Forget about ROI, What’s Your Return on Time Invested?

Today, I want to write about something that is close to my heart. It may sound offensive to many hardcore proponents of personal finance but I believe in sharing my experience to encourage different forms of thinking.

When I was younger, I spent a lot of time thinking about ways to grow my money quickly.

Unfortunately, I knew nothing other than to:
1. reduce my expenses,
2. figure out how to stretch my money through interest rates from banks and
3. get higher cashback from various credit cards.

Was it hard to reduce my expenses?

It certainly felt very difficult. I had to stop my favorite activity: eating good food. No more Starbucks, no more ramen. I forced myself to track every dollar I spent.

Did I save more money and extract more benefits by using credit cards?

Definitely. But, there came a point when I started feeling really sad. I felt that life isn’t supposed to be this miserable.

“There’s got to be a better way to achieve better financial results without sacrificing everything“, I told myself.

Life is almost a mathematical equation.

Addition and subtraction. Multiplication and division.

On that day, I decided that I didn’t want to cut back my spending all the time.

Instead, I would focus on earning more money.

Let me illustrate this with two examples below:

Example 1:
Assuming you earn $4,500 and spend $2,000 per month, you get to save $2,500.

If you push yourself harder and reduce your spending to $1,000, you get to save $3,500. Do take note that this is, of course, at the expense of removing many of the things you enjoy having in your life.

Still sounds doable, right?

However, there is a limitation.

For every individual, there is a threshold where you cannot reduce your expenses further because you have to pay for transportation, food and other miscellaneous expenses.

If you are demoralised by this, you aren’t alone. It happens to everyone.

However, let me show you a different perspective.

Example 2:
As per example 1, we are assuming that you earn $4,500 and spend $2,000 per month, saving $2,500.

Instead of just cutting back on your expenses, I believe that you can also think of how to increase your income.

Before you get upset by that statement, let me explain.

I believe increasing your income is more sustainable as opposed to permanently cutting back on your expenses.

If you start to position yourself correctly by pushing for a promotion or learning a high-income skill, you might be able to earn $6,000 or more instead of $4,500.

With the same spending of $2,000, you get to save $4,000. That’s $1,500 extra!

On top of that, you would not have to cut back your spending on things that you want.

Back then, I did this by giving tuition and sourcing for good merchandise from the USA to resell in Singapore.

It definitely wasn’t the easy route to take – I spent all my free time working or finding new ways to improve myself.

But, when I finally earned some extra money, I could afford to eat my favourite food more often, on top of saving more money.

However, no matter which route you choose to reach your financial goals, one central question remains: what are the returns you’re getting on your time spent?

Return on Time Spent

Over time, I started to realise that many people are extremely enamoured with personal finance tips.

We could spend the whole day debating about the pros and cons of different credit cards and think about how to shift our money strategically across banks to earn a slightly higher interest rate.

Once we’ve squeezed an extra few percentage points of interest on our bank deposits or got an extra $100 voucher, we felt a great sense of achievement.

But let’s be real. While that might help in some ways, I doubt that it will generate significant wealth for ourselves because the math just doesn’t support it.

Why?

Back then, despite what I was doing, I knew that I wouldn’t earn more than an investor who is growing his money at a rate of 15 – 20% annually.

When I realised that, I knew that something would have to change.

Instead of:
1. counting how much I spend on a monthly basis
2. strategising my spendings across different credit cards to maximise my rebates
3. searching for promotions and shop on specific days to enjoy those promotions,

I started to spend more time learning about investing to pull forward the timeline of my financial freedom.

By freeing up my mind, I had time to increase my earning power.

While what I’d been doing previously is still important to help me save money, I realised that there is a much better way to reach financial freedom.

So, I diverted my time towards mastering how to invest profitably.

This is because I know that if I am capable of making $20,000 extra every year, then I won’t give myself a hard time about the few extra dollars that I’ve spent, as long as it remains roughly within a comfortable range. For example, $5,000 to $6,000 a year. The net effect still increases my overall net worth.

Before you decide on what method you’re going to use to reach financial freedom, think about this.

Is it really the best use of your time?

Scaling Your Wealth through Investing

I want to stress again that I am not saying personal finance is not important.

But I do want to point out that there are certain limitations to scaling your wealth by spending less. Essentially, it gets a lot harder to save more money after awhile.

Some reasons why:
1. You need to incur a minimum monthly spending so there is a limit to what you can save
2. There are caps on credit card rebates
3. The extra interest you can earn from banks are insignificant
4. The savings from choosing the correct insurance plans are important but the premiums are still expected to increase over time.

The “UOB ONE” credit card gives a rebate of up to $2,400 per year. Even if you spend more, it’s capped at $2,400.

UOB is also providing a 0.9% interest on a minimum fixed deposit sum of $20,000. That works out to be $180 after 10 months. On first sight, this may appear to be not too bad.

However, you need to remember that Singapore has a core inflation rate of 1% – 2%.

Faced with such prospects, you will need to learn how to invest your money if you want to even beat inflation.

Some of you might feel uncomfortable thinking about investing, because your family or friends have lost money to the stock market.

While it is common to hear such stories, what often causes them to lose money is actually investing without the proper knowledge. And honestly, who can blame them? We weren’t taught how to invest in school.

However, it is not all that grim. Let’s not forget that there are many other investors who are performing well.

People that I can think of right now are Ser Jing, Brian and members of my GIM community.

Thus, it is important for you to know whose advice you’re listening to because it shapes your reality.

If you’re surrounded by pessimistic people, you are going to be pessimistic most of the time.

“You are the average of the five people you spend the most time with.”

by Jim Rohn

Instead, let me illustrate why investing really scales your wealth.

Using an example of $30,000 as starting capital, a yearly capital injection of $6,000 and a compounding rate of 15%, your original $30,000 would become $279,667 by year 10!

I used an example of 15% returns per year, because I believe that it is a reasonable expectation for an investor who does his/her research before buying stocks.

But in most circumstances, after a few years of experience, it is very possible to receive a return of 20%. Just imagine how fast your wealth would grow with those returns!

You may wonder whether there is a difference in the effort to produce 15% on a sum of $30,000 or $94,795?

The truth that most fund managers don’t want you to know is this…

There is little to no difference.

On the contrary, it becomes easier because you know what are the things to analyse before purchasing the companies.

Why do I say that?

I tested the theory myself when I was managing my second “hedgehog portfolio”. Between managing the original sum of $50,000 (back then) and managing a larger portfolio now, the efforts are similar.

Related: The Hedgehog Portfolio Hits $200k!

As time goes by, I will spend lesser time performing the same task of analysing companies because I am familiar with the investment process.

Similarly, your mind will get sharper and be able to connect the dots faster as well.

As that happens, you will have an effect of applying the same (or lesser) effort and producing a bigger result.

To me, that’s what I call leverage.

Not to be mistaken with financial leverage, we are not talking about borrowing money here. We are talking about a method that allows us to achieve more by spending lesser effort.

There is no greater leverage than learning how to invest in stocks properly. It really is a joy that can be felt only when you experience it yourself.

Just like learning anything new, there are challenges in the earlier phases.

When it comes to investing, there are no exceptions. Unfortunately, most people give up too quickly before they experience the joy of seeing their returns.

As a young teenager, I often found it puzzling that many people would spend their time and money investing in books and courses.

But when I experienced my first 6-digit portfolio gain, everything that those people did make perfect sense to me. If it is something that works, I should find all ways to accelerate my learning curve. Even if I have to spend money to get ahead and grow faster, I’m all-in for it!

Eventually, the portfolio gains would far surpass all of my learning expenses.

Return On Time Spent =/= Return On Investment

I suspect most people assume that you have to do more work to get more investing results.

One of the common myths is that if you execute more trades, you will be more successful and get more returns.

This is not true.

On the contrary, the lesser trades you execute, it shows that you know what you are doing and you are comfortable with your decisions.

In the second half of the last year, I did less than 6 trades.

This year, I’ve done 5 trades so far and this is my result as of now (year til date). It’s up 88%~.

No, I did not spend more time.

Instead, my returns are getting better year by year while spending less time. This is due to the scaling effect and beauty of leverage kicking in.

I pondered whether I should show my portfolio results because there are going to be two very different reactions. Some readers could feel happy for me and some might feel I am using this an opportunity to brag. Whatever the outcome, sometimes, I find that our human nature is quite twisted. When you’re feeling sad and miserable, many people will sympathise and show emotional support. If you’re in a worse state than everybody else, you will get more support. When you finally achieve success, you are expecting the same group of people to cheer for you. However, they are sometimes not there and they are not happy for you.

Anyway, we can either use people’s success as a driving force for us to do better, or we can bring someone down by saying they are bragging and they are just lucky.

Ok, I digress, let’s come back.

At the end of the day, investing has asymmetrical returns on time spent.

See, the world’s most successful investor, Warren Buffett spent most of his days reading and doing things he liked while his wealth continued to grow exponentially through his portfolio of stocks.

His wealth grows because he invested in good and growing companies. How Warren Buffett spends his time has nothing to do with the growth of those companies who are managed by a competent management.

Do you understand how powerful this concept is? You literally transformed yourself into a passive business owner who enjoys the benefits without needing to work hard for it.

While personal finance optimisation and tracking expenditures are important, an individual should not be too obsessed with those activities.

Instead, divert your time and attention towards how you can scale your wealth faster by using lesser effort every year.

By far, I still believe that investing will provide you with the highest ROI on your time spent in the long run.

Conclusion

• Optimising your finance is getting your pair of shoes to start running a marathon. To complete it faster, however, you need a pair of strong lungs that will pump out rich oxygen. It’s no use spending hours figuring out what’s the next best running shoes, you got to start running. You got to train your body to produce oxygen. In the same light, optimise your finances, but learn to invest to increase your returns on time spent.
• Pursue learning with passion and curiosity. Don’t make learning a chore because you will kill the fun out of it.
• Always figure out how you can create leverage in different aspects of your life to move faster and achieve more with lesser efforts.
• Be open-minded. Be excited for people when they succeed. Figure out why they are succeeding. Be a life learner.