How To Find an Investment With the Right Return on Investment (ROI)
“How do I know if an investment is good or not?”
This was the question I got from one of my Finance Freedom mastermind members about half a year ago.
It is a good question.
So this post is dedicated to the answer to the question – How to find an investment with the right rate of return on investment (ROI)?
We will start with the basics – how to calculate ROI.
Then we will move on to how to figure out if an investment is right for you.
What is Return on Investment (ROI) and How Do You Calculate It?
The first thing you need to know before you even start investing is what you are currently making on your investments now.
If you don’t have any investments, no savings, no house, no car…nothing…then your ROI is zero.
Zero isn’t that bad, because most people are actually negative.
How is that possible?
Well they think their car or home is an investment, when it’s actually draining them of all of their money, and not making them a penny.
So, how do you calculate your current Return on Investment (ROI)?
First you need to look at the investment, and figure out how much it costs, and how much you make every year from it.
Then you divide how much you make in a year by the amount of money you have invested.
Here is are some examples:
SAVINGS ACCOUNT (POSITIVE ROI)
$30,000 balance
$480 interest in a year
ROI is:
$480 / $30,000 = 1.6% ROI
HOUSE YOU OWN (NEGATIVE ROI)
$30,000 down payment
$12,000 mortgage payments
$33,000 in equity in 1 year
So, profit is $33,000 – $30,000 – $12,000 = -$9,000
ROI is:
-$9,000 / $42,000 = -$21% ROI
So now look at your life.
How are your investments doing?
How much do they cost you a year and how much do they make you a year?
Divide your profits by your costs and you can determine how good an investor you are right now.
It’s ok if you are currently negative or zero, most people are.
That’s why they aren’t financially free.
Keep reading and you can go on to positive ROI instead!
How do I Find an Investment With The Right ROI?
So now that you can calculate your current ROI, now you can start looking for investments.
If you are currently negative or zero, then I would start with the basics, which is opening and doing regular deposits to a high yield savings account.
You can google “high yield savings account” and find one online.
Open one and start funding it.
It is the most conservative level of investing, because you don’t lose principal (you don’t lose money), and it grows with an interest rate (currently around 1.6% in the United States).
Once you have mastered regular transfers to your savings account and it is growing, then you can look for investments that are making more than your savings account rate.
It really is that simple.
Anything above the 1.6% that you are making in your savings account is fair game.
Now, it’s going to take action and experience to learn what is a good investment or not.
For example, you will come to find that if you invest in the stock market, for example, the value of your stocks will go up and down pretty much daily.
This is a lot different from a savings account, where the principal doesn’t go down, and only goes up over time.
This is where you get to measure risk.
A savings account is low risk, you put money in and it stays there and grows with the interest rate.
A stock is more risky. The value could go up or down daily. This leads to the possibility of a higher return, and also losing money.
In addition, the stock may pay dividends.
So, you must weigh the risk, and do your research.
The same is true of buying property.
The value of property depends on how much someone will pay for it.
It’s not as quick to liquidate, and you don’t know if it will go up or down in value.
In general, real estate seems to go up more than go down (so far).
So it may be less risky than stocks.
In addition, you have more control over property you own (though not total control, as the government will still tax you).
Whereas you really don’t have any control over a company even if you own their stock.
All investments have their own features, pros and cons.
Find an investment that makes you more than your savings account, and start there.
If the best you are doing is 1.6% in a savings account, then a property making 4% is a great investment for you.
Now, if you are making 8% in the stock market, then a property making 4% isn’t as appealing, but a property making 16% is…
You see my point?
Start with your current investment level, and work your way up.
Grow, learn and get the experience you need to become a seasoned investor.
Conclusion
I conclude with a funny story.
I had a different mastermind member tell me that his stock had more than doubled in value in a little over an hour.
The market was still open, so I suggested he get out and take his profits.
Why?
Well, because that was by far the highest ROI that he had ever done.
What was the ROI?
Well, he invested $3,000, and let’s say it was worth $7,000 in 1 hour.
Well, how many trading hours are in a year?
Well, there are roughly 252 days the stock exchange is opened in a year and it is open for about 8 hours a day. So 252 days open in a year x 8 hours open a day = 2,016 hours open in a year
So a profit of $4,000 in 1 hour means in 1 year you would make $4,000 x 2,016 hours equals $8,064,000 in 1 year.
ROI is: $8,064,000 / $3,000 = 268,800% ROI
Now that’s very high wouldn’t you think?
What do you think my mastermind member did?
He wanted to see how high it would go and it up dropping below his initial investment of $3,000 by the afternoon.
So in the end, it’s still there, and he hasn’t made any money. If he sells, he will lose money.
What’s the point of this story?
It’s telling you to understand your ROI, so you can recognize a good investment when you see it, and make a profit!!!
You’ll know it’s better than your best ROI to date and you will be able to get out at the right time and make money consistently =)
I hope this blog was helpful to you.
Contact me or leave me a comment and let me know what you think!
Share it and bookmark it if you found it valuable =)
Thank you for your visit and best of luck on your investing!
About Mey Duldulao
Back in 2011 I had over $30,000 in credit card and line of credit debt, was living paycheck to paycheck and was stressed out over my lack of success in my financial life.
In April of 2016, I became debt free and had a monthly passive income stream. I quit my job on December 23, 2016, and started doing my dream work of mentoring others on what I did to create the freedom to quit my job.
In 2017 we bought our first condo in Waikiki, and we went on 5 weeks of vacation (including a 7 day cruise to the Mexican Riviera)!!!
I spend most of my time doing what I dreamed of for years, spending my days with my son Jordan and my husband Jomel, enjoying motherhood and being a wife. I also enjoy researching Financial Freedom and sharing what I learn with my clients and on my blog.
If you want to learn more about how I can help take back control of your money and your time, then CLICK HERE, watch the free video and get started!