Did it pay off?
Return on investment (ROI) answers: for every unit I put in, how much did I get back? It's the simplest score for any purchase or effort.
The formula in words
ROI = (what you got back minus what you put in) divided by what you put in. Put in 400, get back 520, gain is 120, ROI is 30%. Also look at annualized ROI to compare things that took different lengths of time.
Why time matters
A 30% return in 6 months is far better than 30% over 3 years. Annualized ROI puts everything on a per-year footing so you compare fairly.
A salon owner compared two uses for 500: a hair-dryer chair earning about 45 a month in extra bookings, or lending it to a cousin's shop for a promised 12% in a year. The chair returned over 100% annually; the loan couldn't compete. Working the return per year, not the promise, made the choice obvious.
A trader bragged about doubling money on a land deal until his brother asked how long it took — nine years, roughly 8% a year, less than his sister earned on her sewing machine in eighteen months. He still made money; he just stopped calling it his best investment, and started timing every return before judging it.
Practice
You put in 500 and get back 650. What is your ROI?
Gain 150 ÷ 500 = 30% ROI.
Why annualize ROI?
So returns over different time lengths can be compared fairly on a per-year basis.
Open the ROI Calculator. Enter 500 invested and 650 returned over 2 years, then change it to 6 months. How does annualized ROI change?
The same 30% total ROI becomes a much higher annualized figure over 6 months than over 2 years — time makes the comparison fair.
Pick a real past purchase, write down what you put in and what it returned, and work out the ROI.
Gain divided by what you put in, as a percent. Do this for a few purchases to see which ones truly paid off.
