What not to forget when you want to invest.

Published in El Pais, 22 April 2018

When you make financial decisions, we often use the return on investment or return on capital. However, it is easy to do a wrong calculation. Also, how much performance do you want on your investment?

We must understand that any investment means taking a risk. This means that we can lose our investment. Of course, if we put all our savings in a savings account, the risk that the bank goes bankrupt and that we lose everything is very low, and in many cases the central bank even ensures our savings up to a certain amount. But when we decide to invest in a business, buy stocks, currencies, etc., we run more risk. However, running more risk also goes hand in hand with more profit. A savings account in USD / Euro gives between 0% -0.5% per annum. But with actions the yield can go up to 11% or much more. Unfortunately, many people do not consider the risk. There are enough stories of people who invested their savings in stocks, with high returns, and the company went bankrupt and they lost everything. In these cases, there is nobody, not even the central bank, who helps you.

So, if you have special skills, or a good idea, maybe you should invest in your own business. But we must calculate correctly the performance and include the compensation of your own work. Many people with their own business do not pay a salary and think that the utility is their salary. This is not correct. Profit is the reward for investment, and salary is the reward for work. We should not mix it or forget it.

The rule is that in the long term your investment has to have a return according to the risk you take, and your salary has to be comparable with an income elsewhere doing something similar. Of course, at the beginning you work many extra hours but when everything is stable the numbers must be calculated correctly. And perhaps you realize that after paying a salary you are with losses or have a lower return than you want. If you cannot improve this number, maybe it’s time to change business or work.

In some cases, there is also utility that is not seen in accounting. Some people prefer their own business, with a low return and a lower salary than they can earn elsewhere. These people accept this for the increase of well-being of having their own business.