Personal Rate of Return Reconsidered

The term “personal rate of return” refers to return on investment, and was first used by traditional financial firms. Even for standard investment products and accounts there is confusion about how to calculate it.

But the traditional concept of “personal rate of return” is also incomplete, and should apply to far more than just your standard financial investments.


Personal Rate of Return (PRR) Definition

The term “personal rate of return” is sometimes used by traditional finance companies. These are brokers and investment managers that historically controlled the research and investment options available to their clients. It is sometimes used to distinguish an individual’s actual returns (e.g. based on cash flows; when the person invested money into a fund) from the returns of that fund or investment vehicle. But implicit in this is the investor’s personal decision-making in the investment process.

What’s more important than the specific method used is that we, as managers of our full life portfolio, recognize the importance of measuring and tracking the performance of all our decisions.

Once upon a time, individual investors weren’t meant to think for themselves. The finance industry did fine by just taking investment money and charging fees and commissions, regardless of whether the person saw investment growth. But with the self-directed investing revolution, beginning in the 1970s lower costs and new products meant people didn’t need “wealth advisors” or gate keepers.

I believe that the term personal rate of return was also a way for these companies to distinguish their client’s total investment decisions and the performance of ideas and investments the company recommended. And perhaps they thought that most individual investors would under-perform the professionals. In fact, the inverse is often true.


PRR Formula and Variations

In the simplest terms. Rate of return is calculated as follows:

Rate of return=[(Current value−Initial value)​ / Initial value]×100

But there are actually different ways financial services firms calculate and display your personal rate of return. PRR is traditionally calculated in one of two different ways.

The “time-weighted” method is what most asset managers use to calculate personal rates of return for their clients. This measures how any particular investment at the start of a certain time period performed as of the end of that period.

Another method to measure returns can be referred to as a “dollar-weighted” method. This measures the average return of all the money in the account during the period. So, if a small investment at the start of the year had a 10X return over the year, that would be good. But then if a huge additional investment was made in the last month and there was a major drop in the last week, then the overall account performance would look very poor for the year.

These two approaches can yield very different numbers. And traditional finance players seemed to understand, as reflected in how old-line investment bank Salomon Smith Barney used to use both methods. They applied time-weighted for discretionary “managed” accounts (handled for clients) and dollar-weighted for individual, self-directed accounts. I’ll let you decide why they might have done this.


Regardless, the fact is that the individual investor routinely out-performs the financial advisor. What’s more important than the specific method used is that we, as managers of our full life portfolio, recognize the importance of measuring and tracking the performance of all our decisions. The concept of “personal rate of return” should reflect more than just the money we invest in the market.

Rethinking Personal Rate of Return

The big idea here is that your personal rate of return should incorporate all (and all kinds) of your capital investments. Of course, this includes the monetary sort (your research and investing activities, etc) but also must reflect the energy and time you put into other productive growth-oriented activities in your life. You seek value from most things that you do and, therefore, should measure the gains (as a percentage or otherwise).

Time and Energy as Capital

An example of these other activities is work and career (your job), where you exchange time and energy for money (a paycheck). Another is school and education, where the monetary cost can be low or very high, but your time and focus is essential and the results can mean a whole new career or life path.

Business startup projects too can lead to big results but often take equally big commitments of time and energy. Even charitable and social/community efforts can generate value and important outcomes, but require time and energy (and not just money). Cultivating self-motivation to engage in such activities brings its own rewards. All such activities should be considered investments, and reflected in one’s true personal rate of return (PRR).

Time Value of Money (Capital)

In order to fully appreciate this, it’s good to understand the time value of money (TVM). This is a finance term that considers the value of a sum of money in terms of what it can buy or earn today versus its earning or purchasing power over time or at a future date.


So, if you had $1000 in your pocket you could, like most people, spend it on a toy for yourself. That might give you some joy, but it will never do anything more. You could, instead invest the $1000 into a 12 month certificate of deposit earning 1%. It’s a bank CD so you are pretty confident that, after 1 year, you will get your $1000 back, plus $10 (don’t forget to report that on your taxes).

But a third option is that you can hold the $1000 in reserve. If a better investment option comes up, you will have some money to invest and potentially earn more than the 1%.

Opportunity Cost in Investing (and Life)

The time value of capital (I prefer “capital” over the more limiting “money”) is closely tied to another concept, that of opportunity cost. If you did put your $1000 into the bank CD you are (nearly) guaranteed a 1% return, but your money will be locked up for 1 year.

If another investment opportunity comes along offering a potential 5% return over the same time — for instance, a preferred stock with a fixed yield — then the lost investment opportunity (4% less return that you would have gotten) is the opportunity cost.


Taken together, the time value of capital and opportunity cost should be considered and applied to all investment decisions and in all major life decisions as well.

Invest Money, Time and Energy Wisely

So, in your investment accounts, personal rate of return will indicate how well you have done with your individual trading and investment decisions. You research and assess whether the investment matches your risk tolerance and timelines. And then after putting on a position you want to know if the money you are investing is growing or bleeding away from fees and losses.

But what about the energy and time you spend on this and so many other aspects of life? An obvious example is your job. You must spend both time and energy on work and you get earnings (a paycheck) in return. Of course, most people complain about their job but if they consider all that they get out of it, compared with the time and energy it costs them, they might complain even louder (or realize the ‘extra dividends’ they are getting).

School is another example, and it’s important that you consider what you expect to get from your education and training efforts, so you can gauge the projected value of your efforts and then measure your results later. And these less quantifiable gains — the return on time and energy invested — is sometimes referred to as soft ROI.

Calculating Soft ROI

So, for all types of “investments” the basic steps are the same, and similar to traditional financial investing. But how to measure the returns on non-monetary investment — your personalized soft ROI — can depend on the situation.


With any investment, careful analysis and research should come first. One should consider both the desired and anticipated gains, as well as duration. Then comes the investment itself, which is actually simple in the case of traditional investment, but with time and energy (such as in a job or with school) good execution is critical.

Finally, effective performance tracking and monitoring your progress is essential. With traditional investments this is fairly easy (an S&P index fund should track the index). But how we calculate non-monetary investment returns varies case by case. Regardless, there are ways to do it, and assessing your gains or losses (ROI) for all types of capital investments is important.

Non-Standard Returns on Investment

Here are just some time and energy “investments”, and their potential returns.

Time/Energy InvestmentCost/RiskPotential Return
Taking a management role in your current company…Increased responsibility and commitment…New (management) skills; increased market value
Taking a job closer to home (or moving closer to work)Job change risk…Time savings (to spend with family or reinvest in projects/startups)
Moving to a new job in a new industry…Switching risk / starting over…Diversification; new skills; increased market value
Completing a high-demand tech certificate program…Nights and weekend class time; tuition cost…Increased earning potential; greater job security
Taking a yoga class…Class fees; time spent in class…Increased sense of wellness; more mindful and creative

Setting and sticking to a new sleep regime…Less time with your partner or “work time” on your side gig…Increased productivity; improved health and wellness
Start detailed budget and investment tracking processExtra time spent to record inflows and outflows…Improved data and reporting for better decision making
Utilize efficiency tools and pro services for routine tasks…Cost of subscriptions or expert advice…Recovered time and energy (to reinvest elsewhere)

The takeaway here is that anything that requires significant capital, whether it’s money, time or energy capital, should be assessed like an investment. And you should know if the results of these investments and decisions met your original expectations.

Once you start doing this for all your important decisions, it becomes easier to monitor and track your hard and soft ROI, and to calculate your true personal return on investment.

by Jason Paul Hendricks

Jason’s experience ranges from bootstrapped solo startups to corporate roles with publicly traded Fortune 500 companies. On Digital Downshift he shares what he has learned over three decades of entrepreneurship and career-hood, both his mistakes and successes. With an obsession for business building and continuous learning, Jason seeks to apply these lessons (and help others do the same) to achieve more happiness and security.

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