Home Finance for beginners

Choosing Career Paths

Mapping Career Paths

When you walk into most any kind of school, you will be exposed to a variety of different subjects. You will probably have to sample from many of them, but you will ultimately have to choose one particular focus to put most of your professional energy into. While every kind of career will grant you certain benefits and privileges, every career will also impose certain costs and challenges.

For example, a doctor tends to make great money, but there is a heavy price to pay. The hours are often long, the exposure to illness is nearly constant, and the challenges of making it through medical school and your residency will be extreme. You also have to continue your medical training to stay certified, and if you don't pay for malpractice insurance you will be liable for the total price tag if and when a patient sues you.

As another example, being an investment banker also carries with it a lot of stress. But, while the upside tends to be a lavish paycheck, the stress of being wrong in a world where billions can be made or lost with every decision, drives a lot of people to the emotional breaking point. Financial professionals are fired and laid off without hesitation. When you map out your career, you need to be concerned with both the financial and the personal costs you will incur. There is no perfect career path.

Weighing the Costs and Benefits

The math about whether secondary or post-secondary education is really worth the money can go in a lot of different directions. On the one hand, you can take in a lot of money through a wide variety of different career paths, and having a degree can open up a lot of different doors. But, on the other hand, a degree has never been more expensive. If you get a degree, you may end up spending $70,000 to $200,000, and a large amount of that may be loan money that you will have to pay back over a long period of time. So, you may be pushing 40 years old before your student loan is finished, and you may have ended up paying as much as double the price of your education.

Your career trajectory is also an important factor in whether your education will really pay off or not. If you work a 40-year career and earn between $70,000 and $120,000 for most of those years, you will earn in the $3 million range. However, you will end up giving up approximately 35% to 45% of additional income to taxes (payroll taxes as well as state and federal income tax). So, your take-home pay, not including your student loan payments, will be more along the lines of $35,000 to $50,000 for many of those years. The work will also tend to be far harder intellectually than what non-college workers tend to do.

Just as an example of one kind of job that you may be able to get without a degree is warehouse work. If you have a solid work ethic and are reasonably articulate, you may be able to make your way into management. This can open doors by potentially providing you with an education stipend, or even by simply letting you work at a high level using only your experience as your education. You may only earn in the $20,000 to $50,000 range, but in a lot of cases the work will not cause you as much stress.

The costs and benefits that any kind of job involves are very complicated. Much like with deciding whether you want to buy or rent your home, deciding on your intended career path involves a lot of soul searching about whether college is really right for you.

While learning is a good thing, college is not always the most preferable way to learn what you want to know. Sometimes a degree from the "school of hard knocks" is the best one possible. Whenever you can, take advantage of free opportunities to learn and grow the value of your human capital. Take any free classes or training provided by your employer. Try to keep current with new developments in your field. You can make yourself more valuable as an employee by learning more about your employer's organization, volunteering for different roles and projects, and eventually gaining seniority.

How to Estimate if an Education is a Good Deal

Since we have covered subjective career decision-making, we want to outline how to objectively determine if a particular degree is a good investment. This involves a little bit of research and calculation.

Make sure the education leads to a job. You can check this by counting how many job postings appear in your target career with the education you are considering. You can also check LinkedIn.com or other professional databases to see if people with your degree actually get these jobs. If no one has, then you are taking a huge risk. If you find that there are far fewer jobs and positions than the number of graduates from educational programs, then you could be forced to compete vigorously. This is huge risk.

Make sure the job pays well. You should check salaries at the Bureau of Labor Statistics website and other sources. Find at least two estimates for your future salary. Bear in mind that professional organizations tend to rely on biased survey data and that you will start at the bottom, so their averages will likely be high estimates.

Estimate what you could make without the additional education.

Subtract the salary you could make without the education from the salary you could make with the education. This is your additional pre-tax income from education.

Multiply your additional pre-tax by 60% to 50%, depending on your highest tax bracket. This will convert the pre-tax extra income from your educated career to extra after-tax income.

Estimate the cost of the educational program including every expense, like room, board, books, etc.

Divide the after-tax income by the cost of your educational program. This is an estimate for the return on your education investment in after-tax dollars.

If there are differences in unemployment between your current career and potential career, adjust this number to reflect that.

We can now compare the returns on education to the returns on other investments. Your return should be higher than investment expectations of retirement funds (about 8% in 2012) since your alternative to education would be to save and invest your college budget. Your returns on education should also be higher than the interest rate on student loan debt (5.3% in 2012). Since your job prospects are not guaranteed by anyone, you should also get at least the implied return of the stock market as well.

If the degree you are interested in does not beat these returns, then it is not a good investment in a financial sense.

The number of years you intend to work in your new profession also matters. Your new profession has to pay you back. To calculate the payback period, divide the total cost of your educational program by the extra after-tax income your new education generates. For example, if your program costs $120,000 and your extra after-tax income was $20,000, then you would have a payback period of $120,000 / $20,000 = 6. You would need to work in your new career at least six years for your education to pay for itself. For your education to make sense financially, you would need to have many more years of expected employment in you new job than your pay back period estimate. Clearly, the longer an educational program takes, the more years you intend to take off to raise children and the higher your age, the poorer an investment educational spending will be.

Jim's Education Decisions

Jim is a 25-year-old car salesman. He works for his uncle and thus has reasonable job security, and he pulls in $44,000 a year. It's a respectable income among young car salesmen, though his income can vary between $30,000 his worst year and $75,000 during his best. Jim got a bachelors degree in communications and is considering becoming a real estate agent.

To start with, a Realtor® averages $47,000 a year, but Jim believes he can do better because he has sales experience. During coffee meetings with current realtors, Jim has gotten confirmation that he could probably do well in this line of work. But, there is a price to pay for this. Jim will have to pay around $600 for the background checks and fees that the government makes an agent go through. The classes he would have to take would come out to around $1,400, and Jim's tax bracket would impose a 40% tax on any income he makes beyond what he has already made.

Beyond the money he might spend to become an agent, Jim would likely give up around $8,000 in sales, or $4,800 in after-tax income.

The cost of education to become a real estate agent is $600 + $1400 + $4,800 = $6,800.

The extra after-tax income from this career change is 60% x ($47,000 - $44,000) = $1,800.

The return on his education investment would be $1,800 / $6,800 = 26.47% (after taxes). This return on this investment of time and energy is higher than returns on most retirement plans, the stock market's average and that of bonds. Thus, this career move makes sense financially in terms of Jim's rate of return. Now, we consider the payback period. The payback period would be $6,800/$1,800 = 3.78 years. This is a reasonable time frame for working in his new career, since he is very young and has many working years ahead of him.

Jim showed these calculations to his uncle. Jim's uncle was impressed and promised to promote him at the car dealership if he stayed there for one more year as a salesman. Jim agreed to this, because his pay rate at the car dealership would match the expected income he would receive as a broker agent. Jim agreed because he wanted to make his uncle happy, and also because he recognized that being in the family business was much safer than striking out on his own.

For people who desire security, having a secure paycheck is better than having a risky paycheck. Jim was able to frame his decision using simple financial calculations, but ultimately he found reasons outside the calculations that helped make a decision.

Sophia's Education Decisions

Sophia is a 50-year-old government worker who earns $75,000 per year. However, she wants to go to law school and become an attorney. Lawyer incomes cover a wide range between $50,000 and $200,000. Sophia's interest is immigration law, which tends to pay less and would likely compensate her in the $100,000 annual range. Since her husband is a doctor who takes in $180,000 per year, their tax rate for anything extra would be about 50%. The law school and bar exam preparation Sophia is considering would take four years and would cost her $150,000. Since she currently works for the government, Sophia's compensation is basically set. So, her time spent studying the law would not detract much from her compensation.

Thus, the cost of education to become a lawyer is $150,000.
However, the extra after-tax income from this career change is 50% x ($100,000 - $75,000) = $12,500. The return on her education investment would be $12,500 / $150,000 = 8.33% (after taxes) per year.

This return on investment is slightly higher than the stock market's average returns, higher than most student loan rates and will pay better than most retirement plans will. Thus, this career move is acceptable from a financial standpoint.

Now we consider the payback period. The payback period would be $150,000/$12,500, or 12 years of working in her new profession. Sophia is 50 years old, and she would be 54 before she starts paying back this debt. She wouldn't break even until she was 66. Considering that breaking even is a 0% rate of return, this career move does not make financial sense, since it requires her to work well into her 60s before she even recoups her initial investment in this additional education.

While she would need to work into her 60s to break even, she would need to work into her 70s for her move into this new profession to make particularly good financial sense. This is a bad condition since most people would not want to be locked into working past the typical retirement age just to reap a positive return on investment. From a financial perspective, Sophia's career change does not make financial sense.

In a free society, Sophia can do whatever she wants, but her law school is not a good investment. Unless she can find ways to change her potential future income, the duration of law school or the cost of law school, this does not make financial sense. She would be wealthier by investing her money in financial markets than by spending it on this career change.

Both quality of life and financial perspectives need to be taken into account when you consider a new profession. Remember that your money and your time are both on the line. While you can make more money, you will never get back the time you spend on a pursuit. 

Choosing Career Paths562Choosing Career Paths