IRR can make you rich, it can make you happy, and it might even save you from yourself. Why? Because IRR is a tool, maybe the one and only tool, that helps you make better decisions about your money and your life, and who doesn’t want more of that?
IRR is awesome.
I love IRR.
You should love IRR too.
What is IRR?
IRR is an abbreviation for “Internal Rate of Return”. In a nutshell, IRR is a decision-making tool that tells you what something is really worth. In IRR methodology, you line up a series of inputs and outputs over time, enter them into a calculator, press a couple of buttons, and voila – you get the original “one number answer” that represents the full Monty.
I know, it’s like trying to explain to someone, “chocolate tastes like this…”.
Let’s continue.
B, M, E
To use IRR, you have to first adopt a certain point of view. It’s called, “B, M, E” meaning beginning, middle, end. You buy, you own it, and you sell it (or you die). That’s how everything works in life, including your life, and so to use IRR or to be who you want to be, you must begin with the point of view of B, M, E.
Maybe people look at the past to determine the value of something today. Say you’re buying a mutual fund. “Look at how this has performed over the past 5 years” so says the salesman. But IRR is different. IRR couldn’t care less about the past. IRR forces us to think about the future tense of things, not the past tense. Rember: the past is not always a barometer of the future, and when you’re buying an investment, all you should ever care about is the future. Same with people.
As you get to know IRR better, you will see it’s really a beautiful thing. Its high cheek lines, pouty lips, thick lashes, and ripped mid-section are all summarized in the fact that IRR takes into account the full menu of your expectations and returns to you with a one number answer. How’s that for an easy-to-use decision-making tool?
Still not there? Ok, let’s talk tools.
The Tools
To do IRR you either need a financial calculator or a spreadsheet. You also need to understand something called a “T” Account. There are a few steps to it, but just like golf and tiddlywinks, it’s pretty simple once you get the hang of it.
Here’s a link to a short lecture I did a couple of years ago on a 4-plex property demonstrating IRR. This is on the brand-new Does it Pencil YouTube channel we’ve recently built. Even if you’re not that into IRR, if you could just take a visit and subscribe that would be really great. You know how it goes, social proof and all of that.
OK, that’s about it for today. As I press send on this Sunday, once again my life has changed and will never be the same. I really need to stop doing this, but it does make for a good story. Maybe I’ll tell you next Sunday.
Good luck and have a good week.
Joe Still
2023.08.27
Cite
“Our lives are universally shortened by our ignorance.”
– Herbert Spencer