Understanding Leverage As A Wealth Principle
I had a dream this morning and felt like this topic was dropped in my spirit to share with you. I was reading a blog post from one of my favorite blogs that I follow, Ready To Be Rich, about the differences between the poor, middle class and the rich. The post really highlighted a glaring similarity to the poor that my family and I follow, which is, we use cash for everything.
The belief behind the all cash philosophy that we use was to never put us in a situation where we owed someone else. We learned about this strategy from Dave Ramsey. We hated being in credit card debt and remember having more month than money. We used credit at times to enhance our lifestyle and said we would pay it later. Of course that never happened. We said there had to be another way. We ended up taking Financial Peace University and we settled many of our debts and started living a non credit lifestyle. I must admit not owing anybody anything at the end of the month is a stress free feeling.
The post that I read suggested that the rich use credit as leverage to get what they want, while the poor does not allow their cash to actively work for them. Right now we are trying to buy a house and because we have been credit free for the last three years, when I spoke with a mortgage representative recently, they mentioned that our credit scores were fake and inflated because we don’t have any revolving credit. The mortgage rep called credit a necessary evil because that is what establishes credit scores and determines our credit worthiness.
It was at that point that I realized that the author of the Ready To Be Rich blog post that I read was right. I have absolutely no leverage because I didn’t understand the principle of leveraging. Leverage involves using financial instruments to get a return. The wealthy use leverage in real estate transactions, stock transactions, and through access to capital.
I am contemplating using a credit card to pay smaller monthly bills like my cell phone and within 24 hours taking the money out of the bank and putting it in an envelope to pay the credit card off on a monthly basis. By using credit for smaller items I will start leveraging the purchase power of the card to help pull our credit scores higher. It’s a really tricky situation because I never want to go back, but I also know that I need credit for purchases like a home, etc.
The journey to wealth continues….