What is Financial Leverage

Financial Leverage by Farlex Financial Dictionary give 2 meanings; 1) To use debt to finance an activity.  For example, one usually borrows money in the form of a mortgage to buy a house.  One commonly refers this as leveraging the house.  Likewise, one leverages when one uses a margin in order to purchase securities.  2) The amount of debt that has been used to finance activities.  A company with much more debt than equity is generally called "highly leveraged".  Too much leverage is often thought to be unhealthy, but many firms use leverage in order to expand operations.

I've had to rethink my definition of leverage since 2008.  I believe leverage is good as long as you use it wisely.  As the example given above borrowing on a house or business by getting a mortgage is acceptable.  However, I would recommend that you have a strategy on how to pay-down that mortgage in a short amount of time to build up more equity in the house and/or to increase operating income.

In most areas of the country property values reduced by 40 to 50% of their original value.  If this philosophy was followed I don't believe we would have experiences such a large foreclosure or businesses going out of business due to lower operating income, because they wouldn't have been over leveraged and may have had equity built up in their asset.

If you like or agree with me on this post or like to read any of my other financial post I would appreciate you making a comment to the post.

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