Does It Eat You Or Feed You? (A Simple Explanation Of Return On Investment

When you first get interested in Wealth Creation one of the first questions is 'So how do I find these investment, property or business opportunities'?  A little bit later, you will find that you are overwhelmed with all the possibilities and opportunities are jumping out at you from every corner. 

So how can you tell which ones to pursue?

If you have read Rich Dad, Poor Dad by Robert Kiyosaki, you will know about the 'Does it Eat Me, or does it Feed Me' question and it's a really useful first yardstick of how good a deal may be.

Does it put money in your pocket or take money out of your pocket?

How long will it tie my money up for?

If you have to invest some money to get to the opportunity, how much, for how long, and what will your return on that investment be by the end of the first year?  This is known as your Return On Investment or ROI.

We are often asked, by potential clients at The Money Gym, what their ROI will be, on our membership fees, and how fast will they recoup them.  Before I tell you our answer to that, let me go into "return on investment" a bit further as it's important that you understand this fully.

The useful thing about the ROI model is that it can be used to compare any potential wealth creation activity, to compare a property deal with a business deal, a stock market investment with an internet opportunity.

If you can see that something will be putting money into your pocket within a year, and there is another deal that won't, which one will you go for?

If you can see that one deal will return you 10% within a year, and one will return 30% , which deal is the more attractive? 

What about one deal where the return will be 30% but will take you longer than one year, and be harder work, against a deal that will return 20% but start returning in six months and is safer?

This is where many new investors and entrepreneurs come unstuck.

The first way they come unstuck is because they don't set a value on their time.  Because they have a lot of it, but not much money, they don't tot up how many man hours they will be putting into a new business.  They don't work out what else they could be doing with those hours (earning some cash!) and so they discount their real investment into the business and value it at zero.  Bad move!

They don't work out their strategy and stick to it;  so they alternate between fear and greed, much like the stockmarket shows signs of occasionally, and go for the riskier, harder deal for a bigger return, instead of the safer, easier deal with a slightly lower return.

Think about how many of the second kind of deal could you do, with less effort, less stress and the faster returns?

The other thing they do is try to 'bend' a deal to work for them, rather than just going to look for another deal that does, effortlessly.

My ex-business partner, inspirational speaker Gill Fielding, says that she would always rather have the easier deal, leaving her time to get her nails done, rather that one big difficult deal where she would have to really work for her money.

And as someone who has 'bent deals to fit' on many occasions, I now have to agree 100%.

CREATE YOUR ROI YARDSTICK

The first thing to do is create a yardstick for any deal you are considering.  The ROI figure can be applied to anything and you can compare like for like, even if the deals are very different.

How much profit will a deal make in the first year, multiplied by 100, divided by the amount of money you are going to have to invest (or the value of the time you will be spending), to acquire that profit.

That, roughly speaking, is your return on investment expressed as a percentage.  A house that costs £50,000 and will generate £2400k per annum of rental income profit, after expenses, roughly generates a  4.8 % return on investment.  (Not to be confused with rental yield, which is different again).

If you think that the property may grow in value by 10% that year, then add £5,000 to the £2400 rental profit, to find that your ROI is now 14.8%.

Compare that with a similar deal, where you can buy a business card printing machine franchise generating £25,000 per year profit and you have to put in £75,000 to acquire the business.  33.3 % ROI and you have to go round emptying the money.  Worth it for those returns, you say?

But what if you had an 80% mortgage on the property, and the interest repayments were covered by the rent, still leaving you with the same rental profit per annum?

You have spent £10k to acquire that profit, you have a profit including capital appreciation of £7400k so your ROI is now 74%. 

And no work for you, in the form of the money collection. 

But whichever way, both returns are a bit better than the building society returns and both are "Feed Me's". 

Use your yardstick, don't change the goalposts and choose opportunities to fit your strategy or plan.

IN BUSINESS ALREADY?

If you already have a business, think about the startup costs and how much time you spent setting it up. 

Are you getting a 35% return on your investment, year on year? 
Will you get a 35% return on your investment in ten years even? 

What is your exit strategy?  Are you going to work in your business till you drop, or will you eventually sell it? 

Would anyone invest in your business right now?  Would you? 

Would it sell today and if not, why not?  Would YOU buy it?    If not, why not? 

These could be some of the most important questions you ever ask yourself about your business.

We have a visual "Return On Investment" model in the property module at The Money Gym Club - you can adapt it for using to evaluate business opportunities.  In fact, you can use it to compare any opportunity – like with like.

If you are thinking of setting up a new business, think about the projected return on your investment and what your exit strategy will be - how will you get your money out again? 

Most entrepreneurs think that they have to sink everything into their business in terms of time and money; this shows commitment after all. A serious businessperson, however, would be planning to get their money out again as soon as possible, with a good ROI, while leaving the business to thrive healthily and continue to pay them dividends based on profits.

Buy "E-Myth Revisited" and "Rich Dad's Guide to Investment" and devour them.  Make notes, underline, and take on board their wisdom. 

Your business will never be the same.

THE MONEY GYM ANSWER

So, what is our answer to the Money Gym ROI question?

Judith says "By the time they ask this, I usually know quite a lot about them, and the things I am looking for are

1.   Are they bright enough to understand what we teach

2.   What is their preparedness to take action (motivation) for
whatever reasons

3.   Do they have any time - to do the work and take the action - are they willing to read some books and turn the television off? 

4. Do they have any equity - so can afford to get into property
investment - which depending on how much they've got can ensure their financial security and ROI overnight often   

5.   Could they develop maybe, an enthusiasm for learning how to trade the stockmarket, which could soon match their take-home pay if they are in a job, or

6.   Are they self employed  or do they already have an
under-performing business which we can teach them to run much, much more profitably

So my short answer is "how long is a piece of string" and I tell them that, and why.

Then I go on to give them examples of the girl who made her boyfriend over £18,000 in pure profit in under a week after learning what we know about the internet, the chap who made over £80,000 in one lunchtime by just chatting to another member.

I tell them about the woman who is making in one week more than she used to earn in one month from her old business, and she's doing it in under half an hour a day, rather than a 12 hour day, the dentist who had enough equity to become a multi-millionaire almost overnight - he actually did it in under six months - and who still asks us when he sees us "Am I a millionaire yet?" laughing as he does so!

That's a thousands of per cent ROI on their membership fees!  And a lot of the time we can show them how to pay for their Money Gym fee from OPM "other people's money" so their ROI is infinity!!

An infinity return on investment!  That's what the property investors get, when they are able to force up the appreciation of a property, re-finance it and get their cash out again.

The only people who don't' get an ROI, are the ones that don't come to the calls, don't do the homework or who take no action.  The one's who don't listen, who hang onto their limiting and negative beliefs or allow others to influence them accordingly.

The rest do very well!  The one's who take action....