What is ROI?
Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures how much return you receive compared to the cost of the investment, expressed as a percentage.
ROI Formula
ROI = (Final Value - Initial Investment) / Initial Investment x 100
Or alternatively:
ROI = (Net Profit / Cost of Investment) x 100
Annualized ROI
When comparing investments of different durations, annualized ROI provides a standardized measure:
Annualized ROI = ((1 + ROI)^(1/years) - 1) x 100
Why ROI Matters
- Compare Investments: Evaluate different investment opportunities
- Decision Making: Determine if an investment is worth pursuing
- Performance Tracking: Measure how well investments are performing
- Resource Allocation: Decide where to allocate capital
Types of ROI
- Simple ROI: Basic calculation without considering time
- Annualized ROI: Standardized to a yearly rate
- Risk-Adjusted ROI: Accounts for investment risk (Sharpe ratio)
- Social ROI: Measures social/environmental impact
Limitations of ROI
- Doesn't account for time value of money (use NPV/IRR for that)
- Doesn't consider risk level of investments
- Can be manipulated by changing what costs are included
- Different calculation methods can yield different results
Good ROI Benchmarks
- Stock Market (S&P 500): ~10% average annual return
- Real Estate: 8-12% annual return
- Business Projects: Often expect 15%+ ROI
- Marketing Campaigns: 5:1 return ($5 for every $1 spent)
Frequently Asked Questions
How accurate are the results?
The ROI applies a standard formula to your inputs — accuracy depends on how precisely you measure those inputs. For planning and estimation, results are reliable. For high-stakes or professional decisions, cross-check the output with a domain expert or primary source.
Should I include inflation in my inputs?
Depends on your goal. For comparing investments head-to-head, nominal rates are fine. For projecting real purchasing power, use real (inflation-adjusted) rates — typically nominal rate minus ~3% for long-term US inflation.
Common Tip Percentages
| Service | Typical Tip Range | Notes |
|---|---|---|
| Restaurant (sit-down) | 15–20% | 20%+ for exceptional service |
| Food delivery | 10–20% | Consider extra for long distances |
| Taxi / rideshare | 10–20% | More for assistance with luggage |
| Hotel housekeeping | $2–5/night | Leave daily, not just at checkout |
| Barber / hair salon | 15–20% | On pre-discount total |
| Pizza delivery | 10–15% or $3–5 minimum | Higher in bad weather |
General Household Budget Ratios (50/30/20 Rule)
| Category | % of Net Income | Examples |
|---|---|---|
| Needs | 50% | Rent, groceries, utilities, insurance |
| Wants | 30% | Dining out, entertainment, hobbies |
| Savings / Debt | 20% | Emergency fund, retirement, extra payments |
Common Measurement Conversions for Everyday Use
| Quantity | US / Imperial | Metric Equivalent |
|---|---|---|
| 1 cup | 8 fl oz | 237 mL |
| 1 pint | 16 fl oz | 473 mL |
| 1 quart | 32 fl oz | 946 mL |
| 1 gallon | 128 fl oz | 3.785 L |
| 1 lb | 16 oz | 453.6 g |
| 1 ft | 12 in | 30.48 cm |