I love leverage

Posted at 8:03 on Tuesday September 19, 2006 | Filed Under Investing

I really do. Yesterday I was listening to the radio and NPR was running its pledge drive to raise money. I love NPR, but I have to admit that I was about to change the station because, well, that's what's easy. But then they mentioned that some company was doubling every pledge made that hour.

Bam! That's all it took, and I picked up the phone and made my pledge. It wasn't too big, but it felt GREAT knowing it was being doubled. Same with my previous post about the dollar-for-dollar match for Hurricane Katrina.

Usually we only hear about leverage in real-estate terms, but some of you work at places that double your donations and match your 401(k) contributions. That's leverage. Use it. It's really powerful, often with no additional work from you.

PS--Can you think of any other real-life examples of leverage?

DONE READING?: Now you can leave your own comment or subscribe to the newsletter

Comments (15)

1.: The biggest example of leverage I can think of is on a home purchase in a good market (and that's a HUGE caveat). With little to no money down, people purchase homes which have the capability to return much more capital than the cost of their loan, lower their taxes, and provide for possible rental income (if you rent out a portion). This flavor of leverage comes with more possible downside than your examples - buying the wrong place, not being able to rent, house not appreciating in value, etc.

Posted by Eric Franklin at September 19, 2006 08:25 AM

2.: Every time someone purchases a home, for residence or investment purposes, leverage is executed by taking out a mortgage.

Of course, leverage is not used if one pays cash for a home.

Posted by Tyler at September 19, 2006 08:26 AM

3.: PS--Can you think of any other real-life examples of leverage?

Someone using a crowbar.

Posted by A at September 19, 2006 08:28 AM

4.: I'm going to bring up an example from a while back: the check card that automatically puts money in a high-interest savings account every time you use it. Not your money, money the bank gives you.

Why this is bad: because it encourages you to use your check card (although I already buy everything with mine anyway)

Why this is good: Because it's money that someone else is giving you?

Posted by Hawk at September 19, 2006 09:38 AM

5.: By far the biggest example of leverage has to be life insurance, you pay a small premium (as compared to the death benefit) and your heirs get a large sum of money that is in many cases free of income and estate taxes (if structured properly). It's not leverage you'll be able to reap the benefits of, but you will be creating a lasting legacy for your family.

Posted by Ray at September 19, 2006 09:45 AM

6.: Unclear that the facts of your NPR example would actually support your suggestion about leverage.

Having worked as a fundraising professional I can tell you that while matching gifts frequently WORK as a means to successfully solicit additional funds, the reality is usually that the donor offering the match is going to give the same amount regardless of what others do. Either (1) they make a pledge and then offer to structure it as a match so the charity can successfully use it to secure additional contributions or (2) they're going to give X regardless of whether the charity raises the additional dollars or not.

It's an effective sales technique for the charity, but more often than not just that.

Posted by Gary at September 19, 2006 10:13 AM

7.: leverage example

web frameworks, ruby on rails

Posted by jonathan at September 19, 2006 10:27 AM

8.: this is what i call leverage .... a country will an ant size GDP impacting the world's economy :)

"Stocks Off After Coup Occurs in Thailand"
http://biz.yahoo.com/ap/060919/wall_street.html?.v=21

Posted by pakiya at September 19, 2006 11:20 AM

9.: Using blog readership to heft up a new web site's usage?
Using stock options to leverage a greater number of shares than you can buy?

Posted by Matt at September 19, 2006 11:32 AM

10.: Does this count as leverage? I can give money to the food bank (and I do), but I can also give money to an organization that serves youth at risk (Youthcare). It tries to get kids off the streets and give them life training so they don't have to go to the food bank (I give more to this organization than the food bank).

Posted by Paul at September 19, 2006 01:51 PM

11.: Who is borrowing money in this situation? Matching funds is usually a way for one group (the company) to use their generosity to in-cent others to also give.

Posted by David at September 19, 2006 03:19 PM

12.: NPR gets tons of donations and just received a huge billion dollar gift. I think there are other media struggling to survive that deserve donations.

Posted by Ben Casnocha at September 19, 2006 11:29 PM

13.: Stock options are a very interesting form of leverage. Buy a call option and if the underlying stock goes above the strike price you can cash in. Buy a put option and you can make money if the stock price goes down below the strike price.

You can control a lot more stock with less money using options, but they are riskier. They eventually expire, which could mean that you lose your entire investment in the options.

If you can negotiate options when getting hired by a publicly traded company, you might eventually get a nice windfall. I guess that makes negotiation the best leverage of all: a little hot air for potentially lots of money!

Posted by John Knox at September 20, 2006 06:28 AM

14.: I did some modelling showing the effects of leverage here - some might find it interesting:
http://simran.crownpac.net/blog/2006/08/26/personal-finance-and-simulation-modelling/

Posted by Simran Gill at September 20, 2006 01:16 PM

15.: I love my 401k, but unfortunately it doesn't have the leverage many private industry 401ks have, since I work for the state of California. Anyone else know of any other good retirement savings programs for CalPERS-eligible state employees that offer leverage?

Posted by Cody McKibben at September 21, 2006 01:15 PM

Leave your comment

NOTE: Fields marked with asterisk (*) are required.

name*:
e-mail*:
your website:
remember me:	yesno
comment*:(You may use HTML tags for style)