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How to Decide If a Business Investment is Worth It

by Sean Ogle | Last Updated: April 5, 2012

It’s no secret that I’m a pretty frugal dude (to put it in a nice way).

I’ll actually debate for a couple minutes about whether or not I should pay the extra $1.50 for the name brand Tylenol vs. the Safeway brand.  I’ll order a PBR instead of the beer I really want because it’s 2 bucks cheaper – kind of ridiculous really.

This trait in and of itself isn’t actually that big of a deal, it could actually be perceived as asset to not go around blowing all my money on unnecessary things.

It’s when this has a negative effect on the growth of my business that it truly becomes an issue.

Just yesterday I booked a ticket to Hong Kong for later in the month.  This trip has the potential to usher me into a new world of business full of exciting opportunities, and the chance to work with a couple of guys that I know and trust.

So why was it so hard to pull the trigger?  The whole trip for 2 weeks will probably work out to be a couple thousand dollars, not an astronomical sum by any means, but enough to make my frugal mind much more stressed than it needs to be.

I’ve got plenty of money to live on.  I can totally afford to take trips like this – yet a ball of stress forms in my stomach and seems to overtake me at times when making big purchases – scratch that, big investments, because that’s essentially what this is.

The Balance in Bootstrapping

When it comes to building a business, I’m all for the idea of bootstrapping. Especially if you’re building a lifestyle business.  The fact is, the costs of starting these businesses are low as it is, so it’s not a difficult thing to get things rolling on a strict budget.

However, this is exactly the reason we shouldn’t worry as much about the occasional large expense.

My business overhead is remarkably low, so when a couple times a year I have the chance to invest a couple grand in a project, trip, piece of hardware etc. that has the potential to really make an impact in how I operate, there’s no reason not to take it.

This goes back to the idea of “Would You Rather Have a Beer or a Business?” a post I wrote a couple years ago.  So many people have no trouble dropping 50 bucks at a time for beers at the bar, but when it comes to spending $10 on a new domain name or something like that, they’ll analyze the hell out of it and often never make the purchase.

I still do it on occasion too.  It really makes very little sense, but that’s just how the mind seems to work some times.

How to Decide If It’s Worth It

In order to combat my own frugalness and propensity to not make investments that could have a positive impact on my business, I’ve come up with a couple strategies that have worked for me.  These may or may not be tactics that make spending the money any easier, but it’s at least worth giving it a shot.

The Percentage Principle

Say I come up with a great business idea and all I need to get started is by the domain name.

If I have $50k to my name, and the investment in the domain is $10 that’s 1/5000th of my money.

Take into account your rainy day fund (this will be different for everyone), but let’s say mine is $20k. Leaving me with $30k.

Then factor in assets that ideally you don’t want to liquidate (whether they are liquid or not). Say that’s at $20k as well.

This leaves me with $10k that I’m prepared to invest in my business currently.

This makes purchasing the domain 1/1,000th of my investable income.

Divide the 1,000 by 3 (you can adjust this based on your risk tolerance).

Do I think the odds of me making that money back along with at least a 20% return are better than 1 in 333? Yes? Make the purchase.  No? Move onto something else.

Obviously this isn’t a hard and fast rule, but let’s look at more of a major expense.

Let’s use my China trip as an example. Using the same numbers let’s say I have $10k to invest and this trip will cost $2,000.

2,000/10,000=1/5

5/3=1.66

Do I think the chances of making my money back, along with a return on this trip are better than 66%? Yes, take the trip. No? Move on to something else.

This is something I’ve developed based on my risk tolerance.  The best way to figure out what your risk tolerance is, is to consider some of your past purchases.  FIgure out where they fall in this equation, and then adjust the number you divide by to account for the amount of risk you’re willing to take.

More risk averse? Consider dividing by 4 or 5.  Less risk averse, try 2 or 2.5.

Use a Real World Comparison to Gain Perspective

This one is really effective for me.  Thinking of buying a domain name that costs $10?  What is that equivalent to in the real world? Here’s how I would view that:

When I look at it in those terms, all of a sudden I realize, it’s not that much money. And the potential far outweighs the immediate, short-term expense.

When you’re making your comparisons take into account different income streams.  How much time would it take for you to make that back?  What would you have to sacrifice in order to pay for it?

Doing this, helps to make you feel more confident in the decisions you make about investing in your business.

Experiences Trump Just About Everything Else

As we speak I’m currently at Detroit International Airport en route to Augusta, Georgia to go to the Masters golf tournament.  The plane ticket was about double the cost of the most expensive domestic ticket I’ve ever bought (which is made even worse by the fact my routing sucks).

Sure you could call it a business trip as it’s helping me market my lifestyle and business, but do I really think the numbers are going to work out in the above equation? Probably not.

However, this is the experience of a lifetime.  The more people I talk to, and the more cool experiences I have in my life, there’s one thing I and others seem to agree one: you’ll rarely regret the money you spend on travel and experiences.

On Tuesday I talked about the importance of stories.  I don’t regret a single purchase I’ve made that led to a good story.  So take that into account when considering things like plane tickets or travel expenses.

So how do you decide if you should make an investment in your business?  How do you handle the balance between bootstrapping and spending where it’s prudent to do so?

Photo Credit Bredgur

Sean Ogle is the Founder of Location Rebel where he has spent the last 12+ years teaching people how to build online businesses that give them the freedom to do more of the things they like to do in life. When he's not in the coffee shops of Portland, or the beaches of Bali, he's probably sneaking into some other high-class establishment where he most certainly doesn't belong.
Build a Lifestyle Business Giving You Freedom You've Always Wanted

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