Friday, September 11, 2009

Value of Choices

In the United States, the net present value of the difference in after-tax lifetime earnings of college graduates and high school graduates is about $170,000.  This is a lot of money, and many people think that going to college is the single most important thing you can do to improve your life.

But this is wrong, for two reasons.  The first is selection effects.  Many people look at this number and conclude that going to college will give you $170,000.  This is not true.  The fact that college graduates earn more than high school graduates does not necessarily imply that sending someone to college will make that person better off.

To see why this is the case, imagine a weight-lifting contest.  It is certainly true that the winners of the contest are stronger than the losers.  But it not true that the contest makes you stronger.  It is just a way of separating people who are already strong from those who are weak.  Winning the contest gives you a trophy to prove that you are strong, but the trophy does nothing for your strength; it simply shows people that you are strong.

There is a big debate about how much value college actually adds.  At one extreme are people who think that there is no difference between a high school graduate and a college graduate, except that the latter went to college.  These people want to send everyone to college.  At the other extreme are people who think that college is just a sorting mechanism that adds no value.  They see no value in sending more people to college; they see it like giving a trophy to everyone who shows up at a contest.

The truth is, of course, somewhere in the middle.  The kind of people who complete college would have made more money even without college, but their education does have some value-added effect in making them even more productive.  If you are someone who is barely qualified to go to college, slogging through will give you some boost to lifetime earnings, but not nearly as much as $170,000.

But even if the decision to go to college netted you all that money, there are other things that have even more value.  For example, cigarettes cost about $5 a pack, so someone who smokes two packs a day will pay $10 a day.  Assume that this cost will increase at the same rate as inflation, and that people smoke for 50 years.  Starting a smoking habit therefore has a net present value of   negative $180,000.  So even if you get the maximum possible benefit from college, all of that benefit will be wiped out if you develop a smoking habit in college.  And that's just the cost of the cigarettes, without even considering the increased health care costs.

So if you are a parent, making sure your kids don't start smoking is more important to their future well-being than making sure they gets into a good college, or even any college at all.

But everyone knows smoking is a bad.  Are there any other lifestyle changes that might be more important to your bank account than going to college?  There are probably several, but I'll discuss one in particular that many people ignore: cooking.

Cooking your own meals can easily save you $10 a day.  If you eat out for lunch and dinner, you will spend at least $15 a day.  It is fairly easy to feed yourself for $5 a day if you know how to cook*.  If you have special dietary requirements, or a well-developed palate, then the cost savings get even bigger. 

So learning how to cook good food cheaply, and getting in the habit of doing so, will mean more money over your lifetime than going to college.  In this case, it isn't pure profit, because you have to spend time cooking and shopping, but you would also have to spend time driving to a restaurant, ordering, and waiting.**  It also assumes you work somewhere where you have access to a fridge and microwave, so you can eat a hot lunch of equal quality to what you would get at a restaurant.

But that's just for one person.  When you are cooking for multiple people, the value of the skill is multiplied even more.  Assume that you cook for yourself for 60 years, a spouse for 50, and two kids for 20 years each, at a cost savings of $10 per person per day.  Your cooking skills would then have a lifetime value of over half a million dollars, or three times the maximum value of getting a college degree.

Now, the kind of cooking I am talking about has very little to do with high cuisine or what you learn in a culinary school.  It is the dying art of putting good, healthy food on the table day after day, cheaply and efficiently.  Any recipe that is long and complicated or requires too many fresh ingredients is no good because you won't be willing or able to do it on a regular basis.  The food has to be easy to prepare, and use inexpensive ingredients.  It needs to be good enough to keep the family from wanting to eat anything else, while giving them all the proper nutrients without too much salt or fat or empty calories.

This is not an easy skill to learn.  It requires an investment in time and effort, and an experienced person to guide you.  But it is worth it.  So if you know how to cook, make sure you pass that knowledge to your kids.  It may not be the modern or politically correct thing to do, but can mean a huge improvement in their lives.

*I spend about $60 a month on a healthy, mostly vegan, diet, but I know that most people don't have the mindset or skills to enjoy spending that little.

**This time cost of eating out is something I forgot to account for in my previous post, and is another reason why many rich people would choose to spend time cooking their own food.

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