Thinking of Dollars Differently - Investment to Reward Ratio

Originally Posted On December 31, 2015

Investment to Reward RatioWhen people dream of being rich, they don't dream of long hours at the office or sacrificing their free time to pursue a business - they picture the sports cars, fancy clubs, and the daily freedom to do whatever they want without the fear of running out of money.  While these fantasies aren't often rationalized, the idea of making money without working (or while doing very little work) seems to appeal to the dreamers.  Myself included!

 

Investment to Reward Ratio

So what happens when we take those millionaire fantasy concepts and apply it to our daily lives?  We begin attaching to our time an investment to reward ratio.  This really just translates to realizing just how much a money-gaining task positively impacts our wallet.

For example, let's say you have a job that makes $5,000/month and you work 40 hours a week (160 hours/month) AND you have a small side-job that you can perform from your house, making you an additional $500/month and takes up 4.5 hours a week (18 hours/month).

If we break this into hourly pay, we see that your primary job pays $31.25/hour and your side-gig pays $27.78/hour.

However, while you may only be working 40 hours a week at your main job, each working day you spend roughly 2 hours between traveling and preparation for work.  If you're working 5 days a week, you've added another 10 hours a week to your work-related investment total, which adds another 40 to your monthly.  That's 200 hours for $5,000. So your primary job's investment to reward ratio is $25/hour = $5,000/200 hours.

Meanwhile your side-gig doesn't make a grand sum, but also doesn't take any time to prepare for and since you can do it from the comfort of your own home your total number of hours contributed in a month stays at 18.  In this scenario, your investment to reward ratio is the same as your hourly pay: $27.78/hour =$500/18 hours.

Despite your primary job having a higher hourly rate, your investment to reward ratio with the side-job is actually 11.2% better because you've reduced the amount of investment and sustained all of the reward!  (And this doesn't even include the costs of gas and vehicle wear, making your daily job commute even less attractive!)  By focusing on a high investment to reward ratio, instead of hourly rate, we can see that the side-job is actually a better (more highly compensated) use of your time!

Most people associate growing their purse with raises and promotions, but instead of focusing on increasing your reward, let's go the opposite direction and look at decreasing your investment.  We see that halving your investment is the equivalent to doubling your reward and that the closer to zero our investment becomes, the more highly compensated we become.  Now we're thinking like that millionaire-dream version of yourself!

But how can we do it?  Obviously there aren't any companies offering gigantic salaries for minutes worth of work.  Maybe you've got an invention or business idea which could hit it big, but that will take a while to come to fruition, as well and right now we want immediate results!  Our answer lies in savings and one-time-stop passive income options!

Earlier today I negotiated between a two lenders to get the best deal I could on a mortgage loan.  I thought the first offer I got was a little high which prompted me to shop around and fill out some more lender paperwork.  Doing so, I found that with an additional $200 of closing costs, I could get a .75% better interest rate.  By my calculations, on a 15-year fixed rate loan, that's about $5,000 saved over the course of 15 years (assuming I don't make early payments - then it's not as efficient).  You've heard the expression, "A penny saved is a penny earned," -- take it literally, money is money!  It only took me a total time investment 3 hours to get the new deal.  If we calculate the investment to reward ratio rate, we get a rate of $1,666.67/hour = $5,000/3 hours!  By my judgement, this has been 3 hours very well spent (and compensated)!

So saving money obviously made a big difference, but they're reliant on spending, too.  Making profit-gaining one-time-stop investments may seem difficult if you aren't a musician, writer, or YouTuber.  But you don't have to create to reap the rewards earned from one-time-stop investments, they're everywhere.  In fact, our entire stock market exchange is based on a series of one-time-stop investments.  Say you've an extra $1,000 you've managed to save.  You register for an online broker service, put the money into an *insert preferred method of investing here* account then withdraw it a year later with the dividends, let's say 5% or $50.  Maybe it took you 15 minutes to make your online trading account because you already had in mind what you wanted to invest in.  Investment-to-reward ratio states that your time was valued at a rate of $200/hour = $50/.25 hours!  Great job!  (I don't want to trivialize the risk of investing in stocks, but this is how I view stock profits.) 

For a list of one-time-stop investments that require NO monetary investment, check out my list of completely passive incomes!

 

-Phi

 

Posted in Get Started, Independent Revenue, Investing, Personal Finance and tagged , .

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