Happy day to you. This is Ken Kaufman, and I’m thrilled you’re here for episode number 78 titled “ROI,” which stands for return on investment. Now, everything about this podcast, the impetus for me to create it is because I had a lot of ideas and thoughts that I just wanted to put out there in the universe and share. And this concept of ROI, or return on investment, is so critical when thinking about building, growing net worth. So in the world of business, there are decisions made every day in every single business about spending money in a certain place of the business or in certain things or certain assets, and then that driving or deriving a return that comes back to the business. And we have to think about, when it comes to personal finance, we have to consistently think about, what return are we getting on our assets? Because when we’re building that worth, net worth is about building up assets, and hopefully minimizing and reducing and hopefully, ultimately, eliminating any debt that’s against those assets. But as we build our assets, so it could be investment portfolio, or home, or rental real estate, or perhaps you like to invest in commodities, whatever your place is where you’re investing, or it could even be in your business if you’re a business owner, the absolute most critical element of understanding how to build net worth is evaluating what options you have for investments and then prioritizing those based on what is going to create the best overall outcome. And some of the best investments can be in yourself, in education or in skills and tools, and seminars, and, you know, health that allows you to be able to go out and earn and drive an income. That’s a wonderful investment, and, you know, I’ve made those investments throughout my life and throughout my career, and I feel like, you know, for the most part, most of them have paid off.
As our assets build and grow and we’re looking to now invest our money or, you know, other assets that we have, understanding our return on investment is so important and what’s equally important is, are we tracking what our return on investment is? So often I see people say, “Oh, I want to invest in this,” or, “I want to do this with my time,” or, “I want to go this direction,” or, “I’ve decided,” you know, or in business, “We’ve decided to create this new venture that we’re going to, you know, put money into, put time into, and a bunch of focus.” And more often than not is I see people do that and then they kind of shy away from looking at what the results is that it’s creating. And being objective and clear about what return is that generating, and was it a good decision or a bad decision? And in some instances, if it’s going well, and maybe it might need more money, then you feel good about putting more money toward it and tracking what is your return on investment. And there are a couple of key things here, first is you’ve got to understand how much are you putting in, and then you’ve got to understand what return on investment are you expecting, and what is the timing of that return? I’ll give you an example. If you want to remodel your home and you think, “Hey, this is a great investment.” So you sit down and you look and you get quotes and bids, and you define the scope of what your project is, and you say it’s going to be this amount of money to do this renovation project or some remodeling in your home. And then you want to understand, and what is going to be the return on that? Now you’re going to live in it, and you’re going to get some value that way, but how is that going to improve the value of your home over time? And how are you going to hopefully recoup the money you put in and actually get more money back than what you put in? It’s the same in business. If you decide, “Hey, I want to grow my business and there’s this position that I need to hire for, and they need to have…the person that’s hired into this position needs to have these qualifications and this skill set and these talents. And when I hire them and have them do these things inside my business following a system and a process, then they’re going to generate a return. And let’s say that’s an employee that makes, just to pick an easy number, $50,000 a year.
Well, if that cost of $50,000 a year is going out, you’ve got to make sure that you’re getting at least that $50,000 back into the business, or you’re going to hurt the business over time and, hopefully, you’re getting more than that. And it’s even kind of tricky in business because it’s not just, are you making…are they selling $50,000 more product for you? Because the problem is, you have all the cost of the product and all the other variable costs, and then your overhead costs of running your business, and so it’s not a dollar for dollar. Now, if you can cut it, if they’re coming in and they’re going to just straight cut expenses in your business, perfect. But if they’re adding revenue to your business, you’ve got to look at your variable cost structure, your overhead costs, and to even see, it might be that that person’s got to generate $100,000 or $150,000 of new revenue in your business to justify their cost of $50,000 in terms of covering the cost and maybe being slightly profitable above and beyond that. Because, again, even to make an investment to say, “Hey, I’m going to take all my money and I’m gonna put it here. And then I’m going to get exactly that amount of money back in 5 years or 10 years.” But guess what, your money actually, it’s not that it didn’t grow, it actually decreased in value over a year because inflation goes up. And I realize we’re in a somewhat low inflationary environment right now, but inflation means the cost of living and the cost of goods we buy, it goes up every year. And so if we invest and all we do is get the money back that we invested 10 years later, your money is decreased by, I don’t know if inflation is 1% or 2% or 3%, it’s decreased in value by that much every year. That is not a positive net return on investment, that’s a negative net return.
And so I really just wanted to give some context here, talk through a couple of these scenarios, and be really, really clear that return on investment is the name of the game when we are building net worth. Because if we let our assets just sit and do nothing, they’re going to lose value over time. If we are investing them, and then most importantly tracking and seeing how it’s doing and making sure that we’re maximizing the return on the investment, or sometimes we have to take some losses and sell out of an asset and go get into a new one, whatever your situation is, setting up a discipline that allows you to look at how are all of your investment decisions doing and tracking their performance and then, you know, measuring that. And if you decide, “Hey, I want to go and hire a financial planner who’s going to handle my investments for me,” great. Well, they should be reporting to you how they’re doing in coaching you and helping you to invest your assets and to maximize them and get the most return possible that you can relative to the risks you want to take. And I mean, there’s a lot of factors and they get to know you and understand, you know, your background. Or if you decide, “I want to invest in rental properties,” and, you know, build up a portfolio and rent them out, and handle maintenance, or maybe you decide you want to have a property management company, all those things are great ideas, but note at the end of the day what return is that going to generate for you. After the debt’s paid and maintenance costs and property management fees and insurance and the mortgage and all of those different things, what net cash flow is returning back to you? That’s how you evaluate rental properties and, you know, many other investments.
So this is the takeaway, return on investment is the key. Once you start to build your assets, to continue to build and grow your net worth, you track it and you hold yourself accountable, and you know what your return on investment is, and you know what’s acceptable, and ultimately, you know what’s not. And that allows you to tweak and change and iterate and, you know, potentially move in different directions from things that haven’t done as well for you. So that’s it. Many, many thanks to you for joining episode number 78 on ROI, and this is a wrap for episode 78. Happy day.