Friday, June 05, 2009

Is an Education Worth the Expense?

Outside the improvements in self esteem, communication and analytical skills, an education boils down to return on investment. I risk making this post as exciting as a "Wonder Years Ben Stein Lecture," but here goes...

Do you think it will make you more competitive for promotions? Do you think that a new career field or higher education would give you enough of a marginal increase in salary to merit the time spent?

I'm a proponent of education. However, you must understand that it's important to monetize the worth of an education. Here's some things to consider:

1. How much of a pay cut will you sustain over the period of pursuing an education? If you don't experience a salary decrease, do you think that your focus on an after hours education will impede your focus at work, thereby limiting promotion opportunities?

2. Once you graduate from a program, do you think you'll take a pay cut until you establish some form of seniority?

3. How long will you work in the new career field and benefit from the improved education? The best thing to do, strictly from a monetary sense, is to:

a) Monetize the net increase in salary that you expect over the remainder of your career: Present Value[ (new salary - prior salary)*(Number years remaining in work force)].

b) Monetize any impacts (decreases) to your annual salary while going to school

c) Monetize the cost of your psychic energy expended on school work. Could you have otherwise spent your psychic energy (brain power) teaching your children something useful or otherwise contribute to the household? This cost may be ignored, but you should be aware of it.

Now determine the net present value of a, b and c.

Example... If you make $90k/yr now and you pay $125k to go to med school and increase your salary to $200k/yr for a 15yr career as an M.D.

Benefit "A": ($200k - $90k) for 15 years @ 5% discount rate, Pay Raise Deferred Six Years From Now = $852,000.67

Cost "B": Lose $90k/yr salary for six years @ 5% discount rate = -$456,812.29 (present value of unearned income b/c in Med School/Residency)

Cost "C": Ignored, but could be considered

Net Present Value of "A, B, C" = $852,000.67 - $456,812.29 = $395,188.38

Now determine your return on education: Return on education: [(Net Present Value A,B,C) – Education Cost]/Education Cost * 100 = ($395,188.38 - $125,000)/($125,000) * 100 = 216% return.

In this case, furthering your education makes sense.

1 comment:

Anonymous said...

I'm thinking that might be too simplistic since you can't discount the value of the social interactions that you'll find only in college (and somewhat in the military).

For example, how would you quantify the value of landing a big job or making a big sale at a company whose VP used to be your college roommate? How would you quantify the value of meeting the next Bill Gates who asks you to be his business partner?

While the direct costs are easy to gauge, I believe that there is more long term value to attending a university than in not attending.