How does leverage work?

If you think back to your elementary school days, you may remember lessons on simple machines and the different forms that they come in, such as axles, pulleys and fulcrums. Chief among these devices is the lever, which as you no doubt recall, serves as an instrument to cause motion or exert pressure toward achieving a desired aim.

This is essentially how leverage works when it comes to financial planning for your future. You've probably heard about leverage at one point or another whether in the news or perhaps in interactions with friends and acquaintances. If you've had questions about leverage and how this strategy works, the following should help you get the gist of some of the basics.

What is leverage?
If you're familiar with the loan process, you probably know more about leverage than you realize. Consumers or business owners who are interested in purchasing something apply for borrowed funds that they then use for transaction purposes. The same principle applies to leverage, in that borrowed funds are utilized from a bank or financial services company. But it goes a bit deeper than that because the ultimate goal of leverage is to produce a return that creates the potential for future income.

How does leverage actually work?
An example may help illustrate how leverage works in practice. Suppose someone wants to sell a product in bulk to turn a profit. We'll call this person the intermediary, because he's the middleman between the producer and the consumer. One way of going about this is by buying as much of the product as possible - say smartphones - or at the very least an amount that the seller knows will be purchased.

The money borrowed goes toward the mass purchase of smartphones, with the intermediary then charging a higher price so he makes the money back, plus the added amount that's profited once sold to customers.

The intermediary then pays back the loan to the lender plus fees associated with interest. The borrowed funds made available via leverage enable the seller to make more money than he would have had he gotten a traditional loan because it enabled him to sell at a greater volume. Here's a web video that can help illustrate leverage a bit further.

Piggy bank on top of retirement plan packet or folder. Retirement planning is made easier with Leveraged Planning.

What is Leveraged Planning®?
Here at Global Financial Distributors, we specialize in leverage through our proprietary Leveraged Planning
® solutions brand. Available to both individuals as well as business owners, Leveraged Planning® provides borrowers who have a demonstrated life insurance need with financing so that they can obtain coverage in large quantities without having to divert financial resources that may already be utilized.

For businesses, Leveraged Planning® can be used to fund life premiums associated with key man policies, executive compensation and buy-sell funding, among others, and high net worth individuals can apply leverage toward income creation and retirement planning.

To learn more about Leveraged Planning® and what makes GFD Global unique, talk to us or fill out our online form.