help you or someone close to you who is struggling with the decision of which bills to pay.

Here’s where you can find a list of important changes to credit card regulations intended to protect consumers.  Changes Set to Protect Credit-Using Consumers | RISMedia  I don’t know about you, but the fact that you could be a few hours late with your payment and could end up being dinged by “universal default” so that all your card rates go up, is a practice by credit card companies that I have considered very underhanded.  Universal default still exists, so look at the new rules to see how it is applied.

With the new rules, as long as your payment is received by 5pm the day it is due, you are considered to have paid on time.  Plus, if your payment due date falls on a Sunday or holiday, you get an extra day added to your due date.  The other thing I think is an improvement is that the credit card companies have to mail or deliver your bill 3 weeks before it is due and they have to give you a consistent due date.  That will help everyone who uses electronic bill payment services so you can set up an automatic payment and never be late again, which can help raise your credit score.  If you only pay the minimum due, you will still take years to pay off your balance, so make a plan to get those balances down and don’t use the card until you pay off what is owed.  Paying interest is a lost opportunity for being able to buy fun things you want.  Instead you get nothing for your money except a bill every month.  The best plan is to pay off your balance every month.  If you can’t do that, figure out why not.

People under 21 will now have to show proof of financial ability to make their payments or have a co-signer to get a card.  Let’s hope this rule helps a lot less college students and young people get in trouble with credit cards which damages their credit at a young age.  Plus you start out in life behind and never seem to get ahead.  Very sad way to start adulthood.  Financial responsibility goes a long way to helping you have a less stressful life.

There are needs (food, transportation, shelter) and wants (video games, top of the line mobile devices, name brand clothing) in life and wants will never be needs.  Too many people have been using credit cards to buy wants they can’t afford.  Maybe as a country these rules will help us individually get our priorities straight and we can tell Congress to get their spending priorities straight as well so that the next 3 generations aren’t bankrupted.  Not many of us, government included, have a pocket full of blank checks with endless resources to pay off debt.  But that’s another topic.