Page 135 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

2. ROI: Return on investment. A confusing concept for many investors is
the return on their money, or ROI. For example, when you read financial

publications, many mutual funds claim they have gone up by 10 percent.
But my question is, did any of that 10 percent return to the investor? And
how did they measure that 10 percent? Some funds measure the 10 percent
by the price of the shares in the fund going up. For example, if a year ago

the price per share in the fund was $10 and today it’s $11, they can claim a
10 percent return. In this case the return was measured in capital gains.
As an investor who invests for both capital gains and cash flow, the only
return I count is the cash flow. For example, if I invest $10 and each year

after taxes I put $1 in my pocket from cash flow, my return is 10 percent. I
do not count the return on asset appreciation because it is an estimate and
does not become a reality unless I sell the asset.
The difference is that one measure of the ROI is in the price of the stock,

and the other measure of ROI is money in my pocket. I actually want both,
10 percent in asset appreciation and 10 percent cash in my pocket. But cash
flow is the only return that can be tangibly measured while I hold the asset.

Matching 401(k) Contributions with One’s Own

Money

Another confusing point is that financial planners claim companies match
your retirement fund contributions. If the match is dollar-for-dollar up to a
certain percentage, the advisor may claim that this is 100 percent ROI. That

is not how I see it. My way of looking at matching contributions is that the
company is simply putting my money in with more of my money. In other
words, the contribution the company withholds and then contributes is still
my money. It is money the company should have paid me anyway. It is part
of my total compensation, an expense to the company.

When I talk about leveraged returns, I am talking about someone else’s
money . . . not my money.

More Leverage, Higher Returns