Introducing the Metric ‘Actual Return’

I believe we can use inno­v­a­tive ways of mea­sur­ing our suc­cess to rein­force our moti­va­tion to save, espe­cial­ly when we’re look­ing at a long time hori­zon (like sav­ing for retire­ment).

Imagine you save $100, and that $100 earns you $10 (per year) in div­i­dends. That’s a 10% return.

Let’s say, your invest­ment increas­es to $150, and over that time, the com­pa­ny increas­es it’s div­i­dend in pro­por­tion. That means, your div­i­dend will be $15. Still, a 10% return.

Keep in mind, these increas­es, and that high a return are not real num­bers. I’m using them to keep the math sim­ple to make a point.

Let’s take a clos­er look at this exam­ple. I start­ed with $100 dol­lars. That $100 dol­lars is earn­ing $10/year or 10%. Time pass­es. I’m now earn­ing $15/year. That’s a 15% return (each year) on my ini­tial invest­ment.

But, the finan­cial com­mu­ni­ty, they don’t mea­sure it this way. They look at the cur­rent val­ue of the stock to mea­sure the return. As such, they look at the cur­rent val­ue of the invest­ment of $150, and say that the $15/year div­i­dend is 10%. And, it is… if you were to pur­chase that invest­ment today.

What’s miss­ing is a way to mea­sure the impact of time on our div­i­dend income invest­ment blue­print.

In order to reflect the val­ue of time in our met­rics, we will call the way the finan­cial com­mu­ni­ty mea­sures return “Current Return” to reflect the return on the cur­rent val­ue of the invest­ments. We’ll use the met­ric “Actual Return” to mea­sure the return on the actu­al amount invest­ed. This ter­mi­nol­o­gy reflects the deci­sion we make when choos­ing whether to invest that $100 or spend it at the time we are mak­ing that deci­sion. It also gives us a way to under­stand the util­i­ty you’ve achieved by mak­ing the deci­sion to save it, when look­ing back on that deci­sion at some point in the future.