Wednesday, December 4, 1996
The Opportunity (Cost) of a Lifetime
by MF Cormend
I was sitting at a traffic light the other day, on my way to return some home videos, when I noticed the blue Volvo wagon in front of me sporting five different car decals on its rear window. Three of these decals proclaimed that their kids attended different local private high schools, while the other two boasted of prestigious private universities. My wife and I spontaneously had the same thought: There's a lot of money tied up there in those kids' educations.
If we can put the qualitative issues concerning education aside for a moment, let's do a down and dirty monetary analysis of the decision to send our budding Einstein through a private preparatory education.
As in any type of analysis such as this, a few assumptions are in order. Let's assume your kid arrives when you're 30 and you send her to a private school for thirteen years, starting in kindergarten. Smart Money magazine recently claimed that the median yearly tuition for private independent day schools ranges from $7600 to $14,100, depending on one's region, so let's use $10,000 as a nice round number for this cost. Let's also assume that you've been quite Foolish in your investments and achieve Beating the Dow-like returns of 20% over the long run.
Well, thirteen years of $10,000 tuition payments will set you back $130,000, a fairly hefty sum, right? Wrong. There's a factor called "opportunity cost" that we must deal with. Now that we Fools can make about 20% over the long run with fairly little effort, we must consider what we could have done with our dearest's tuition money if we had invested Foolishly. By the time our darling graduates from Distinctive Prep Academy and goes on to Prestigious U., our yearly $10,000 investment would have grown to about $302,900 in today's dollars, allowing for a 4% rate of inflation. Given 17 more years for this potential money to work (before we retire at age 65), the same yearly tuition would have been worth roughly $3,450,000, again in today's dollars.
Yes, the usual caveats about taxes and trading fees not being taken into account might apply here. But in addition to the possibility of tax-deferred accounts, I've not included yearly tuition increases or the fact that some investment strategies might beat 20% per year. Also, does the phrase "pre-first" mean anything to you?
So, the true cost of that private prep education is about three and a half million dollars per kid. Mind you, I'm not saying that this might not be money well spent. But by using opportunity-cost analyses in situations like these, one can better estimate the true costs of various household expenditures, whether it be that new Volvo you've been eyeing or that Jamaican cruise you surely deserve.
And that $200 graduation party that your daughter decides to throw for herself with her own funds before going off to college? Forget it, Charlie. That will actually set her back a cool $167,000 by the time she retires.
Well, just maybe this one time she's worth it.