Is spending on higher education really wise thing to do?

Ever since I left studies and started pursuing business, I started considering every penny spent to be either an investment or expenditure. That’s the lesson we businessmen are taught first: to understand the nature of every cash outflow. Thanks to my friends who are pursuing higher studies and are in the field of education, I have been thinking of late that whether spending on education is an investment or expenditure.

There’s a friend of mine who is now a successful industrialist and at the age of 23, he himself set up and is running a factory. To me, he is a genius. At this ripe age, he has achieved a lot. He now wants to get involved in politics. Don’t be surprised guys; he does have a knack for it. He wasn’t a very bright student in school. He once had told me

"padhega likhega banega muneem

Nai padhega likhega rakhega muneem"

(If you study hard, you can become an accountant.

If you don’t study hard, you will keep an accountant. {Coz u will be doing business in huge scale})

To a guy like him, and I might say, to a certain extent, myself too, spending on education is an expenditure. Now when I say education here, I am excluding primary education, coz theoretically, in India, primary education should be free. Education here means higher studies, which you do after your higher secondary exams. So to many guys and girls as well, spending on education is expenditure. Something which should be minimised and if possible, avoided. Well, this article is meaningless for people like them. This article talks about people who consider spending on education is an investment.

From every investment, we expect good returns. When we invest in education and higher studies, we expect to get good and proper training and education that would help us get best paid job and salary. We do expect to get best possible salary, which is actually a return on investment made on education of ourselves. Understanding this theorem will also help understand and estimate the minimum expected salary after completion of a course. Now here’s the theorem explained:

First, let’s understand the nominal rate of return on investment (ROI).  The interest rate on bank’s fixed deposit in today’s date is approx 9% per annum compounded. As we all know that this interest rate is due to inflation existing now, we will take a suppressed rate of interest of 8% for our observation. So following the rule of 72 (see http://www.moneychimp.com/features/rule72.htm), your money should double in 9 years. So you would have earned 100 Rs. on your 100 Rs. simply by putting it in a bank. Likewise, if you invest 10 lakh in bank as fixed deposit, which is sure, safe and secure, you would have earned another 10 lakh on it without actually doing anything for 9 years.

Now if you invest 10 lakh in your education, including your graduation and masters in any subject, you should be able to earn 10 lakh in 9 years minus time spent in grads and masters. For example, let’s say you spent 4 years in engineering and another 2 years in MBA. So now your 4+2=6 years are gone along with Rs. 10 lakh. You now have 9-6=3 years to earn Rs. 10 lakh minimum. According to the above stated result, your minimum expected salary after completing your MBA should be

Rs. 10,00,000 / (3 x 12 months) = 27,777/- per month.

If you think your education and training wouldn’t help you get that salary, you rather invest that money in a fixed deposit and time in some other creative activity.

Well, every theorem has a corollary. So the corollary(s) follow:

1. What if I didn’t invest my own money? What if I took a loan for your education?

Ans. technically speaking, it’s a very smart move. Then your investment would actually be the total interest you have to pay on that loan. Then you can calculate the whole stuff again. For example, on loan of 10 lakhs, approx interest to be paid on it is 6 lakh. So 6 lakh is your investment on education.

2. What if I received a scholarship?

Ans. Well buddy, then you need not worry about petty stuff like this. Just chill!

3. What if I decide to invest in Mutual Funds and not in Fixed Deposit?

Ans. Return on mutual funds vary greatly, with average being somewhere near 10% to 15%. So your money might double within 5-6 years. Take 5.5 years as average and calculate. For example, you would earn 10 lakh on 10 lakh invested in mutual funds in 5.5 years. So you have only .5 years to earn 10 lakh after completion of your studies (5.5 years – 3 years in grads – 2 years in masters). Good luck with that!

4. What if my starting salary is low, but my growth prospects are high?

Ans. If you invest 10 lakh in FD for 18 years, its future value (fv) is 40 lakh. In 9 years, 10 lakh would have doubled. So you re-invest those 20 lakh and on each 10 lakh, you earn another 10 lakh. So total amount you earn in 18 years in 40 lakh. If you work for 13 years (18 years – 3 yrs in grads and 2 yrs in masters), you should have earned 30 lakh by the end of the period. 

Likewise, there can be numerous variations. But the theorem stays. To make it simple for you guys, here’s the summary:

Investment amount (actual): X

Rate of interest on investment (estimated): Y

No. Of years to double the amount: Z= 72/ Y

No. Of years spent in graduation: P

No. Of years spent in masters: Q

No. Of years required to earn amount X: R = Z – (P + Q)

Expected salary after completion of studies: S= X/(R * 12)

Actual salary: T

Is T> S? If yes, go for it. If not, think again.

This article discusses very critically about economical aspect of education. I personally feel that money spent on education is neither an investment nor expenditure. Would you talk about the amount spent with friends in movies and parties so critically? Also, benefits from education are not just monetary. My dad says education leads to enlightenment. I do agree, but with kind of mentality we study, I feel that kind of approach to education doesn’t exist anymore. Final verdict to this debate: Baba Ranchordas had said, “sirf Kamyab nahin kabil hone ke liye padon, kamyabi toh jhak maarke peechhe aayegi”. 

This is Prasanjit Saha. Signing off.