Return on Investment

Return on investment summary:

• Return on investment is a financial term that describes how much you profit from an investment. 

• You can use ROI to measure the success of your investments in the market, but it has other uses as well. 

• A so-called good ROI is subjective, and what's good to you may be different for someone else. 

Return on investment definition and meaning

Return on investment, or ROI, is a financial term that describes how much gain someone realizes from an investment. For example, if you buy a stock for $100 and sell it for $200, that's a 100% return. You got back what you paid, plus the same amount in profit. 

Estimating your return on investment could help you make decisions about where to invest your time, money, and energy. The stock market is just one place you can put ROI to work. 

Key concept: A measurement of the gains from an investment. 

More on return on investment

In a world where most people only have so much money and time to go around, you have to make the most of it. Before you put your cash or energy into something, you probably want to know what you stand to get back. 

In other words, you want to know what kind of return on investment you're likely to get. Return on investment is finance-speak. Essentially, it means what kind of payoff you get from doing A, B, or C. 

Why should you care about return on investment? Simply because it can help you decide on the best way to use the resources you have. 

Return on investment: a comprehensive breakdown

There are two ways you can look at return on investment. The first is the technical way that deals specifically with finance. 

For example, investors may try to predict their ROI before they buy a certain stock. Or a business owner may want to know what kind of return they could get by investing money into new equipment or hiring new staff. 

Here's how to calculate ROI in those scenarios:

• Subtract the cost of the investment from your profit.

• Divide that amount by the cost of the investment.

• Multiply that answer by 100 to get a percentage.

In money terms, if you invest $100 and get back $100, you have a 0% ROI because you only made back what you invested. If you invest $100 and get $200, you have 100% ROI because you got back your money, plus an amount equal to 100% of your money on top of that.

It's simple enough. But what if you're trying to measure ROI for something harder to quantify like home improvements or delaying saving so you can pay off debt?

In those situations, it's a little trickier to find an exact ROI. For example, say you want to spend $20,000 on a kitchen remodel. You're hoping the upgrades will boost your home's value by 10% when it's time to sell. You know the numbers, but what you don't know is exactly how much of an equity bump you'll get down the line in exchange for your efforts now.

Some gains can't be measured in dollar amounts or percentages because they're intangible. For example, it's hard to put an amount on how amazing it could feel to finally be out of credit card debt. 

Or maybe you want to join a gym to lose weight. You know the cost of the membership fee, and you could even guess-timate what you might save on healthcare by getting in shape. But you can't put a dollar amount on the emotional and mental benefits of improving your health. 

Real-life example of return on investment 

Let's use a simple example to illustrate how ROI works. Say you're approved for a $50,000 home equity loan at 14%. The loan has a 10-year repayment term, and you plan to use the money to remodel your home. After the renovations are done, your home value jumps by $100,000. 

When you factor in interest, you'll repay $69,804 in total for the home equity loan. Here's what your ROI works out to:

$100,000 - $69,804 = $30,196

$30,196 / $69,804 = 0.43

0.43 x 100 = 43%

You have a positive return on investment, since you got back your initial investment, plus an extra $30,196 of net gain.

What's a good return on investment? A positive ROI is always better than a negative return. The higher the number is, the better your investment did. When you calculate ROI, you have to consider what's being invested and whether the return is something you measure in dollars, mental and emotional benefits—or a little of both.