Return Rates to Maximize Return on Residual Income

I try to be financially wise so I can do what I want. Investing means you put resources in and you get more out. There's so many ways to invest and recently I have been comparing methods to see what my next move will be.

I want to cover some investment types and their rates of return because I was a little surprised.

The number one rate of return is investing in yourself.  By investing in your health you reduce medical bills and related expenses in the future (0 cost, $1000 in return). By investing in your education for a job,  you may need to invest $100K, but you should make back 100%+ of your investment annually. But,  there are other skills you can invest in that cost much less and save you $5/day...like baking and cooking in general.  That's HUGE! $1.8K a year, or a gain of $9,000 in five years!

Second is selected efficient equipment.  So, proper insulation may cost $1000, but it may save you $500/year. The five year return on that is $2500+you still own the insulation. That's 250% return, right? A 40w heated blanket vs a 250 watt space heater in a cold climate.  $40 expenditure for maybe a $30/year return. A $10 fruit tree returns $30 in 5 years and then increases to a steady rate thereafter.

Third, monetary investments stocks and debt. Debt free has all sorts of benefits, but some argue you should not worry about early pay off if it's a lower interest than what you can get from investing in something else. I've been trying to figure out how to do this efficiently because the rate of returns are so low compared to the above two methods. I was looking at stocks and an average rate of 10% per year gain is considered good, compared to 100% return in the other methods. It seems almost wasteful to invest in banks and stocks, etc because it's such a low rate of return. Perhaps someone else can shed more light since I'm a novice.

The other thing I want to mention is not all resources are $$. In fact, it's one of many. So you may spend 1 hour talking to your neighbors and your return is a safer neighborhood or something.

Increase wealth by decreasing expenses.  Periodically, take a hard look at expenses. Cell phones, insurance, etc. Im not saying ditch the cell phone, but look at the plan. On the insurance, i progressed over the years. From a $200 car deductible to $1,000 or more if allowed. Same for home.

I don't do addon insurance for cars or appliances. I've saved enough on just that to buy a car. Seriously. Its crazy. If you buy a new vehicle,  the interest rate is where they get you. It can be a lot of money. Know what your interest rate should be before you walk in the door. Trading in might be just as bad.

I'll give a different perspective to your $100,000 education. Get a job, participate in their 401k plan. How many years before the educated guy has more money in savings? The working guy got a head start, the educated guy has debt.  It may be never.

There are ways to not lose value. A vintage truck will always be worth what you paid for it. A new truck will lose value.  Repairs could skew it though.

This is a very tricky set of calculations because it is very personal; the truth is The Higher the Risk, The Higher the Reward, but what each person is willing to risk is vastly different.

Myself, I do not have insurance on anything except my vehicles, and then only liability because that is law. Since I own my houses, I can determine what I insure. For some people that risk is too much, but I also have three homes, so if one was to be destroyed by fire, I could move into another house tomorrow. I would still lost the contents, but then again full coverage, on three houses, is a lot of money per year, and I have already saved enough money over the years to buy most of what I need to survive for another day. Again, some people could not possibly live like that, but I can, so I reap some financial benefit from it.

The other difficult part of these calculations is theoretical calculations and cold hard cash. For instance, I can tell you by experience that converting land from forest to tillable field costs $201 per acre, and that in less then one year, there is return on investment. However I must be able to take that new crop of hay and sell it in order for that to work, or convert that hay into feed for my sheep that they convert into lamb that is old at the slaughterhouse, for it to be true. Just because grass is out in the field and has value, does not mean it is worth cold hard cash until it is harvested and sold. That is a big difference.

Then there is cash flow. Again, there is a vast difference between theoretical and reality. A case in point is one of my houses. I am taking it out of rental as a residence and going in a different direction with it, even though that secondary function will yield less money per month then as if it was a house for someone to live in. Why? Because people assume that a house will be rented 100% of the time, and that is just not the case. When a person calculates the months that the house sits idle between tenants, other uses suddenly look more fiscally attractive. There are other aspects to look at as well, but the point is; less is often more...in the long run.

It is often not the case with education. I worked at a shipyard where we I was paid over 50 cents a minute, and over a dollar a minute with overtime as a welder. I had no education outside of high school, and from day one, was able to start keeping all the money that I made. I invested in houses and land, but that is another story. Today times are changing. A town near me had their plumber retire and they could not get one in town, so they put out a bid for a plumber with a sign-on bonus of $7000. Now people might scoff at that, but they were not looking for computer tech's. That was a career that was in high demand when I was in school, but they are a dime a dozen now. If the trend towards free education continues, those careers will be saturated while skilled labor will be in higher demand due to baby-boomers retiring out. At 42 I retired, but have been asked to rejoin the railroad: no thanks...

(My career path was construction to railroad, to merchant marine, to ship building)

One thing I often see permies mistake is not putting a dollar value on their time. I pay a lot of people to do things I can definitely do — I have contractors remodeling the garage right now, I pay a full-time caregiver to help my parents, I pay an accountant to do my taxes, etc, etc. These are all tasks I'm totally capable of doing, but when I factor in the value of my time, I lose money to do them.

As an example, if you earn $50/hr at your freelance job and a housekeeper costs $15/hr, that means you earn $35/hr for every hour you hire them to do work since you can earn $50 in that same hour. But even then, that math is off because they are probably much better at housekeeping than you are, do a better job, and do it in less time.

It's not always clear what your hourly rate is, especially if you work for yourself. But I assure you, with enough calculations you can find a number. Even if you're not making money. Let's say you're willing to go into $10k of debt to build out a pasture that will require an extra 5hrs/week of your time for a year. You have decided that your time is worth $38/hr ($10k/(5x52)). If a housekeeper costs $15/hr and housekeeping time directly conflicts with building this investment, it's an easy choice to spend the money on a housekeeper.

But of course, you're going to have to mesh this money-centric view with your values. Maybe you enjoy cleaning your kitchen. Maybe you value self-reliance more than your hours. Focusing on rates of return is a great way to manage your finances, but not always a great way to manage your happiness.

Travis, I'm curious what you plan on doing with your property.  I've considered investing in property here and have a rent-to-own type agreement and then use a portion of the rent $$ to fix it up to zero energy. I don't have the money or time for that at the moment though!

Amit Enventres wrote:Travis, I'm curious what you plan on doing with your property.  I've considered investing in property here and have a rent-to-own type agreement and then use a portion of the rent $$ to fix it up to zero energy. I don't have the money or time for that at the moment though!

Amit: I am not at liberty to say at this time. I am not being evasive to be mean, it is jut something my business mentor told me years ago, and that is directly related to this discussion. NEVER disclose what you intend to do, until everything is signed on the dotted line.

I see so many people make this mistake, even major corporations. They make big announcements on what they plan to do, then...and...because a decision to do X always amounts to changes for Y...so people rail against it. Often public persuasion is enough to stop the project.

With my mentor, who owned a telephone company of all things, never announced anything to all the permits were in place, and all the parties were committed to contracts. By that time, people who were opposed had no say in the matter.

Kyle Neath wrote:One thing I often see permies mistake is not putting a dollar value on their time. I pay a lot of people to do things I can definitely do.

I feel this is fairly short sighted. For me, I try to do as much for myself as I can because no one else is going to have the passion that I will. A carpenter will not tuck that flashing up underneath the drip edge like I will, thinking like a drop of wind driven rain because its MY building. For them, it is just a job, and I understand that; on my house today, onto a different house tomorrow. I understand that, but for me everything matters and my work shows it.

But mostly I disagree because that line of thinking keeps a person indebted to a system of working off-farm. By building my own houses, I was able to build up enough net-worth, and enough income in property, so that I do not have to work for another person...at age 42. We had this same sort of discussion on a different thread a month or two ago.

In the example I used then, I was able to take a house that was worth $40,000, invest 5 weeks of work into it, and $1800 in material (that was not a number mistake, eighteen hundred dollars) because I used my sawmill to make 90% of the building materials required. In 5 weeks time, the house went from $40,000 to $60,000: $20,000 in 5 weeks. That is $100 an hour directly towards my net worth. No commuting costs, no time away from my family, $100 an hour.

But because my net worth went up, if I ever need too, I can leverage more credit from that...or not...my call, again I am not at the mercy of creditors since I do not have any. But I have that option. And since I am retired, I can do additional things to increase my net worth, and my residual income so that it just continues to build. I can spend $650 a month to feed my family of (6) per month, or I can spend more time raising my own food. Or I can spend time gathering firewood, or I can buy more propane. The choices just continue when a person is gifted with time.

Paul's story of Gert really showed that well.

Travis: I suspect you and I are aiming toward the same goal. What I have seen many times is people take on projects that active take them away from their farm, because they are spending time learning skills they don't need to build up their farm. Roofs are a great example. I have seen people waste entire growing seasons learning how to replace the roof on their house, thus setting their farms back an entire (!!!) year. And they didn't do as good of a job as roofers would have, because — well — roofers do it for a living. A lot of these people are putting on metal roofs, which will likely outlast their lifetime. So that skill was learned in vein. It won't be re-used. I had my roof replaced this year and it took them 3 days. I can spend $10k and save myself an entire summer of labor, which would have been an effective wage of something like $4/hr. There's no world in which that's a good decision unless I have an extra summer of free time, am already an expert roofer, or strive to be a professional roofer in the future.

My point is maximize the time doing the thing you love and want to do more of. Spend money on the things that aren't that. More likely than not, it's a good financial decision as well as a good-for-the-soul decision.