It dawned on me recently that people are easily confused by, or at least misconstrue, numbers that are use to express “return on investment”, or ROI. We get used to hearing these numbers when talking about how the stock market is doing lately, or how our own investment portfolio might be doing. And it's always expressed in terms of percent increase (or decrease).
The stock market had an incredible year in 2019, one of the strongest bull markets in history. Returns were in the high 20% range, depending on which index you were looking at.
Some lucky (yes lucky, not clairvoyant) investors may have owned stocks that grew in value even faster...by about this time last year (August of 2019), Twitter’s stock had grown nearly 50% from the beginning of 2019. That means if you bought $1,000 worth of Twitter stock on January 1, 2019, it would have been worth nearly $1,500 by the end of August of that year. That’s almost unheard of (which is why it was really just luck).
You can calculate the ROI of almost anything you put money into. It’s simply how much do you end up with, compared with what you put into it?
In fact, here’s a handy online calculator you can use to calculate percentage increase: https://www.calculatorsoup.com/calculators/algebra/percent-change-calculator.php
So take financial coaching, for example.
Those who invest in their financial future by paying a financial coach for a period of time will see a turnaround in their finances that is easily measurable in dollars and cents. That turnaround will consist of things like:
Debt paid off
Large purchases cash flowed (that would otherwise have become new debt)
Money saved for emergencies
Money saved in a sinking fund for large, predictable expenses
Money put into retirement investments, or non-retirement investments.
So we can calculate an ROI based on how much is paid for the coaching (which varies widely, since some folks need only a short period of time while others need help for longer), vs. the financial turnaround achieved as a result of the coaching.
The mistake I’ve been making is expressing the ROI for coaching in terms of “fold increase” instead of percent. For example, my client Dave had a 29 fold increase in his financial status as a result of my coaching.
But if I expressed that 29 fold increase in terms of percent, like you would when evaluating a stock’s value, it translates to nearly 2800%.
Yes, you read that right. Two thousand eight hundred percent increase.
And Dave’s case is really on the modest side.
I have another client, a married couple, who are on track to pay off a MOUNTAIN of debt, hundreds of thousands of dollars in consumer debt and student loans, in about a 4 year period. The total ROI of their investment in financial coaching (calculated ONLY on their debt payoff) will be about 700 fold, or 70,000%. Divided by the 4 years it takes them, that’s still 17,500% ROI per year.
Now, if they hadn’t made that small investment in coaching, would they have eventually gotten out of debt? Well, maybe, someday. Hard to say. I’ve seen plenty of people whose debt just grows over the years rather than shrinks. Every situation is different.