Return On Investment Defined
Breaking down Return on Investment, Payback period, and how to teach it to your kids
As parents, we all want our children to grow up to be financially responsible adults.
Teaching them the concepts of return on investment (ROI) and payback period at a young age can be a great way to set them on the right path towards financial literacy.
In this blog post, we’ll explain what these concepts are and how they’re used, how to relate them to children of different ages, and how to apply them to real-life examples with your family.
We will look at the following topics in this 6 minute read:
Understanding ROI and Payback Period
Relating ROI and Payback Period to Kids of Different Ages
Applying ROI and Payback Period to Real Life Examples with Your Family
Let’s get started!
Understanding ROI and Payback Period
ROI and payback period are financial terms that are used to evaluate the financial viability of an investment.
ROI measures the return you get on your investment as a percentage of the amount you invested. Payback period, on the other hand, measures how long it will take for an investment to pay for itself.
For example, if you invest $1,000 in a business venture and earn $1,200 in return, your ROI would be 20%. This means that for every dollar you invested, you earned 20 cents in profit.
The payback period would be the amount of time it takes for your $1,000 investment to earn back the initial investment cost, plus any additional profits.
ROI and payback period are important concepts because they help us make better financial decisions. When we understand these concepts, we can evaluate the financial risks and benefits of an investment and make an informed decision.
Relating ROI and Payback Period to Kids of Different Ages
Teaching financial concepts to children can be challenging, especially when they’re still young. However, it’s never too early to start teaching them the basics.
Here are some tips on how to explain ROI and payback period to children of different ages:
Ages 5-7: For children in this age range, keep it simple. Explain that when we spend money, we can either save it or invest it. Investing means putting our money into something that we hope will make us more money in the future.
Use examples they can relate to, such as buying a toy that will last a long time versus buying a toy that will break quickly.
Ages 8-12: At this age, children can start to understand the concept of return on investment. Explain that when we invest our money, we expect to get more money back in return.
Use examples they can relate to, such as putting money in a savings account that earns interest or buying stocks in a company that pays dividends.
Now, when it comes to teaching the concept of ROI and payback period to teenagers, parents can use real-life examples and practical applications to help them understand. Here are some tips:
Use Real-Life Examples: Teenagers are more likely to understand the concepts of ROI and payback period when you use real-life examples they can relate to.
For example, you can talk to them about the cost of college and how investing in their education can pay off in the long run. You can also talk about investing in a property and how it can generate income over time.
2. Explain the Risks and Rewards: It’s important for teenagers to understand that every investment comes with risks and rewards.
Help them understand that high-risk investments may offer higher returns, but they also come with a higher chance of losing money. On the other hand, low-risk investments may offer lower returns, but they also come with a lower chance of losing money.
3. Encourage Research: Encourage your teenagers to research different investment options and evaluate their ROI and payback period.
They can look at the historical performance of different stocks, mutual funds, or real estate investments to get an idea of how much return they can expect.
4. Teach Financial Responsibility: As teenagers start to earn money and become more independent, it’s important to teach them financial responsibility. Help them understand the importance of budgeting, saving, and investing.
Encourage them to set financial goals and create a plan to achieve them.
Here are some practical examples of how you can apply the concept of ROI and payback period to real-life situations with your teenager:
Buying a Car: When your teenager is ready to buy a car, involve them in the decision-making process. Have them research different options and evaluate the ROI and payback period for each one. For example, they can look at the cost of the car, the gas mileage, the maintenance costs, and the resale value.
By evaluating these factors, they can make an informed decision and choose a car that offers the best ROI and payback period.
2. Investing in the Stock Market: Mentioned a bit above, but if your teenager is interested in investing in the stock market, encourage them to do their research and evaluate different options.
They can look at the historical performance of different stocks and mutual funds to get an idea of how much return they can expect. You can also talk to them about diversification and how it can help reduce risk.
3. Starting a Business: If your teenager is interested in starting a business, help them evaluate the ROI and payback period for their idea. For example, they can look at the cost of starting the business, the potential revenue, and the estimated time it will take to break even.
By evaluating these factors, they can determine whether their business idea is financially viable.
By teaching teenagers about the concepts of ROI and payback period, parents can help them develop the financial literacy skills they need to make informed decisions and achieve their financial goals.
Applying ROI and Payback Period to Real Life Examples with Your Family
Now that you and your children understand ROI and payback period, it’s time to apply these concepts to real-life examples with the whole family. Here are some ideas:
Create a family investment club: Start a family investment club where everyone contributes a small amount of money each month. Let your children decide on an investment opportunity and track the ROI and payback period.
Evaluate household purchases: When making household purchases, such as appliances or cars, involve your children in the decision-making process. Have them research different options and evaluate the ROI and payback period for each one.
Start a lemonade stand: Help your children start a lemonade stand and have them track the ROI and payback period. They can learn about expenses such as the cost of lemons and cups, as well as revenue from sales.
Final Thoughts…
There are many different ways to teach our kids the concept of ROI and payback period but at the heart of it all it should make them think about what they are putting into something vs. what they are getting out of it.
This can apply to many things they do in their life whether it involves money or not. What is the ROI and payback period of studying to be a doctor? What is the ROI of wasting time sitting in front of the TV vs. reading that book? Getting out kids to think about the investment and what they get from it can help them learn to live the life they truly want!
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