Personal Finance Articles

I anticipate that the title of this article will probably upset a few people, but please bear with me and continue reading. I am certainly a strong proponent of learning and education, as I myself am a college graduate in Chemical Engineering. However, the chief arguments I would like to present are that education does not have to be formal to be effective, and that the main purpose of a formal education is to get a better job.

Basically, a college education is an investment in your future. Just as in evaluating the merits of any investment, you need to perform a cost-benefit analysis, with the cost being the tuition and fees, and the benefits being the increase in pay you could expect due to attaining your degree. The higher the costs, the larger the benefits need to be for the investment to make sense.

Let’s say you have a full ride college scholarship with all the trimmings. You would be crazy not to take advantage of such an opportunity. On the other hand, what if your college education will cost over a million dollars? The higher pay you could expect had better be much, much higher for such an enormous investment to be justified financially.

Learning Versus Formal Education
Often times people graduate from college and believe that their learning years are over for good, and for this they are usually thankful. This is unfortunate. In fact, I believe that your best learning years normally occur after you graduate from college. Please let me explain.

While we are part of the “school” system, we normally don’t feel inspired to learn, mainly because we are forced to be there. Even in the case of a college education, we are often “socially” forced to be there by family, friends, and society at large. Because we usually feel uninspired in such a rigid environment, the amount of learning we truly absorb is minimal.

Once we have graduated from college, we are now freed from the bondage of a formal education and can pursue knowledge on our own terms. We can choose to study astronomy, history, or basket weaving if we wish. The reason I believe we are able to learn more effectively after college is because now, for the first time in our lives, we are truly in pursuit of knowledge, and not some piece of paper. From this point forward, learning is conducted on our own terms and at our own pace. Now, learning has become our choice. And thanks to the internet and your local library, it’s usually free!

A “Quick and Dirty” Look at the Numbers
Let’s say you’re considering a career in medicine specializing in, say, pediatrics. Since it normally takes around 12 years to finish your schooling and residencies, you would not be able to call yourself a pediatrician until you’re around 30 years old. Assuming you owe $125,000 in student loans that are to be paid off in 10 years at 5% interest, you would be paying $15,780 in loan payments annually until you reach 40 years old. This is not a major problem because pediatricians make around $135,000 per year, but it will probably put your investing program on hold until the loans are paid off. Let assume once your loans are paid in full you begin investing 10% of your salary, or $13,500 annually. If your investments earn you 8% per year, you will have accumulated $1.1 million dollars by the time you reach retirement at 65.

Now let’s look at someone going to be a hair stylist. Assuming you are able to finish your training in 2 years, you will be ready to begin work at 20 years old. Now you begin investing 10% of your $30,000 yearly income, or $3,000. If your investments earn you 8% annually, your account will have grown to $1.3 million dollars by your 65th birthday.

As you can see, the high educational investment required of the pediatrician coupled with the early start of the hair stylist makes the financial decision more or less a wash. The main takeaway from this discussion is that your decision to pursue a high paying career requiring an extensive amount of education should be due to your passion for the field, and not because you believe it will make you rich. Furthermore, a large difference in annual salary between careers does not always translate into a large difference in accumulated wealth.

Summary
From my experience, a college education is not necessarily the most effective means of acquiring new knowledge. However, a college education is certainly an avenue for obtaining better employment opportunities. The key to determining whether a college education is worth it is to weigh the costs required against the benefits to be realized. As the cost of college continues to rise faster than inflation, the decision as to whether a college education is worth it will not be nearly as obvious as it used to be.