According to the Mohawk Group, the average person makes a whopping 612 decisions per day. It's no wonder that we need that extra shot of espresso in our coffee to get through the day.
Some of our decisions are relatively unimportant, such as deciding what to eat or watch on television. But other decisions are incredibly important, such as where we work or live, or how we invest our money. However, one decision you'll make during your lifetime could wind up standing head and shoulders above the rest.
Your most important decision?
Based on research released last year by the Pew Research Center, there's a marked difference between median annual earnings for millennials who have graduated from college and those who have not.
According to Pew's findings, in 2012 dollars, the median millennial aged 25 to 32 with a high school diploma is earning $28,000 per year. By comparison, a two-year degree or some college experience tends to boost the earning capacity of millennials of the same age range, but only to $30,000 per year. However, graduates with a bachelor's degree or higher within the same age range are earning $45,500 per year. That's a $17,500 difference between a four-year degree and a high school diploma.
On the surface a $17,500 difference per year might not sound like it would make that big of a dent over the course of a lifetime. For instance, think about the cost of going to college these days. College tuition costs have risen much faster than the rate of inflation, making it exceedingly pricey for high school grads to get the skills needed to land a well-paying job.
In 2014, per the College Board, annual tuition and fees at private nonprofit colleges rose close to 4% to $31,231. Over a four-year period you could be looking at roughly $125,000 in costs, on average! If you don't have the money available and don't qualify for scholarships, you could be saddled with student loans for an exceedingly long time. And, as a reminder, filing for bankruptcy doesn't necessarily wipe the slate clean for student loans.
Up to a $5 million difference
But your education, even with its rising costs and possible student loan debt, could over time be worth as much as $5 million.
How so? Allow me to elaborate.
The latest data from the U.S. Bureau of Economic Analysis shows that the personal savings rate is 5.1%. For the sake of argument (and ease), let's round this down to 5%. This means the average millennial with a high school diploma should be able to sock away $1,400 per year (5% of $28,000). If this fictitious individual began with nothing at age 25 and made a conscientious effort to save and invest 5% of their income over the next 42 years (i.e., until retiring at age 67), and the investment rate of return was 8%, a figure that is historically consistent with the stock market average, they would retire with just under $500,000.
Now, let's take a closer look at our fictitious four-year college graduate.
I'd suggest looking at this two different ways: as an individual also saving 5%, and as an individual living along the same means as a high school graduate, but pocketing and investing their income difference.
For example, if a millennial with a bachelor's degree were to save 5% of their income annually, they would be committing $2,275 (5% of $45,500) to investing. Over 42 years, the difference amounts to about $300,000 more upon retirement (close to $800,000) for the fictitious graduate.
However, imagine if the four-year college graduate millennial controlled their expenses and lived on the same budget as the high school graduate. In other words, imagine if our college graduate put their extra $17,500 a year into their investment account and tried to live within or well below their means. Upon retirement, this investor would be sitting on roughly $6.1 million after 42 years of investing. That's greater than a $5 million difference.
There are some caveats to keep in mind here.
For instance, taxes. Someone who earns more is going to pay more in taxes, and the calculations above (which are courtesy of Bankrate's return on investment calculator) don't factor in a changing tax rate. If, for example, our fictitious college grad living on the budget of a high school graduate moves from a 15% effective tax rate to a 25% effective rate, he or she would see $1 million of their $5 million difference evaporate.
Additionally, student loan costs aren't factored into the equation. It's a cost that could compromise the extra money that our fictitious college grad is earning.
Also, someone with a high school diploma can begin saving and investing at an earlier age, thus taking greater advantage of time and compounding, which might not be reflected here. For college students it's difficult to work full time while also attending school. I can attest to this fact firsthand.
Finally, much will ride on the career you choose, with pay and demand for some majors clearly outweighing others. Raises and the ability to increase your income over time were not factored into the above scenario. An individual with a college degree should have more avenues for job advancement available to them, thus their ability to "get a raise" should be better, which could again magnify the difference between a college and high school grad.
But, overall the decision to get a college education versus not getting a college education could cost you in the neighborhood of $5 million under ideal conditions.
The above example might be "ideal," but there's little denying that going to college tends to give Americans a better chance at saving substantial amounts of money, which they can invest over their lifetime. U.S. personal savings rates are already paltry compared to those in other industrialized nations, so it certainly appears to make sense for America's high school graduates to spend money now on college in order to make more money later for retirement.
Second, this is a lesson in humility and living within your means. How often do you find that the raise you've just received is absorbed by new expenses within a matter of weeks or months? If you were able to survive just fine prior to earning extra income, perhaps it's time to sit down and devise a budget to keep living within your means. Giving up a little bit of luxury now can reward you many times over during retirement vis-à-vis extra savings.
Finally, the above example serves as a great reminder of the importance of time. You'll note I didn't even factor dividends into the scenario, which, when reinvested, could have really magnified the difference between a college education and a high school diploma come retirement. Time is truly the greatest ally of all workers (regardless of education level) and investors. The more you can save earlier in life, the more substantial your compounded gains should be as you approach full retirement age. Thus, the quicker you can land a well-paying job, the better chance you have of retiring on your own terms.