The 4 Types of Leverage to Supercharge Your Income

Do you know what separates the rich from the superrich? Leverage.

And, no, I’m not talking about the “borrowing money to invest” kind of leverage. I’m talking about the leverage that determines how much output you get for each unit of input.

For example, Elon Musk currently has over 150 million Twitter followers. When he tweets something out, far more people will see it than when you or I tweet out the same thing. Elon gets far more output (i.e. impressions) for the same input (i.e. a tweet) than almost anyone on Twitter. That’s leverage.

But, content is just one of the four types of leverage. As Naval Ravikant highlighted in a 2019 podcast episode, leverage also includes: labor, capital, and code. This article will discuss each of these types of leverage in-depth, so that you can determine which form of leverage you might want to employ in your future.

In recent weeks I’ve highlighted the importance of income and which high income skills can help you to build wealth. But this week we are taking it to the next level. So, if you want to supercharge your income by utilizing the four types of leverage, read on.

1. Labor

The oldest and most ubiquitous form of leverage in human history is labor. Getting other people to help you build something that’s worth more than what you pay them is one of the most consistent ways to create long-term wealth. However, because it relies on the actions of other people, it can also be quite challenging. Let’s walk through an example.

Imagine that you mow lawns for a living. It takes you 30 minutes (on average) to mow a lawn and you charge $50 per lawn. In an 8-hour day let’s assume that you can mow 14 lawns (with travel time), which generates $700 in revenue. Assuming your costs are roughly 10% of your sales (this includes gear depreciation, gasoline, etc.), that means your daily profit is around $600 (before taxes).

But what happens if you employ someone to help you out for $20 an hour? Imagine by doing so you can mow an additional 6 lawns in the same amount of time. So now you are mowing 20 lawns a day at $50, for $1,000 in revenue. Netting out your gear costs of 10%, that leaves you with $900.

However, you still have to pay your lawn care assistant their $160 daily wage ($20/hour * 8 hours). Netting that out and you have $740 in profit (before taxes). By employing another person you just generated an additional $140 in income for your lawn care business every single day.

Now imagine scaling this further. You start hiring more people, buying trucks with your logo on them, and working in more distant neighborhoods. Pretty soon your team is mowing a significant portion of the city’s lawns. Eventually, managing the business takes so much time that you stop mowing lawns altogether and manage your employees mowing lawns.

And guess what? Your earnings skyrocket. Since the cost of running the business and paying your employees is less than what they generate in revenue, you are able to create a larger profit that you can keep. The more employees you have and the more lawns they mow, the higher your profit, all else equal.

While the benefits of using labor as leverage are clear, this method of increasing your income isn’t without its challenges.

One of the primary downsides of using labor as leverage is that people can be difficult to work with. For example, what if one of your employees starts cutting corners (literally) to save time so that they can finish their work earlier in the day and go home? The quality of your product starts to suffer and you don’t even realize it because you are too busy managing the rest of the business. Before you know it, you start losing customers and your brand begins to suffer.

While you try to repair the damage done by that one employee, another employee accidentally crashes their lawn tractor into one of your client’s homes, causing $5,000 in damage. In the midst of this, a third employee is complaining about not getting paid enough and you have to convince them not to quit.

While using labor as leverage is great on the upside, it can cause all sorts of problems on the downside. This is why running a business, whether involving lawn care business or any service, can be incredibly difficult. However, if you can navigate this difficulty successfully, you will be rewarded for it.

In full, while using labor as leverage has been a timeless method for growth, it demands a delicate balance of leadership and management to maximize its potential.

Labor Summary

  • Pros: Allows for higher income generation by capitalizing on the difference between revenue generated and wages paid.
  • Cons: Managing people can be challenging. Effective leadership and interpersonal skills are crucial for scaling and success.

2. Capital

The second oldest form of leverage is using capital, or other peoples’ money, to increase your wealth. This can be done by borrowing money from someone to invest in a business/asset by yourself or by managing the wealth of others in exchange for a fee.

The most common use of capital as leverage is done by asset management firms (e.g., hedge funds, venture capitalists) who deploy other people’s funds to generate a return that will (hopefully) outperform the market. These firms are incentivized to do this through a performance fee where they get a share of the upside. Let’s illustrate how this works using a hypothetical example.

Imagine you had the ability to beat the market by 10% every year no matter what. If the market was up 5%, you’d generate a 15% return. If the market went down 20%, you’d only lose 10%, and so forth. Assuming you had $100,000 of your own money to invest, your market-beating ability would be worth $10,000 [10% * $100,000]. However, this would change dramatically if you had more capital.

Let’s say you call up everyone you know and convince them to invest alongside you, raising $10 million in the process. Now, your 10% market-beating ability isn’t worth $10,000, but closer to $1 million. Unfortunately, you don’t get to keep all of that $1 million because some of that value has to go to your investors (who gave you the $10 million in the first place).

Assuming you charged your investors a 30% performance fee on all gains generated above the market (and nothing else), your ability would be worth around $300,000 a year. By using capital as leverage, you were able to increase the amount of income you earned off of your market-beating abilities by 30x.

But harnessing other people’s money has its challenges. Not only do people change their minds and ask for their money back (especially during periods of underperformance), but getting them to hand over their money in the first place is no easy task.

The problem is that affluent individuals receive pitches on what to do with their money all the time. With so many opportunities made available to them, it can be difficult to separate a worthwhile venture from a scam.

In addition to the difficulty of raising capital, there can also be emotional challenges associated with investing other people’s money. You might feel like you have a moral duty to protect them from loss given that they trusted you with their life savings. This can be a heavy burden to bear as a money manager.

Furthermore, using capital to invest carries significant risk if things don’t turned out as planned. If you borrow money to start a business and your business fails, you still have to repay your loan. If you’re an asset manager that fails to generate your expected returns, your reputation could be permanently tarnished. Either way, using capital as a form of leverage can be much riskier than other forms of leverage.

Overall, capital is a great way to create leverage if you can successfully turn it into more capital. However, this type of leverage requires managing financial risks in markets and emotional risks with counterparties.

Capital Summary

  • Pros: You can build wealth more quickly through the use of other people’s money.
  • Cons: Demands a specific skill set, especially in sales and emotion management. Heightened financial risk.

3. Content

It was in 1436 when Johaness Gutenberg invented the printing press and changed the world forever. Before then, content had to be produced by hand one copy at a time. Now it could be produced at scale.

Over time the price of mass content production decreased until the invention of the internet when it essentially went to zero. Today content is the ultimate form of leverage because it can be produced once and shared as many times as you want. Jack Butcher famously branded this idea as “build once, sell twice.”

And in the internet age, content/media has become permissionless. This means that I don’t have to ask for anyone’s permission in order to share my work. You need permission to utilize labor or capital because these forms of leverage rely on other people’s time or money. However, this isn’t true with content.

While Twitter or any other social media company can ban me from sharing content, there is nothing stopping me from posting on this blog indefinitely. The same is true for you or anyone else. 

The good news is that it’s never been easier to share content at scale. Unfortunately, that’s the bad news as well.

Because the barriers to entry to create and share content are so low, anyone can do it. The competition is fierce and it can be incredibly difficult to stand out and build an audience. When there are thousands of people doing the same thing as you, you have to create high quality content for a long time to get noticed.

Lastly, content is generally short-lived. Even if you have something go viral today, it is likely to have far fewer shares in the future. There aren’t many pieces of content that break this rule.

I know this from experience as this is my 364th blog post. Most of you who read my work regularly probably can’t name more than 2-3 pieces, if that. I know this because I read a lot of other people’s work and find it hard to name more than a handful of their pieces as well. I don’t see this as a sign of disrespect, but as a function of the overwhelming amount of content that exists today.

This is why creating content can be such a grind. You spend all this time putting work into something that quickly fades into the background. The only exception to this is content that is high quality and evergreen. Unfortunately, creating content that stays relevant in the long run takes a lot of effort and a touch of good timing as well.

In full, content is an incredible form of leverage, but requires high quality and consistency to stand out within a given space.

Content Summary

  • Pros: Incredibly scalable. Low barrier to entry. No permission needed.
  • Cons: Lots of competition. Difficult to build an audience. Content is generally short-lived unless it is very high quality.

4. Code

In today’s digital age, code grants you the ability to create immense leverage using just lines of text as instruction. Think about the websites you visit or the apps that you rely on daily. All of them were built once and then replicated millions or billions of times for others to use.

Consider someone creating a mobile game. They spend months or years developing it, however, once released, it can be downloaded and played by anyone for basically no cost. If they sell it in the app store for $9.99 and 10,000 people download it, that’s nearly $100,000 in gross revenue generated (before app store fees) with no additional work needed on their end. This is the power of code as leverage.

My financial calculators are also an example of code as leverage. I created them once and then thousands of people can use them daily without any extra effort on my part.

In addition, like content/media, this form of leverage is permissionless. I don’t have to ask anyone for permission to write code and share it. I can do it 100% on my own.

However, as a form of leverage, code has its own unique challenges. Coding requires high technical skill. This means domain knowledge, continuous learning, and keeping up with the ever-evolving tech landscape.

Moreover, the digital space is quite crowded. With over 1,000 new apps launched daily, you will need to be able to market your work in order for it to reach the necessary scale to stand out.

Lastly, there’s also the risk of becoming obsolete. What’s hot today can quickly become forgotten tomorrow. Ensuring that your software or app remains relevant with the changing technology landscape is key to long-term success.

Nevertheless, code remains an attractive form of leverage in today’s technological landscape despite the technical skill requirements.

Code Summary

  • Pros: Near infinite scalability. Works with minimal day-to-day monitoring. No permission needed. 
  • Cons: Technical skills required. On-going maintenance of the code in case of bugs and updates. Effective marketing is essential to achieve significant scale.

The Benefits of Multiple Kinds of Leverage at Once

The true beauty of using leverage to increase your income is that you don’t have to stick to one kind. In fact, using multiple forms of leverage can be even better than using just one type because they can amplify each other.

For example, the founders of Twitter relied on capital to hire labor that wrote code to share content. But, you don’t have to create the next social media giant to employ multiple types of leverage. You can start on a small scale.

This is what I’ve done by creating this blog and writing a book. The blog is a form of code that shares content. It doesn’t employ any labor (outside of my own) and I have no outside investors. It merely distributes my work and monetizes it via ad revenue, book sales, and some paid speaking opportunities.

The nice thing is that the blog and the book build off of each other, as some blog readers discover my book and vice versa. This is the benefit of having multiple kinds of leverage.

However, building multiple forms of leverage takes time. For example, during my first three years of blogging I didn’t make a single dollar. My audience was too small and, to be honest, I didn’t know what I was doing. It wasn’t until I got better at creating and sharing content that things started to take off.

For those who want to build multiple types of leverage, I recommend going deep into one before exploring others. This ensures that you have a sturdy foundation that you can always fall back upon in your future.

The Bottom Line

If you want to supercharge your income, you have to use leverage. Whether we employ labor, raise capital, craft content, or write code, each form of leverage offers its own unique benefits and challenges. While it can be tempting to employ multiple forms of leverage at the onset, I’ve found that it’s much easier to build expertise with one form of leverage before moving onto others.

Therefore, the key decision is figuring out which form of leverage best suits your strengths, interests, and aspirations before embarking upon your journey. Of course, you don’t need to build leverage to do well financially. However, if you want outsized financial success or a fast track to wealth, employing some form of leverage is the best way to get there. Ultimately, the choice is yours.

Thank you for reading.

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This is post 364. Any code I have related to this post can be found here with the same numbering:

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