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  • Erdem Ong

Invest or get another degree? A financial compass to getting ahead in life

Updated: Nov 30, 2020

In 1096, Oxford University taught it’s first lesson. Cambridge followed suit shortly in 1209.


Since then, they have been responsible for world changing discoveries and inventions such as the theory of evolution, IVF, artificial intelligence, heart and lung transplants, stem cell research, gravity, the discovery of electron and nuclear fission, and last but not least, the Internet.


So arguing against higher education for a better (financial) future would be futile, right?


Not quite.


The whole idea of “study hard, get a higher education and get a higher paying job” is a platitude typically repeated by parents who had that line drilled into their head by their parents or people who ‘want the best for you’.


It is understandable though.


Not only was that the case in the past, with degree holders being virtually guaranteed a high paying job for the rest of their life; we as an Asian society are also culturally inclined to pursue education as a result of familial and peer pressure (just think back to how often your grades or studies were brought up during Chinese New Year or whichever your relevant festivity was).


For our pioneer generation, less than 1 in 10 had a degree, but for younger Singaporeans, that number has risen to about 50 per cent.


What this means is that back in the 60s, if you had a degree, you were set for life. This was because the market of degree holders was not saturated. Today, there are more degrees than ever before. Effectively, this lowers the value of each individual degree.


According to the Ministry of Manpower data on starting salaries of graduating university cohorts, 10.2% of graduates were unable to find a full time permanent position within 6 months of graduation in 2007. In 2017, that figure stands at 21.6%.


On top of this, only 44 per cent of degree holders were hopeful of getting a promotion of some kind in 10 years time according to a survey by the Institute of Policy Studies at NUS.


Statistics like these highlight the increasing competition arising from over saturation of degree holders in the country.


If a degree is less likely to get you through the door today, imagine going back to school to get ANOTHER degree to increase your income.


Yep. Quite a stretch.


This isn’t anything new. I’m willing to bet most of you have thought or heard about this in some capacity before. The quality of academic qualifications has been coming under increasing scrutiny in recent years. You would be wise to give it the same scrutiny.


What do I mean by this?


To determine whether an additional degree is worth pursuing, one needs to look at the underlying fundamentals.


Someone who is seeking a higher education has to consider 2 main factors


Opportunity cost – both the time spent not working AND the cost of education

Breakeven duration – how long it takes to recover the opportunity costs with the pay increment you receive in your job as a result of the second degree


From a business standpoint, this can be rephrased as “How much would this investment cost me and how long before it starts making a profit?”


To illustrate, let’s look at both a positive and a negative example of this. For ease of illustration, we wont be taking into account cost of living expenses such as food, transport, rent etc.


Positive example


One of our clients who works in the education space was drawing an annual income of $40,000 with a Bachelor’s degree. She took a 2 year hiatus from work to pursue higher education. Upon completion of her Master’s degree, her annual income dramatically shot up to $100,000 as she got promoted to become a Head of Department.


Was pursuing an additional degree a good choice here? Duh.


But let’s break it down into Opportunity Cost and Breakeven Duration


Opportunity Cost


2 years of not working = 2 x $40,000 = $80,000

Cost of Master’s Degree = 0 (Scholarship; Sponsored by her school)

Total Opportunity Cost = $80,000


Breakeven duration


Net pay increment after completing her Master’s = $60,000

Total opportunity cost of pursuing Master’s = $80,000


Here’s a math problem for you – With the net increment in her annual income, how long will she take to recoup the costs of pursuing higher education?


Her monthly net income increment = $60,000/12 = $5,000


Time required to recoup costs = $80,000/$5,000 = 16 months


Everything she earns 16 months after she resumes work as the newly promoted Head of Department is pure profit.


Her annual income of $100,000 is hers to enjoy in it’s entirety. That’s plenty of delicious zeroes right there.


For most people, however, their life looks something more like Vivien Yap’s in this article - https://www.businesstimes.com.sg/brunch/degrees-of-underemployment-fresh-grads-stuck-in-a-bind


Negative example


Profile:

23 years old, graduated 7 months ago, can’t find a job. Currently undertaking random odd jobs that pays her $600-800/mo; barely enough to survive. Has a Bachelor’s Degree in Communication Studies and is looking to pursue a Master’s in Creative Writing.


So first of all, as a fresh graduate with little to no work experience, she (or anyone with such a profile, for that matter) would have already forked out $40,000 of her parents’ money to pay for 4 years of her education.


On top of this, IF she pursues her Master’s degree in Creative Writing, that would cost her an additional $18,000 across the 2 years it takes her to complete it.


This puts her cash flow position at -$58,000, not including her daily living expenses racked up across that period.


In addition, she would have essentially spent the last 6 years studying and racking up exactly 0 work experience. To top it off, that is still no guarantee she will be able to get a job after her Master’s.


Imagine studying 6 years only to end up no better off (financially) before you began. This is not something anyone would want. Therefore it is vital to make the right decision.


So how does this apply to you?


If you are at a crossroads like I was, wondering whether pursuing higher education is the right decision for you, here are some questions you should be asking yourself:


⦁ Can I get a pay bump at my current job upon completing this degree?


⦁ After the initial pay bump, what is the FREQUENCY and QUANTUM of the subsequent pay bumps?


⦁ Am I able to secure some sort of paid scholarship/sponsorship/bond from my employer for pursuing this qualification?


⦁ Is there any sort of binding guarantee that ensures I will receive a promotion upon completing this course of education?


Last but not least, and perhaps the most important question of all:


Why am I pursuing this degree?


If you are unable to give a concrete answer to any of these questions, you may be pursuing a pipe dream. A pipe dream is fun in your 20s, not so fun when you are in your 30s needing to ask your parents for financial support.


If you are like most people, the reason you are pursuing this additional piece of paper isn’t because of passion.


Face it. You just want more money.


Nothing wrong with that.


In the words of Tim Ferris in The 4 Hour Work Week, “for most people, somewhere between six and seven billion of them, the perfect job is the one that takes the least time. The vast majority of people will never find a job that can be an unending source of fulfilment, so that is not the goal here; to free time and automate income is”


The fact of the matter is, it is highly likely that you will be in a much better position financially if you invested that money into crafting a solid portfolio instead of pursuing that additional piece of paper.


Summary


Understanding Opportunity Cost and Breakeven Duration helps me with your financial planning in several ways:


⦁ We can calculate EXACTLY how much money you would be making with that additional degree VERSUS investing that money.



And we’ve been making some serious money since Co-Vid.


⦁ You will appreciate and understand precisely the cost of your dream in dollars and cents, as well as how much time it would take.


Time is money. A good financial planner will always take that into account.


I’m always open to giving my professional opinion on your portfolio and your investment options. Hit me up for a nice conversation at one of the many awesome cafes I have visited with my dear clients (occupational hazard, really).


I’m not against the paper chase of academic qualifications.


I just like to get to the point ;)



Sources:

https://www.businesstimes.com.sg/brunch/degrees-of-underemployment-fresh-grads-stuck-in-a-bind


https://www.forbes.com/sites/ccap/2010/12/20/is-america-saturated-with-college-grads/?sh=50bef6f752c5


https://www.onlinecitizenasia.com/2019/11/19/4-in-5-singaporeans-say-salaries-not-matching-up-to-costs-and-complain-about-wage-stagnation/


https://stats.mom.gov.sg/Pages/Graduate-Starting-Salary-Tables2019.aspx

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