I choose ROI or return on investment because this is a super great tool to have in your tool box. Not only can you use the ROI calculation to evaluate the performance of your investments but you can use it to compare it to the performance of other investments. Whether you want to see how one of your investments performed or if you are trying to decide which investment to buy.
To perform this calculation you need two elements – your costs and the amount you receive or your profits when you sell the investment. And the formula is your profits minus your costs divided by your costs.
So for example, if you buy 20 shares of XYZ stock for $10 a share, your investment cost is $200. If you sell those shares for $250, your ROI is 25%. That is (250-200)/200 and that equals 50 divided by 200 for a total of 0.25 or 25%.
In this scenario, each dollar you invest in this stock pays you 25 cents. You could put more dollars in the stock to increase your dollar return but you would still get 25 cents for every dollar you invest. The payout amount would change but the ROI would not.
Also, because ROI is a percentage, it makes it easy to compare investments because it doesn’t rely on the actual dollar amount which can overstate or understate the return when you take the costs into consideration.
Our word of the week – ROI – it is one of the best tools to keep you on track to get to where you want to go.
Got a suggestion for a word of the week that you would like? If so, send it to me at firstname.lastname@example.org.
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Thanks so much for listening and as always remember that minding your money really is the path to a richer life!