A few days ago I posted an article called Going to School Pays Off. I talked about what people at certain education levels can expect to earn throughout their lives. It really made me wonder what the opportunity cost was of going to school for 12 years.
Opportunity cost is is the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative, i.e. the second best alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city’s debt, and so on. – Wikipedia
Around here a high school graduate with no degree can earn around $7.00 per hour without trying too hard. So let’s create a basic scenario. We have 2 guys. One graduates high school at the top of his class, goes on to a prestigious college, then goes on to medical school, graduates and makes it to his residency and his fellowship and is a full fledged medical doctor after 12 years. Guy number 2 graduates high school and goes on to get a job at your favorite fast food chain making $7.00 per hour.
Alright, it seems that the first guy is in a much better position. But wait, let’s look into this further. In a strenuous medical program, he probably won’t be working. More than likely, he’s going to school from 8 to 5 and studying from 5 to 10 – no time to work. So that means that for the first 12 years of his “working life” he won’t be working.
Now, enter guy number 2. He’s now working at a fast food chain making $7.00 per hour (we’ll assume that that’s an after-tax number.) Let’s say he is working 40 hours per week and only takes 2 weeks off per year. That means he’s making $280 per week which comes out to $14,000 per year – not much. That only comes out to $168,000 over 12 years (probably the amount of school loans that our doctor will have…)
But really, that’s not the true opportunity cost for our top student, the doctor. It’s actually much more than than $168,000. Let’s take a scenario a little further, maybe even stretching it a little, but stick with me. Let’s say that both of our guys live at home until the doctor graduates. Let’s even stretch a little further and say that both guys have a small job on the side for their spending money. Alright, now, what if our slacker took his $14,000 per year and invested it in a mutual fund earning 12% per year. So at the end of 12 years he has invested a total of $168,000. Also, suppose that after the initial 12 years he never invests another penny. At age 65 he would have an astounding $24,310,814.15!
Don’t believe me? Do the math:
Use the future value of an annuity to get the amount that would be in the fund after the initial 12 years.
where
Then use the future value formula to determine the growth of the fund from age 30 to age 65.
where
$24,310,814.15 is a heck of an opportunity cost for spending 12 years in school!
What do you think? Let me know below.
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The problem is that you can’t find a mutual fund that will make 12% per year. Maybe if he did tax liens, tax notes, or mortgage notes… Actually you could do better than 12%.
Actually Che, you can. Check out Vanguard’s 500 Index fund. It’s earned an average of 12.10% since its inception in 1976.
https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0040&FundIntExt=INT
Think it’ll still be averaging 12% growth any time soon?
Eh…this year may hurt hurt growth rates a bit. Though, now’s a great time to invest. Get stuff while it’s cheap!
Still think its a good time to buy? As long as there is no available credit companies will continue to lose money. Maybe once banks start giving credit again (if they do) the stock market will turn around, but of course you know a mandatory withdrawal of 401k stocks is just around the corner for the early investors of that program. Which means many millions of dollars leaving the market every month. You are much better off with tax liens if you can get them, or maybe insurance bonds. Though I really don’t know much about insurance bonds. Maybe oil futures might be good.