Sunday, September 20, 2009

The 80/20 rule. Or: There is no ROI in a college education.

Anyone know anything about the time value of money?

Let's assume a mediocre college education (let's call it vocational training for professionals) costs 20k a year, totalling a smooth 80 grand. I know, it costs more than that, but bear with me.

And let's assume you're prudent and wise and you've saved that 80 grand by the time you're twenty. I know, I know, you're laughing now. But wait- it gets better!


More accurately, leave that money alone and find another way to get the money to go to college. Study something FUN for crying out loud. Not accounting, business, engineering or, heaven forbid, law or medicine. Study music or literature or philosphy. Find a nice girl. Get married. Have kids. Tithe. Buy cars, a house; take vacations. Don't save another penny for retirement. Play some golf. I don't care, play the ponies. But live on cash-flow, not debt, and leave that college fund alone.

But leave that college money alone. Let it sit in a retirement fund until you're sixty-five and earn the (worse than market) average 10% per year on that money. When you look up at sixty-five, assuming the government lets you keep your own money, you'll have


sitting in the bank waiting for you. Enough to cash flow you $63,282.12 a month if you can live on that.

It's what I call the 80/20 rule. Get 80 grand by age 20, and you'll be a multi-multi-millionaire when you're 65 without any other investing.

What's it take to get 80,000 together by the time you're twenty? Well, if you start late, like, oh, say age 16, it takes $20,000 a year. Which you can earn, net, in a 40 hour work week at $14/hour. When you're 18-20 you can work more than 40 hour work weeks and get it done quicker. But that's work. How about saving from the moment you're born and not working a lick? Just convince your parents to put aside $100 a month for you until you're twenty and resist the temptation to buy a Corvette when you graduate from high school.

Back to the title. What really is the value of a college education? Most see it as an investment for their career so they can get a better job; make more money; move up the ladder. But most will not come close to saving as much for retirement as they (borrow to) invest in their education.

So here's a different proposal: DON'T GO TO COLLEGE! Leave the college money alone and get a job. Or backpack around Europe. Then work your way through college, paying as you go.

Okay, okay, $80,000.00 is too tough. I know. Here's plan B- the 20/20 rule.

If you insist on only having $1,767,083.62 when you retire, try the 20/20 rule. Get 20K scratched together by the time you're twenty. A year of college, which can wait, I think. Yeah. I'll take 1.8M to wait a year to start college.

In summary:

All of you out there that have college funds set up for your kids, set up retirement trust funds instead. Forty years is a lot of wealth.

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