Have you ever wondered how much money you are Really making? This isn't just about the returns on your investments, your salary, or the additional income from your education. The real question is: how much are you getting by trading one asset for another?
Over the next few weeks, we'll dive into this concept because, in truth, we don't make or create money. What we do is trade assets—our time, our education, or the products we create—for other assets.
Let's take a closer look at the asset of education. To illustrate this, I'll use a hypothetical rate of return of 7%. You might earn more or less, but this exercise is about understanding how money works, not the exact amount you accumulate. For simplicity, we'll exclude taxes, as accounting for different tax brackets and rates over the years would complicate matters unnecessarily.
For example, consider the cost of attending the University of Wisconsin-Madison for a Wisconsin resident in the 2024-2025 academic year. Here's a breakdown of the estimated expenses:
Tuition and Fees: $12,326
Course Materials and Supplies: $1,100
Housing and Meals: $15,928
Personal Expenses: $4,942
Transportation: $920
Loan Fees: $268
Total: $35,395
Now, let's adjust these numbers a bit. Suppose scholarships, family contributions, or grants reduce your actual annual cost to $25,000. Ignoring inflation for now, let's consider an alternative scenario: instead of attending college, you invest that $25,000 each year at a 7% tax-free rate of return. Over four years, this would grow to $118,768.
This figure represents the cost of a college education over four years, in terms of the money you could have invested instead.
Some might argue that this amount needs to be paid back, but whether you pay it now or later, it still impacts your finances. If you repay it with interest, the cost is even higher. If you let that $118,768 grow at a 7% annual rate for 43 years (until age 65), it could potentially become $2,178,731.
What does this mean for your retirement? Assuming a consistent 7% return and you start drawing on these funds from age 65 to 95, you could receive $14,411.09 per month in retirement income.
When trading assets, remember: You are your best asset. This is a crucial conversation, especially for high school students weighing the financial impact of a college education versus technical training. The money that you spend on education is no longer part of your personal economy. If that money were invested, its true cost would be felt in retirement.
Understanding the value of education can motivate students to take their studies more seriously, possibly completing their degrees within the standard timeframe and avoiding the need for additional semesters. This awareness might encourage them to prioritize their education over leisure activities, recognizing the long-term financial benefits.
The decisions we make daily significantly impact our future financial health. We trade our value for the money we receive, which we then utilize to build our future. Learning to maximize our greatest asset—ourselves—is key to financial success.
For a deeper understanding of how your financial decisions today affect your future, consider scheduling a Financialoscopy®.
For more information on the cost of attendance at the University of Wisconsin-Madison, visit their official website at https://financialaid.wisc.edu/cost-of-attendance/
(Note: The example of a 7% return used for this blog post explanation is for illustrative purposes ONLY. No assumption of ‘rates of return’ is implied. The example used is only to educate the reader on the “concept” of potential “lost opportunity cost” associated with financial decisions.)
