#Household Math - High school, career paths, and financial outlooks...

Question

For a high school student who's thinking about the future, it seems to me (a parent) that there are three basic choices: working straight out of high school and getting into some sort of un- or limited- skill labour; going to university and (presumably) learning some sort of skill that can translate into a job directly (ex. accounting), and going to trade school and learning some sort of trade. What are your thoughts on this?

Answer

Before talking about potential net earnings, I think it's most important to talk about the desires and nature of the student. That said, and with some very basic (and perhaps widely inaccurate) assumptions, the trade school grad does best over time. However, going to work straight out of school and being able to get a good wage gives that person a leg up over the college graduate for close to 20 years.

Analysis

There's quite a bit to unpack here, so let's take it step by step.

My first thoughts don't go to finances but rather to happiness - where is it that any given person will be his/her happiest. This is an individual decision that will be guided heavily by the interests and desires of that person. For instance, I know that at that age, the thought of doing anything other than going to University was a non-starter. Thankfully, I had a scholarship that covered many of the costs! However, as I've grown older and worked with students, it's become clear that for many students, it's a better choice, due to their desires and temperament, that another choice such as a trade school would be far more desirable. It used to be the case that a college education was a guarantee to a good job but that hasn't been the case for many many years. For example, Lululemon, the clothing retailer, only hires college grads as sales people. How are they able to do that? Because there are so many of them that can't get jobs in their chosen fields that Lululemon can be extremely choosy in who they hire.

Let's say for arguments' sake that the choice really is up in the air - the student is planning a future and that all of the three choices (working, university, trade school) are appealing. We can now look at this in terms of finances.

I'm going to make a lot of assumptions on this question, so if you spot an assumption that needs adjusting, please do point it out!!! For ease, I'll assume a 2000 hour work year.

Working straight out of school

This part of the question needs a heavy dose of assumption. I'm going to assume that a limited-skill job can be obtained - something that brings in the following amounts:

$14/hr for the first two years
$16/hr for the next two years
$18/hr for the next two years
$20/hr for all years thereafter

University

This part of the question also needs a heavy dose of assumptions. I'm going to assume that the cost of University is all borne by the student and is all paid for with loans. I'll set the loan interest at 10% per year for 10 years. The cost of university I'll assume to be $20,000 per year for four years, all in (tuition, lodging, food, books, lab fees, etc) (public schools being a bit less and public schools being potentially considerably more). Coming out of school, I'll also assume a skill has been learned that will pay $40,000 entry with a 5% raise per year afterwards.

Trade School

And time for more assumptions... I'll assume a trade school is one year and $20,000 all in, with the same repayment schedule as for the university (10 years, 10% interest). I'll assume the graduate is able to get a job for $20/hr starting and receives a raise of $5/hr after two years (I'm assuming moving from an apprentice to a journeyman) and then 5% thereafter.

I'll use a spreadsheet to figure out the results over time.

https://docs.google.com/spreadsheets/d/1_SpdTjdH2DJr8grYs8Mfl90crsECIih8mVvo5YozoII/edit?usp=sharing

And so again - these results are the result of the assumptions made and one or more of them may be wildly off, depending on individual circumstances - please take that into account if using this as a basis for decision making! Or let me know your particular circumstances and I can adjust the sheet appropriately.

If we project the net earnings of these three tracks over the course of 30 years, we find the following:

At year 4, the Trade School graduate overtakes the person who started working straight out of school.
At year 19, the University graduate overtakes the person who started working straight out of school.

In terms of overall earnings over the course of 30 years, we have:

• Working straight out of school = 1,152,000
• University = 1,920,538
• Trade School = 2,782,456

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Questions and comments always welcome!

#Household math - Which is the better way to pay for an online school when dealing with referral credits?

Question

I'm looking at joining an online school website that has over 22,000 courses in all sorts of different topics (I'm interested in some portion of them that relate directly to my interests). The cost for joining this website is $15/month but if I join for a year, I pay $99. To make things more complicated, I have 2 coupons for 1 month off each (one is the usual offer from the website and the other is as a referral coupon - I got one and the person who referred me also got one). What's the best way to join the website?

Answer

It's best to subscribe for a year, unless you are going to receive 2 or more referrals every month. 

Analysis

This is an interesting question because of the twists and turns in what's available in terms of options. The key is going to be to put everything on equal terms so that we're comparing "apples to apples".

Let's look first at what happens if we look at the options without regard to the coupons. We're comparing the regular monthly cost of $15 vs the monthly cost of $99 over 12 months, which is $8.25 per month. Clearly it's better to pay less per month! But... what if you don't use the site for all 12 months? What's the number of months that'd you have to use the site on the yearly plan to have it cheaper than paying $15/month?

We can find that by dividing the yearly cost of $99 by the monthly cost of $15. This gives 6.6, or in other words, it's better to pay by the month if you'll use the site for 6 or less months. For 7 or more months, it's better to pay the yearly amount.

Now let's look at the coupons. When paying by month, the coupons give 2 free months (and so for the cost of 1 month for $15, you get 3 months). When paying by year, you get 14 months for the cost of 12. What that works out to be is, when paying monthly, $15 for 3 months is $5 per month. When paying yearly, $99 for 14 months, that's $7.07 per month. And so there appears to be a better financial result to pay for 1 month and pay $15, use the site for 3 months, then change over to a yearly plan. However, that ignores a couple of factors, and so the best way to calculate this is to calculate the monthly cost over the course of the annual plan, then look at the associated monthly cost.

Using the yearly plan, you get 14 months for $99. Using the monthly plan first and then paying for the year, you get 15 months for $15 + $99 = $114. To compare the two, we divide the $114 by 15 (to get the per month rate), then multiply by 14 to get to the same number of months under the yearly plan:

And so it's best to pay for the year and get the 2 free months added on.

The one exception to this would be if there is an expectation of receiving 2 or more referral codes per month. If that's the case, it'd be better to stay with the monthly plan until the likelihood falls off of getting those referral codes. At 1 referral code or less per month, it's better to pay yearly.

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As always, feel free to ask a question!

#Household Math - Credit or coupon for defective goods

Question

I bought some art supplies for $65 and found that a portion of them are defective. I was given a credit of $20. Later, I found that the remaining part of them are also defective. The retailer is offering me a 10% off coupon on a future purchase. Should I accept the coupon or should I try for another credit?

Answer

In all likelihood, unless there is a very large purchase you'd like to make, the credit will be better than the coupon.

Analysis

There are a couple of things going on here, but the most relevant question is: Which is better? A 10% coupon or a credit of some amount?

So let's talk about the results from each possibility.

The 10% coupon will offer some money back on a future purchase. For this to be worthwhile, we first need to assume that there will be a future purchase! If you are so disgusted by the quality of the product and the retailer isn't trusted, then the coupon would be absolutely worthless.

Let's assume there is an intention to order again. To get the most out of the coupon, you'll want to order as much as you can in order to get the maximum benefit (keeping in mind that you don't want to buy more than you reasonably need!)

The credit is an unknown quantity, but we can assume that the company will offer, at most, the remaining $45 of the original purchase price.

So how much do you need to buy using the coupon in order to have it equal the potential credit?

For this, we can set up an equation.

On one side, we'll have C, the credit. On the other, we'll have B, the amount you'll buy. Since we'll pay 10% less than usual, the amount of benefit we get from the coupon is 10% X B:

C = 10% X B

We can multiply both sides by 10 to get:

10 X C = B

So what does this say? Let's throw in a number - if the expected coupon is $20, we'd have to buy $200 worth of goods for the coupon to worth just as much. If we expect to buy more than that, then the coupon is better. If we expect to buy less, then the credit is better.

ANSWER KEY (alternate variables)

At 10% coupon:

C = $10, B = $100
C = $30, B = $300
C = $45, B = $450

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Please feel free to comment or ask a question!