When it comes to the millennial, the biggest problem facing the generation is a poor financial position. Stereotypical of the generation, the average millennial goes to high school, applies to college, gets accepted, and borrows a lot of money to pay for tuition and living expenses. Student are trained to go straight into college. They aren't told to wait a few years. The logic is that the sooner you get your degree, the sooner you can make a good income.
Students aren't encouraged to work and save up all the money needed to pay for tuition before entering college. The more common approach is for a student to work part time while in college.
Looking at a college degree as an investment, deciding how to pay for it illustrates the concept of leverage. Leverage is borrowing money in order to get an investment and sell the investment for a return in order to gain a return while having less equity. I probably didn't do a good job explaining that so I'll try to explain it with the example below.
There is a house that is being sold for $100,000 and it can be sold one year later for $150,000. You buy the house, hold it for a year and sell it for $150,000. After the sale, you profit $50,000 making a return of 50%.
Now say you didn't have $100,000 today. Say you only had $10,000. In order to buy the house, you need to take out a loan for $90,000 and pay 10% interest on the loan. You buy the house today. When you sell it one year later, you get $150,000. After paying the loan back with interest ($99,000), you have $51,000. You started out with $10,000 and earned $41,000 from this deal. Your rate of return on your equity was 410%. Much greater than 50%.
Obviously, this example is very simplified. It doesn't take into account things like closing costs, inflation, taxes, insurance, and maintenance. You also will never have a guarantee on selling price. However the example illustrates the concept of leverage.
Leverage can maximize your returns, however it can be very risky. If that house didn't sell or if it was destroyed by a natural disaster that insurance companies would not cover, you are still on hook for that $90,000. And if you don't have that money, things won't be easy for you.
Before going to college, you have to make sure you will major in something that has a good starting salary and good job prospects. Go become a doctor, an engineer, or almost anything related to STEM. Remember though, if you become a doctor, this will be really risky. Since tuition can run you past $100,000 you have to follow through and become a doctor in order to make that lucrative income.
If you quite after a few years, life won't be easy paying off those expensive loans which cannot be discharged through bankruptcy.
Majoring in a different STEM field can give you a good $50,000 to $60,000 income with the requirement of just the undergrad degree so it is much safer. You just might not make that six figure income.
However, the academic system offers several majors that do not have good job prospects. Most liberal arts and humanities degrees don't provide high paying jobs outside of academia. The real problem here is that tuition for your degree is dependent on the college you go to. This means that at State University, a degree in art history will cost the same as a degree in actuarial science. One degree will lead to a path to easily pay off student loans and build wealth. The other degree will lead to a path much harder to pay off student loans and build wealth.
If you decide not to borrow any money in order to pay for college, you are living your life on equity. You don't buy anything that you cannot afford. In choosing this strategy, you have less potential for maximizing your gains however you also limit your potential for catastrophes.
Living your life on equity has another term. You live within your means. Not having the option to borrow money, you have to make sure not to waste money on things that don't provide value to you. It also makes you think really hard about the things that you do purchase. Say at the age of 18, you decide to work whatever job you could find and were able to save up $10,000 a year for 4 years.
While your peers are graduating, you will have the option to decide if you want to pursue higher education and what you want to pursue. You build a real connection to the wealth you accumulated. You know what it takes to earn money. At that point, you could decide if you want to spend your equity on something like sociology or engineering. If you major in something worthless, then at the end of four years you are broke but not in debt. If you major in STEM, then you can start earning a good salary and not have to worry about paying off debt.
Deciding to use debt or equity will be your choice. Personally, I am very risk adverse and will only live on equity. However, if you do decide to use leverage, make sure to do a lot of research.
Make sure your investment can reasonably provide a good return after you pay off your debts. And make sure you can sustain yourself until you make that return.
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