You may have heard of return on investment (ROI), but what about return on spending (ROS)?
Return on Spending (ROS) is a metric that measures the financial return on non-investment expenditures.
Ok, but how do I generate a return on my non-investment spending?
If you use a credit card with cash-back rewards to make purchases, then you can monetize the financial benefits of “paying later” to generate a return on your spending.
To learn more about ROS, including how to calculate and the positive impact it has on your Purchasing Power, please read on.
How to calculate your ROS
To calculate the ROS for your credit card spend, use this formula:
(Cash-back reward + Interest income from savings)/Credit card statement balance
In the example below, the ROS for an average month’s spending on a cash-back credit card was $115 or 2.6%. If the ROS amount is used to offset the cost of those purchases, then it effectively lowers your net expenses.*
An ROS of 2.6% may not seem like much to you, but it can have a positive impact of your Purchasing Power.
ROS impact on your Purchasing Power
As referenced in my new book Making Big Money Decisions, by taking steps to increase your Purchasing Power, you can improve your financial security and overall well-being.
As a refresher, household Purchasing Power is defined as the amount of goods or services that can be purchased with a given income.
To grow your Purchasing Power, you need to increase disposable income (e.g., wage, investment return growth) and/or reduce expenditures. With rising prices, your ability to reduce expenditures can be difficult, especially for necessities, such as food, transportation and medical services. Paying for goods and services in these spend categories with a cash-back credit card provides you a mechanism to offset price inflation costs and increase your household Purchasing Power.
By generating an ROS of 2.6%, the person in the example above could use that return to reduce next month’s expenditures. Using ROS to offset inflation costs has a positive impact on your Purchasing Power by effectively lowering what you paid for those expenditures, and you may even exceed those costs depending on your spending, categories, and rates (as shown below).**
MyROS
If you would like to calculate your ROS, then you can access the MyROS worksheet here. The worksheet includes tabs for calculating your ROS and analyzing the impact on your credit card spend categories relative to inflation rates.
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Notes:
* For the ROS methodology to work, you need to make sure your credit card limit is sufficient to cover spend amounts, always pay monthly credit card statement balance in full each month, and use cash-back rewards to offset expenditures (e.g., as statement credit). Also, note that high levels of credit utilization may lower your credit score so plan accordingly.
** Price changes based on Consumer Price Index Summary, BLS. Sept 2024 monthly and yearly changes. Worksheet named “CPI” in MyROS file.