This Is the Most Important Financial Decision in Life
Part 1 of a 10 part series covering the decisions that make or break your finances
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Not all financial decisions are created equal.
Whether you cook at home tonight or go out for dinner means nothing compared to a decision like whether you decide to rent or buy your home.
There’s a prevailing school of thought that if you take care of the little problems, the big problems will take care of themselves. I think that’s backward; if you absolutely nail the biggest financial decisions in life, you don’t need to sweat the little stuff so much.
This is the first in a 10-part series looking at the 10 most important financial decisions you are likely to make in life, where we drill down and give each of these questions the spotlight they deserve.
#1—How you’ll make money
Your human capital, aka “your ability to make money,” is the most important financial asset you’ll ever own. Most people think of their house or retirement savings as their most important asset. Nope, it’s your human capital, and it’s not even close. If you doubt that, just remember you wouldn’t have a house or retirement savings if you didn’t make money.
Think of your human capital as a giant gold mine.
You are sitting on a huge amount of wealth. The only problem is that, like with a gold mine, you can’t extract that wealth all at once. You need to go in and mine the gold bit by bit. For most of us, we only get a small piece of gold every two weeks on payday.
As you age, you draw down on the supply of gold. There is not an infinite amount of gold in a single mine, and you only have so many paychecks you’ll earn in your life. For many of us, once we retire, we have no more paychecks to collect. Of course, some people still do some paid work in retirement, but at that point, you are mining the last bits of human capital you have left.
That’s why the general idea of financial planning is to use some of your human capital today to buy financial capital like stocks, bonds, and real estate to one day replace your human capital.
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Is a 4-year degree still worth it?
Since your human capital is your most important asset, you will need to invest in it.
A 4-year college degree has historically been one of the most reliable ways to invest in your human capital and increase your lifetime earnings. Unfortunately, education is also a service and is not immune from the laws of supply and demand. Given the crucial role a 4-year degree plays in climbing the economic ladder over the past several decades, the demand for college has exploded, and the supply has not kept up.
As a result, the cost of a 4-year degree has been steadily climbing for decades. From 1963-2020 the average cost of a 4-year degree in the U.S. increased by 748%— even after accounting for inflation.1
The ever-increasing price of education has led to an explosion in student loan debt. In 2022, there was $7.5 trillion in total student loan debt in the U.S, and the average student loan balance was over $40,000.2
With all the media focus on the cost of tuition and debt loads of recent graduates, it’s easy to lose sight of the fact that a 4-year degree is an investment. Unlike an investment in real estate or the stock market, investments in your human capital are intangible.
This makes the investment benefits of a 4-year degree easy to overlook, but the benefits are very real.
Men with bachelor’s degrees earn $900,000 more lifetime earnings than male high school graduates
Women with bachelor’s degrees earn $630,000 more than female high school graduates
Men with graduate degrees earn $1.5 million more lifetime earnings than male high school graduates
Women with graduate degrees earn $1.1 million more lifetime earnings than female high school graduates
Remember, the average student loan balance of new graduates is $40,000. Think of it this way; would you invest $40,000 today if you knew it would turn into $630,000 to $1.5 million over the next 30 years?
Seems like a slam dunk. The problem is that all the costs are paid upfront, and the benefits are both intangible and paid out in tiny amounts every two weeks for the rest of your working life. That makes it feel like a “scam” when it’s really just an expensive investment.
You may say that a lot of people graduate with much higher debt loads than $37,000. While that is true, it is also true that the majority of student loan debt is held by those with graduate degrees who make the most money and can most easily manage their student loans.4
I racked up more than $50,000 to get through grad school, which was one of the best decisions of my life. It allowed me to double my income, buy multiple properties, successfully invest in the stock market and gave me the tools I needed to build a profitable side business to supplement my 9-5 income, none of which would have been possible without the investment in my human capital.
Go down the line of any metric you want; annual salary, homeownership, or retirement savings. They all point to the same conclusion; people who graduate from college tend to accumulate more wealth than those that don’t.
When you understand human capital is your biggest asset and that a 4-year degree is an investment in that asset, the question of “is college still worth it” given the rising cost of tuition can be looked at like any other investment proposition. If you invest in an absurdly overvalued business, you’ll probably lose money on that investment.
However, a high valuation of a business is sometimes justified if investors are incredibly confident in the future prospects of the business. A 4-year degree is expensive, but it’s not true that it’s absurdly expensive in every situation.
Whether college is a good investment depends on the amount of debt you take on, how much your degree is expected to increase your lifetime earnings, and whether you finish the degree and actually use it in your career. If you finish a three-year law degree and decide you don’t want to be a lawyer anymore, you just potentially lit hundreds of thousands of dollars on fire.
To quote Warren Buffett, “Price is what you pay; value is what you get.”
A college degree is a form of certification, that piece of paper you receive on graduation day acts as a signal to employers that you have the skills and discipline to be considered for higher-paying jobs.
Luckily, a 4-year degree is not the only way to get certified and increase your marketable skills in the job market. A University degree is one way to do that, but there are others.
Technical training and programs.
I am a believer in the 4-year University degree, but not for everyone and not at any cost.
As the world of online learning evolves, there will be more opportunities to make affordable and profitable investments into your human capital; you just need to be ready to jump on the opportunity.