When investing in yourself is wise
You've heard it before, many times probably: Investing in yourself is the best investment you can make. Really? How do we know that's true?
Google the term “investing in yourself” and you'll find numerous references to things like explore your creative side, nurture your mind and body, sleep and relax, say no to others, do things you love. You get the picture. The term is commonly used as a metaphor for self-improvement, and that's fine. But since Get Rich Slowly is a site about money, we should attempt to bring a more precise understanding of terminology like “investing” to the table. Maybe we should explore what “investing in yourself” actually looks like, from a financial point of view to better understand when it would be a wise move.
What is an investment?
People who know a little about accounting understand that, when you spend money, it can be classified as an expense (gone forever) or an asset/investment (around for a long time). To qualify as an investment, dollars spent must have three attributes:
1. More: With a true investment, you get more back than you put in. If you pay $1,000 for a bond, you get $50 every year in interest; and when the bond matures, you get your $1,000 back. When you invest in an S&P index fund, you get about 2 percent per year in dividends; and when you sell at some point in the future, you get your money back, or hopefully more. It's a common theme: more money back than you put in.
2. Money: An investment is a money thing. Sure, you can use it as a metaphor, but don't confuse fancy prose with reality: When you talk about spending money, the return has to be measured in money — and it should be more money coming back in than went out.
3. Causality: There's something rarely mentioned explicitly which makes an investment an investment: You get the money coming in only because you made that investment. You would never get that 2 percent dividend if you never bought that index fund, and you'd never get that rent if you never bought that rental property.
Where marketers (and sloppy writers) muddy the waters is when they lose sight of one or more of those three elements. Buy that smart outfit or those designer sunglasses on sale, they say — it will get you a raise or promotion. Afterward, when you actually do get a promotion, it's easy to tell yourself it was that outfit — or the sunglasses, or the smartphone, or whatever. But was it? Can it be that it was a combination of your good work ethic and nobody better being available for the job which got you that promotion? This is where the term “investing in yourself” can get a little fuzzy.
Let's take a look at the two things most likely to be listed as ways to invest in yourself (in money terms).
Investing in your education
A college degree can be a very expensive thing to buy. But it is well documented that people with at least a bachelors degree make significantly more money than people that don't have one. Whether that should be the case would be a very interesting topic for debate, but it is a documented fact that it is so.
University degrees are not the only education investments which pay good (cash) dividends, though. Field-specific qualifications like the RN designation for nurses also require an investment (cash) into an education, and they result in higher (cash) earnings.
What makes education a good investment?
But do all expenditures for education constitute a good investment?
In a word, no. In order for education to be a good investment, the money spent has to lead to more money than would have been earned without the degree, and it has to be only because of that degree. Two factors influence the success of education as an investment:
- Which field the degree (or qualification) is in
- How much is invested
An engineering degree will pay more than a degree in arts, for example. Again, whether that should be the case or not can be argued endlessly, but it is a fact that some degrees have a better payoff than others.
How much you invest in your education has a profound impact on the quality of that investment, as it does for any investment. Investing $100 to get an annual dividend of $10 is a far better investment than paying $1,000 to get that same $10-a-year dividend. The same applies to an education: The less you pay for your qualification, the better that qualification is as an investment.
Therefore, getting a bachelors degree by means of two years at a community college, then transferring to a four-year state college is cheaper than a similar degree at an expensive private school, and that makes it a better investment.
The decision to pursue education is often accompanied by strong emotions, sometimes fear and even entitlement. From a monetary investment perspective, though, it's very clear: Some disciplines generate higher returns than others, and the less you spend to get that kind of education, the better your investment (unless the more expensive option can be demonstrated to directly yield a higher return).
Investing in your own business
Another thing that is likely to be considered making an investment in yourself is starting your own business. It never fails to amaze me that people who rail at the riskiness of the stock market think it is safer to sink their hard-earned money into a business of their own, given that the statistical chance of losing all that money in the first three years is something like 80 percent.
Starting your own business and thinking of it as an investment is probably not a wise view, because your own business is actually two things rolled into one: a job and an investment.
I know of many people who run their own businesses, never make much money at it, but are quite content … because it's a job they can't be fired from. There's a lot to say for that, but being a good investment is not one.
Why your own business may not be a good investment
If you view a business strictly from an investment point of view, you have to separate the money generated between a wage and a return.
Most businesses require capital up front. That's the investment part. Let's say it's $50,000. At the end of the year, let's say the books show $100,000 in profits. It's easy to say that's a terrific investment: Where else are you going to get a 200 percent return every year?
That would be wrong, though.
If you had to hire a general manager as competent as you, you might have to pay him or her $95,000. So $95,000 of what you made is the wage for your work. That means your investment of $50,000 earned only $5,000. Not bad — granted — but it's not 200 percent either.
Consider the alternatives
In practice, very few business startups do that well. If you invested the capital for your businesses in a CD (or an index fund) and add the wage you get from a regular job, chances are you would make more money than you would by running your own business … assuming you are one of the successful 20 percent who didn't lose it all.
Investing in yourself is a smart decision only when the money earned strictly as a result of that investment is more than the money invested. You can take the view that things like finding your dream, fulfilling your potential, making the world a better place and things like that are worthy causes for the money you spend, and there is nothing wrong with that. Calling those things investments, however, may not be the most accurate position to take.
Investing in yourself is often the best investment you can make — however, that is not always the case. Wisdom comes from taking a hard look at the money you're investing, and making sure that extra money from that investment will be put back in your pocket.
When do you think investing in yourself is a wise move? Have you measured the return on your investment in yourself against the alternatives to get a clear picture?