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June 29, 2009

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Here's a #5 for the recommendations: Choose a major that pays well. Spending $49K for a degree that gets a salary of $56K probably isn't a wise investment.

"The author admits that there are flaws that could be poked in his analysis and that the standard of living of the two men will likely will be different, but the point is made"????

Not just a minor flaw here. This example assumes Bill spending a lot more (higher standard of living) by only saving the same PERCENTAGE amount as Ernie. This leads to a higher standard of living throughout his entire working career. On the flip side he could have lived off the same amount of money (had the same standard of living) as Ernie and saved the rest, which likely would have given him much more savings than Ernie. This is the calculation that is needed to determine whether his conclusion is correct or not.

Lets put it this way, say we assume they are normal pre-recession americans and save 0% and that one makes 20K a year and one is a doctor making $1Million/year, are we really gonna say becoming the doctor wasn't worth it because they both have $0 saved at 65?

Strick --

What would you have done differently to try and make a fair comparison? Sure, if one guy makes nothing and the other is a doctor it's pretty easy to "prove" a point, but that's skewed (on purpose.) What could this guy have done differently to make his analysis better?

IMO, he was pretty fair given that he assumed mostly "averages". Yes, he probably made a few judgment calls in favor of the non-college guy to make a point, but with so many variables to consider, it seems like at least a decent review to me.

FMF - I would have assumed they lived off the same amount of money and the rest was saved, thereby equalizing their SOL for a fair comparison. Using Ernie's savings of 5% you can calculate what he spends a year. Use this same spending for Bill to get an apples to apples comparison.

Sure this is not what would practically happen. Bill would likely live at a higher SOL, but that is a choice made and the SOL for 45 years is worth something. The worth of this most easily calculated by just assuming he spends the same amount and saves the rest.

Those are two very lazy people to only be earning 32k without a degree and 56k with a degree after being in the workforce 30+ years. Were they even able to keep up with inflation?

A main point that you are missing is quality of life. A degree opens more doors and offers more opportunities that your HS diploma. Do you want to "grind it out" for 30 years or do something that you love?

Randy --

Exactly my point.

These are averages. Kinda scary, huh?

The other problem, I think, is his taking as unquestioned the assumption that stocks will return 8%. If that's truly to be an unchallengable assumption of the model, then why the hell is Bill paying any more than the minimum on his student loans and not putting the rest of that 5% into the index fund?

(In real life, of course, people do this because they *don't* feel comfortable with the 8% assumption. But if the 8% is to be something effectively guaranteed Ernie, it has to be guaranteed to Bill as well.)

There are many un(der)employed college graduates who would envy Ernie's income, let alone his nest egg.

Randy -

Many college graduates are underemployed at jobs they hate. For them, the so-called ignorance of not having gone to college would have been preferable.

Yall are missing the most blatant flaw, that he transferred to a private college. Why not assume he went to a community college then to a state school and he would have no debt plus his little college savings.

They're assuming everyone saves the same % of income regardless of their income. Thats probably true to a degree but at some point the more you make the easier it is to save extra. If they lived on the same amount and the college grad invested the extra income then by age 65 the college grad would have substantially more saved.

Some of the numbers seem off. They claim average after tax earnings for a college grad at $23k. Even teachers start higher than that on average (for 9 months work). Mean earnings for people 25-29 years old with a degree is $42,237 so after tax should be closer to $30k.


Still I do think that college isn't the best choice for everyone. A lot of people would do better by going into a skilled trade straight out of HS.

I whole-heartedly agree that too many people go to college to create a life for themselves... when they really would have been better in trade school or doing something they enjoy.

This is an interesting analysis, and we could bicker about the assumptions all day long, but in the end I think the assumptions were fair and likely.

The assumed return is 8%, which means inflation isn't being scaled out. Yet he uses current income peaks, rather than adjusting them upwards for inflation. More realistically, person A would start at $15k and peak at $70k (but that $70k would only be equivalent to $35k in current dollars) and person B would similarly start at $23k and peak at $120k.

Alternatively, the assumed return should be more like 3-4%. It makes the math much simpler.

Dollars today have more time to appreciate, but you have access to more dollars in the future. The financial cost of getting a college degree should be weighed in those terms, but it must be done the right way. A mistaken (or dishonest) analysis does nobody any good.

I don't see the assumptions at fair and likely in any regard. First the lower you income the less likely you will be able to actually save money. bills take a larger % of your money at that level, unless you living in your moms basement. They also don't account for the lower unemployment rates of college graduates or the greater likely hood of having health insurance.

Examples like these are why I hate comparisons between college graduates and those that enter the workforce from high school. In reality either decision is equally valid if you do it intelligently. A college educated fool is no more better off then the foolish high school graduate. He will just waste larger sums of money and end up with the same stress.

I know too many people that didn't go to college making six figure salaries. They just made the best of the opportunities available to them.

The big problem with this is that I don't see why there's an assumption that all college grads must have crushing debt loads that they have to service for years before they can begin saving.

I'm in my late 20s now with a good job and healthy retirement accounts, but it's because I put myself through state university (about $2500/yr with a half-scholarship based on merit -- still wouldn't only been $5000/yr if I hadn't gotten the scholarship!). Since I worked while I got my degree, I came out debt-free. I got my grad degree the same way (scholarship + working so no loans).

I don't mean to say that everyone can always make it through without ANY debt (I realize I was fortunate to get scholarships), but part of it is choosing a decent school that's not too expensive so you can get out with the LEAST debt possible. A lot of my friends picked whatever school tickled their fancy, because it was "free" for 4 years while they were living off loans. Now they're paying the piper for not thinking ahead.

If we all just made smarter decisions about going to lower-cost (but still good) schools, college grads *would* have the advantage. And maybe it would encourage some ridiculously overpriced schools to bring down tuition if students were choosing not to go there and be in debt forever? Well...maybe not!

That said, I definitely think college isn't for everyone, and hope that we restore the prestige that should be associated with skilled trades. A good electrician is just as important when you need one as a good attorney is when you need one!

Compound interest is a good thing.

That, summarized, is what Jack Hough is saying in his article. A good point, but his story example is as simplistic and uninformed as is most of his writing.

We have Bill, the college student, and Ernie, the high school grad. Bill earns more, but starts saving later. Ernie earns less, but starts saving earlier. Compound interest makes Ernie wealthier when they retire. Except for the following holes:

- Inflation. Hough specifically says he does not account for inflation in Bill and Ernie's salaries. Yet he assumes they will make an average 8% return on their investments - which means that Hough specifically doesn't adjust the salaries for inflation (which would help Bill) but does include inflation adjustment in the investment (which helps Ernie because he started investing earlier).

- Social Security. Hough messes this up. Bill's lifetime average salary is much higher than Ernie's. Bill is going to get a much higher payment from social security in his retirement. The value of this difference is not included or mentioned.

- Housing. Hough messes this up. Based on his assumptions, Bill will buy a much more expensive house than Ernie. Why will Bill buy a more expensive home? Because Bill has a higher income and they spend the same percentage of income throughout their lives. Therefore Bill is required to spend more money on housing - to keep his percentage the same - than Ernie. As a result, Bill will have much more home equity by retirement (houses - historically - go up in value). But home equity is not included in their relative wealth in the final comparison.

- Loan payback. Hough, to make his point, does not follow his own rules. He has Ernie and Bill both save money through Bill's college years. Bill's saving are then taken out and used to pay down his college loan. Okaaaay. But then he also stops Bill's saving entirely for 12 years after college and devotes all of Bill's savings (which were earning 8%) to paying back a loan (at a 5% rate). Logically, Bill would have continued saving at 8% and stretched out the loan payment to 30 years because it is at such a low rate.

I understand the point Hough is trying to make, but I've read his books and other articles and have not been impressed. He typically focuses only on the point he wants to make (right or wrong), and will change his own rules to make his point. I approach his articles with great skepticism...

The college grad (higher income) could save more, and that might lead to a different result.

Save not only early, but also a lot.

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