Return on Investment - an example
Return on investment is the difference between cost and value. Some people look at the cost of things and buy the cheapest item, thinking they're saving money. Those same people are probably buying their third pair of slippers from the big box bargain store because they have walked right out of the slippers they purchased a couple of months ago.
If they had recognized the value of higher priced slippers, then they might have made a decision to buy the more expensive and better built pair at the local shoe store.
Regardless of how cheap the slippers are elsewhere, if you can buy a pair that lasts 10 years, then you have much greater value for the price – much better return on investment.
It's a fact of life here in America that many of us like "cheap crap." Being able to buy so much for so little makes us feel affluent. We like that. If we stop long enough to look at the true value of an item, we might not be quite so satisfied with our purchases.
There is more to saving money than simply knowing the cost of an item – you need to see the overall return on investment (ROI). Focusing on the value of a product or service will help you make better decisions in this area of personal finance.
Example of ROI
When I think of return on investment, I don't think of interest on a savings account or dividends from stocks. I think of other types of returns from the investments I've made.
Reliable transportation is just one example I'd like to share. You might not think of your car as an important investment, but it really is.
Perhaps the most important part about having a car is that it takes you to work so you can earn money.
The money you earn can be seen as a type of return on investment provided by the car. And, the lower the cost of ownership for the car, the higher the returns are on that investment.
Okay, so you have good transportation and it takes you places where you can earn money. That seems simple enough, but don't we all know that? It seems that some of us do, and some of us don't.
A long time ago I had a secretary who had an unreliable car. She was late to work several times because her car would fail to start and run for her. I depended on her to be in the office to help me get things done. After several occasions where she was late because of the car, I had a discussion with her.
My encouragement went something like this: "You have to put some money into your car to fix the problem so it can take you to work where you earn more money. It's a valuable tool for earning money."
I don’t think my characterization of the automobile came as any surprise to her, but I don’t think she had ever looked at her car that way. Soon after our discussion, she came to work in a new car. I assumed that she went overboard with my advice and really fixed the problem well.
It wasn’t too long after that she gave me notice that she was leaving to start her own business. She was going to clean houses as a self-employed individual.
So, she really did take my advice to heart! She acquired reliable transportation so she could make it from house to house throughout the week in support of her own new business venture. She realized just how important having a reliable car was to a better financial future.
She saw clearly that there was return on investment to be had, whether working for me or working for herself in her own enterprise.
Done with Return on Investment, back to Mindset of Frugality