ROI - Understanding What You Get For Your Investment

 ROI or Return On Investment, put simply is what you get above and beyond what you put into an investment. Most commonly this is used in reference to a monetary amount but you need to think about more than the money if you want to invest for financial freedom. If you have been an investor for a while you probably know how to calculate ROI but if your not sure or are new to the game lets all get on the same page.

ROI, when talking about monetary value is calculated as follows. ROI = (Total Return on Investment / Cost of Investment) x 100. Before we get to in the weeds lets look at a real quick example. 

Lets say you give someone $100 and they give you $125 back after a month. So we would write it as $125/100 = 1.25 x 100$ = 125% ROI after only a month. It might not sound like much but that is actually a very good return. consider that an investment of $1000 in the same situation would be worth $4000 after 1 year, not accounting for compounding interest. A much more realistic number for most investing is about a 110% ROI for an entire year, assuming you pull your original investment back out after that time frame, for this blog post lets assume that at the end of the time frame we will be pulling our investments out unless otherwise stated.

Now in the above paragraph we talked about a very important factor that is not used in the ROI formula, Time. This is the real thing that most investors should be focused on, not how much am i getting back, but how fast am i getting it back? You see there are some investment vehicles that you might be able to make a 200% ROI but if that comes at the cost of locking up your funds for 5 years is it really worth it? That's for you to decide. I'm not here to talk tactics or give financial advice just here to educate and give you another way to think about your investing.

This is where the "Day Trader" mentality comes into practice. If you could take $1000 and successfully get 101% ROI each day for a year, allowing the entire account to compound earn, you would have a little under $40,000 in your account. I have tried this, it's not that easy, trust me. 

So now that we have the basics of ROI fresh in our noodles lets talk about how time plays into it. There is two primary ways to think about your ROI and how time plays into it. 

1. Time It Takes

In every investment opportunity there will be some amount of time that the investment will take form you. whether it is 6 months of day in and day out of working on a house flip or if it is the 3 hours or so of work you spend setting up some kind of high yield crypto staking account on some random platform. Each one not only requires some amount of time of the front end but usually require some time on the back end to actually see those sweet sweet gains realized. 

Since my focus is on financial freedom i want those gains to be realized in the days to weeks timeline (for the most part.)  Sure this means that i don't get the compounding effect of my money that i made from the original investment also making more money but that is fine because this method allows me to recoup a lot of my time.

this leads me into the second way that time plays into ROI

2. Time It Gives

Every investment, especially when being considered by those seeking financial freedom, should be analyzed for how much time is this giving me back. Lets say you need to make $4000 a month and you make $20 / hour. That's 200 hours of work at your job you need to work in order to make that $4000 a month. Well what if you had an investment that paid you $200 a month. Sure it might just seem like a drop in the bucket but that investment should be looked at, as giving you 10 hours of your life back each month. Now sure you might not be able to go into your bosses office and say "hey i want you cut my work schedule down by 10 hours each month." That might be a good way to get your schedule reduced to 0 hours a months. But this is the type of mindset you should have when analyzing a investment. That investment Isn't making you $200 a month but its giving you 10 hours a month. It may take a while for you to realize that gain but stay at it and you will realize those sweet sweet gains one day. 

So how to figure time into analysis

Again there is no easy way to do this and i don't have some great formula that will solve your problem but here is some "rules" that i like to analyze by.

Fist you want to know the worth of your time, For me, I value my time at $100 an hour. So what I look for is that for every $2500 of my own money that I invest I want a return of 1 hour a month, in perpetuity. In this example technically my ROI is infinite but that's semantics, lets just look at the ROI over 1 year. If that investment gave me 1 hour a month, that's roughly $100 a month i earn off of that $2500 so total return after one year is $3700, divide that by the original $2500, you get 1.48 x 100 and you get 148% ROI after one year.

I have found this ratio, for myself, to be a fair one and one that with a little work is doable and most importantly, repeatable. That being said, to find those investments i spend ALOT of time researching opportunities and kissing some frogs. I believe that spending a lot of time on your investment in the front end will not only save you time but make you more time on the back end. 

Conclusion

Framing ROI and investment analysis around this type of light can help us determine what should be a priority and what shouldn't. I know that when i analyze most opportunities that they wont be able to reach my time return criteria so i don't waste my time. On the other hand when i see something that can far beat that return of time expectation i really spend some time analyzing the opportunity. the same goes for meetings and other business activities. I take meetings and do networking events when i believe that the ROI of my time to be greater than my time return criteria. Lastly this is not investing advice and nor is it a type of analysis that you should take to a banker or another investor to show them why this would be a good investment. This criteria is for you to determine and define and something that should act as a compass to tell you if an investment is worth doing or not. Now go out and conquer!