Invest in You!

Sep 26, 2012 by

Some commenters on my “Why I’m Wary of Stocks” post were skeptical that significant opportunities besides stocks exist that can support a comfortable retirement and outpace inflation with less risk. Among the constellation of alternative investments I suggested was investing in education or training to boost income over your “career years.”

Education and Training Are Investments?

Absolutely! I suggest you look at furthering your education and taking training in an area new to you or to complement or advance what you already know the same way a business looks at making an investment. That means you ask yourself these questions:

  1. What’s the projected rate of return on the investment?
  2. What’s the risk, or the likelihood I’ll achieve the investment’s projected rate of return?

How to Analyze an Investment in You

I’m going to leave out some implicit assumptions and nuance that would understandably cause many of you to go cross-eyed and skip directly to the end of this post, but trust me: This is the sort of investment analysis MBA-types learn. I’ve used this approach myself in analyzing innumerable prospective capital investments (plant & equipment) for companies where I’ve worked.

We’re going to project the Internal Rate of Return—or IRR—for a hypothetical working lifetime of simple costs and benefits related to periodically investing in education and training. The IRR is one of several classic methods of evaluating and ranking (compared to alternatives) potential investments.

Imagine this: You’ve got a 40-year career. Every five years, beginning with year zero (the start of your career), you invest $7,500 in education or training. The benefit of your investment is that your income is $3,000 per year more than it would be otherwise. In other words, it’s an incremental $3,000 annual benefit that you would not receive if not for the periodic education/training investment. Here’s a picture to help you quickly understand this investment’s annual cash flow.

Annual net cash flow from investing in education or training

In words: In Career Year 0, the investment’s cash flow is -$7,500—the cost of the additional education or training. Then in Career Year 1 you earn an additional $3,000 (only $250 per month—a realistic expectation, in my view) because you’ve made yourself a more valuable employee. In Career Year 5 you again invest $7,500 in more education or training. You’re still earning the extra $3,000, so your cash flow in that year is -$4,500 ($3,000 extra income less $7,500 education/training cost).

Since our world changes rapidly and there’s always more to learn, I assume the benefit of the investment wears off over time. So the incremental $7,500 investments in education or training every 5 years just maintain the annual income benefit at $3,000. You’ve got to stay current, right?

Sound reasonable, though of course simplified?

Your Investment Return

As measured by the Internal Rate of Return and calculated by Excel’s IRR function, your return on the career-long investment in education and training pictured above is:

“Invest in You” IRR = 28.6%


What About Risk?

We’ve projected the IRR on this investment. Now how risky is it? That’s always a tough question no matter the investment. But, unlike stocks and many other investments, you have considerable ability to control the risk of an investment in education or training. For example:

  • Before spending money on specific education or training, you can talk to your employer, other employers, and colleagues in your network to learn more about the likelihood of the investment actually boosting your income and by how much. (Some employers help pay for certain training, which would make the IRR skyrocket.)
  • In doing your own analysis, you can be quite conservative in estimating the future income benefit of an education or training investment. And to improve your comfort level, you can do what’s called “sensitivity analysis,” asking yourself this question: What’s the least income benefit I might earn that would still make this investment worthwhile to me? I played around with my example above to see how low the annual income benefit could be before the IRR would fall below 10%. As long as the additional income benefit stays above $2,000 per year, I’ll earn more than 10% on my education/training investment. Not bad. You can decide the minimum IRR you want on an education or training investment, and then judge how likely it is the income benefit will be enough to generate at least that IRR.
  • You can do your own research and talk to your network to learn what specific education or training is most likely to provide you, given your unique background and experience, the biggest “bang for the buck.”

Yes, I’ve Taken Liberties

Let me anticipate some of the holes others may poke in this presentation.

  • The cumulative net cash flow for my hypothetical investment is only $60,000, a tidy sum but hardly a retirement nest egg. True enough: In my scenario, you’d be investing a total of $60,000 in education or training and gaining an additional $120,000 in income, over 40 years. First, this is just one example. You might invest $50,000 one time to earn an additional $750,000 over a 40-year career. Second, understand please, I’m not proposing this option alone as a substitute for investing in stocks. I’m suggesting that a prudent investment of $60,000 in you instead of in stocks is very likely to provide a superior return at less risk, contributing meaningfully to a nest egg. (You’re supposed to save, not consume, that extra $120,000 in income!) And I contend there are many other investments you can make that provide good returns at less risk than stocks, if only you’ll turn off CNBC and other mainstream financial establishment sources long enough to clear your mind of the Wall Street marketing chatter and open it to creative options!
  • Yes, I’ve ignored taxes. My IRR is pre-tax, since I didn’t take income and payroll tax out of the $3,000 annual benefit. First, often times (like now, for instance) the Federal government offers tax credits to help offset expenditures on education or training. Such tax credits might slash the $7,500 investment cost, which is also pre-tax. Second, I can’t predict the next 40 years of tax rates and tax credits, so I suggest doing the analysis pre-tax makes more sense anyway.
  • Yes, I’ve ignored inflation. But I’ve ignored it both in the cost of the additional education and training and in the annual income benefit. And I can’t predict 40 years’ worth of inflation either; trying would only pointlessly muddy the analysis, in my opinion.
  • I’ve failed to explain some of the assumptions implicit in IRR analysis. Guilty, as charged. If some of you finance types want to discuss offline whether these assumptions matter to the overall point I’m trying to make, please shoot me an email.

Wall Street or You?

Don’t get bogged down in the minutiae of IRR analysis. Rather, please bear in mind the Big Message I hope this article conveys, which is:

Investing in You is Just One of Many Very Viable Alternatives to the Wall Street Marketing Machine’s Drumbeat That You Must Buy Stocks or Retire on a Cat Food Diet!

I have not and am not today suggesting you avoid stocks entirely. As you know, we own stocks, but have invested a far lower fraction of our financial assets in them than virtually all “experts” would recommend. I’m merely suggesting that, the next time you have a chunk of money to invest, consider: With respect to risk and return, are you likely to do better investing in you or buying stocks? Further, isn’t diversification, rather than putting most or all of your nest eggs in the Wall Street basket, a desirable goal?

What Do You Think?

Have you invested in training or education to improve your income? Is it paying off?

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  1. Jason @ WorkSaveLive

    I’ve looked at getting more training and certifications with my financial advising career, but until I’m totally certain that this is what I’ll be doing for the long-term I’ve decided again moving forward with it. My income is just too unstable right now to be able to justify it. All in due time though!

    • Sounds prudent Jason. You make a good point about an implicit assumption in my analysis, which is that you continue working in a field where the ongoing training investment can pay off in terms of additional income.

  2. I completely agree that you are your biggest asset everytime. To earn the money to invest, it requires YOU making it. The more you make, the more you can invest or do other things. Bottom line, everything involves you.

  3. William_Drop_Dead_Money

    Your model is good, because it assumes you’re working 40 hours anyway, so why not make it pay off more with an investment in education? But there is the unspoken implication that you are now chaining yourself to the desk (or shop) forever to keep making that return. The stock investment (or any other passive investment outside of yourself) allows you to keep getting the return while you sit by the pool sipping pina coladas… and that’s the conceptual difference.

    Unfortunately, the education investment doesn’t scale well. You can’t boost the total dollars of your return by investing say $100,000 in yourself and then count on getting a corresponding raise. But you can sit by the pool and invest more and get more. (Or lose more LOL)

    In summary, I’d say when you’re young, then you should invest in yourself, because that will definitely increase your earning power. But at some point the return on that earning power has to be invested in something outside of yourself.

    • No need to be “chained” to a desk. The education or training in which one chooses to invest could be to support a side business, real estate investing enterprise, etc. I wrote about earning more as an employee as a single example, but education/training could be to support independent entrepreneurial endeavors as well.

      Regarding scalability: As I noted in the article, “investing in you” is but one piece of a constellation of viable non-stock investments that, in combination, can easily support a comfortable retirement–and without taking on the considerable risk of equity investing. I’ll write about others in future posts.

      You write of stock market investing as if the returns are virtually automatic. Put a dollar in the machine and get $1.25 (or whatever) out. That may be your experience–and congratulations–but that is hardly the universal experience of individual investors.

      • William_Drop_Dead_Money

        Oh I agree that stock returns are not automatic. If I created that impression, please let me correct it. It’s not, which is why I mentioned other investments like rental homes. (As a matter of fact, I’m out of the market for the most part as we speak.)

        But, on the other hand, raises from education aren’t automatic either; life is full of uncertainties and bad bosses. But I agree with your fundamental point that you improve the odds by an investment in yourself.

        My only point was that that is an active investment, meaning it takes working at something, and it can be a side business, to realize the return. A passive investment, whatever it is, does not require manhours. And it’s scalable.

        Not disagreeing with your point – only trying to place it in perspective. When I was younger I did exactly what you propose, and it worked out extremely well. I got my MBA part-time and it was probably the highest return investment I ever made. So you’re absolutely right about that. But I’m 60 now — it’s not going to work as well for me at this stage of my life. Old age and decrepitude catches up to some of us faster than others! 🙂 That’s when you need to have built up some passive investments…

  4. Jonathan

    I recently read Cal Newport’s new book So Good That Can’t Ignore You,
    and he speaks to your point. Many people fall for the passion
    hypothesis, the idea of following your dreams or doing what you love.
    Yet many of these people end up with nothing when they try to make the
    leap from their current situation to their newfound passion.

    without career capital (either tangible and intangible) you are most
    likely destined to fail. Passion isn’t something you arbitrarily find,
    it is something that develops as a result of getting so good at a
    particular skill that it becomes monetarily (ROI on career capital)
    valuable to other people.

    In corporate finance speak, the
    investments in yourself you are proposing could be thought of as paid in
    capital on your personal balance sheet.

  5. Andy Hough

    My J.D. hasn’t been a good investment. I’m still hoping that I will get at least some return from it.

    • I’m sorry about that Andy. How would you honestly rate your past level of ambition in leveraging your JD to generate income?


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