Indirect Costs- What is the costs of the forgone opportunities that could have been taken advantage of with this time and money?
I was fortunate to complete some of my schooling with not only a full scholarship, but an extra Graduate Assistantship that paid me very well for my time. In this case, I didn’t have a direct degree “Cost” and in fact made more money in my Assistantship than I needed for room, board, and similar. In other words, I was actually making money while going to school. While this sounds like a dream for many students, there is something many of them forget: The indirect costs.
I spent 6 years in total in school. What else could I have been doing with those 6 years? What else could YOU be doing with your 4-8 years? I could have gotten a job somewhere else, I could have done an apprenticeship, or gone to tech school for 2 years and worked for 4. There’s a plethora of things I could have done. I could have even traveled the country or the world!
Here’s a place where I know I’m an exception. I managed to minimize indirect costs by running my own company WHILE going to school. In other words, while other students were getting loans, I was getting paid AND ran a company that was bringing in more money in addition to what was happening at school. But that’s not what most student’s do- most students look at it as 4-8 years of dedicated studying and no working, except maybe a $8 an hour school job or time on the summers.
The indirect cost is a calculation of what else you would have been able to do instead of spending the time in school. It should be salary as well as interest on that salary. If for example, instead of going to school you could stay at home for 6 years rent free and board free, and you saved 95% of a minimum wage salary in California (which is $10.50 an hour), choosing this path would net you $124,488 or so. Depending on your situation, taxes could vary, but worst case scenario should put you around $99,590.
This may not sound like a huge sum, but assuming your 24 when you’re done accumulating it, you have a lot of life left. Assuming a 7% annual return, that could turn into well over 1.5 million dollars at retirement. Yes, working minimum wage and sacking 95% of your salary for 6 years could cover your entire retirement basis for life and make you a card-carrying millionaire… and this is assuming no raises, and literally just getting minimum wage for a 40-hour a week job! Take a 50 hour a week job or get paid more, and the game changes quite a bit.
It does take work and focus to sack away this much for 6 years- just like a college degree does. Many people have trouble saving even 1% of their income. However, looking at it as a 6 year “preparation for your future” time period would equal a similar- or greater- benefit than spending 6 years in college.
The opportunity cost, or indirect costs, don’t have to be limited to just the salary. It could also be side jobs (say you are working TWO jobs), personal projects, or life experiences. The opportunity cost is simply whatever else you would be doing with the time and money you used for college.
One other opportunity cost is what you would be doing with any money you had for college. If for example, your parents had saved $20,000 to help pay for your college, that could be put towards retirement, used to start a business, or used in another way to get you career or future rolling. If you just put it into retirement, it is is another $480k you would have at retirement age, bringing your balance to over 2 million dollars- not including a penny you’d make after the age of 24!
If you are struggling to “estimate” the numbers, break each one down using the the 3 point, also known as PERT method of estimating:
In project management, when things are uncertain, we often use the PERT method. Here we look at:
A: The Worst Case Scenario
B: The Most Likely Scenario
C: The Best Case Scenario
Then we take the following calculation: (4*B + A + C) / 6
So if the worst case scenario is $330,000, and the Most likely scenario is $280,000, but the best case scenario is $80,000, the PERT approach would give you:
(4*(280,000) + (330,000) + (80,000))/6 or (1,530,000)/6 which is $255,000 for the estimate.