Placing a Figure on Personal Investment

We've been having this conversation in my home over the weekend. What's the right amount of money to invest in ourselves?

When we get right down to it, some of our motivation comes down to money. Grad school is a great motivator for people looking for a change. Grad school comes at a price.

But how much money should you spend on personal investment?

For our example, we'll follow the thought process of a young (thirty year old) accountant considering the CPA examination process. The minimum cost of this process is $2700 (exams, basic study materials).

The CPA exam is a notoriously hard test and study cycle. Our young accountant is curious how much money she should spend in preparation for the exam.

#1 WHAT ELSE CAN YOU DO WITH THE MONEY?

In my world, fixed sums of money invested are likely to average around 8% return compounded annually. I like this number, because I think it encompasses middle road investors with diverse portfolios. Some more conservative investors will err towards 5%. Other more aggressive investors can squeeze out 12% in most years. Decide where you are on the scale before running your own analysis.

#2 WHAT IS THIS PERSONAL INVESTMENT WORTH?

For our young accountant, let's assume a salary bump of $20k, and an additional 1% salary growth for the next 12 years. At that point, raises and other wage growth will have slowed.

At present, she is paid a healthy $65k/year. Expected raises are around 2% (cost of living) for the full 30 years. With the bold goal of retiring at 61 (thirty years after CPA). Here is the expected value of the personal investment: $1,139,154.87(difference between both outcomes). 

Check it out at Google Docs, Here.

*The blue section is where the CPA's wage growth returns to the normal 2%/year. At the completion of the first 12 years. 

**And there are other ways to run this model, we are not even accounting for the tax burden of higher salaries, or the chance to put more money into investment throughout the course of a career with higher wages.

#3 WHAT'S OUR ALTERNATIVE INVESTMENT?

It's important to understand that studying for the exam 'This Year' is not worth$1,139,154.87. Instead, it's the amount of money required to make that gain in thirty years. Recall the 8% yearly, compounded return:

1.08^30 = 10.063 (rounded)
$1,139,154.87 / 10.063 = $113,202.31
In other words: out-of-pocket exam preparation would have to cost more than$113,202.31 to make it a bad deal.

#4 SEVERAL CAVEATS

• Your time does have a value. Studying and building personal skills is tough.
• Wage growth is not everything. You should aim for fullfilment in your career.
• Life shifts will create great variance in this analysis. For instance: Someone who takes 18+ years to be a full-time parent will see no benefit of skills-based wage growth. (Truly) passive income will remain the same in either case.
• Taxes create a counter-incentive for higher wages.
• Yearly contributions to investment create an additional incentive for higher wages.

#5 STUDY HARD FOR THE EXAM!

The CPA exam is clearly a bargain (ask any accountant, they will say it's miserable, though).

Some food for thought, some graduate programs cost as much or more than $113,202.31. Many of these will not provide close to the financial benefit of a CPA license. Fulfillment and life goals notwithstanding, if your education is income-motivated, it is worth a second look.

Don't know where or how to make 8% returns over a thirty year period? That's a topic for another day. If you feel like learning more right now, shoot me a message. I am more than happy to help.

To download a version of the wage growth spreadsheet, get it at Google Docs Here.