What Is The Value of A Skills Upgrade?

A version of this post ran in The Rivard Report.

What is the value of an education?

codeupLike many, I see education from a combination of angles. Unquestionably, education makes us broader thinkers and more sparkling conversationalists. Education makes us more actualized humans. But as a finance guy, a small evil part of me always applies the $64,000 Wall Street question to every activity – from brushing my teeth to tossing a ball with a (in my case, non-existent) dog. 1

It’s the bottom-line question: “How is this making me money, like, right now?” 2
One of the problems of education, generally, is that we have a hard time proving or quantifying its value. What is the value of holding your shoulders back and head high when you walk into a job interview, knowing you’re the best they’re going to interview that week? Or the value of the feeling, when given a work assignment, of “Boom! I got this!”

Philosophically, how can you put a value on just knowing more stuff?

Codeup
The weird thing about my friend Michael Girdley – who started the computer coding school Codeup – is that he’s ambitious enough to say that the education community tradition of waving a hand at hard-to-measure fuzzy feelings is not good enough. Just because the education community finds it difficult to measure value doesn’t mean business people shouldn’t try to.

delorean_codeup
My friend also weirdly decided to buy a DeLorean as his signature marketing prop.

In less than two years he’s established a pattern of tracking the data on the most important finance question of education.
By that, I mean the bottom-line question: How is this making me money, like, right now?

Girdley shared with me the pre-Codeup and post-Codeup earnings of his students, along with some useful stats on entry-level and mid-career web developer salaries. Using a couple of his statistics I want to take a stab at figuring out the total value, right now, of a student’s investment in Codeup.

Statistic #1: The average Codeup graduate saw her annual salary jump $13,035 in the year after graduation from the program.
What does that really mean? What can you do with that number if you plan, say, 30 working years at this higher salary?
It would be great to say that a Codeup education is worth 30 times $13,035, or $391,050. However, money in the future is not as valuable to me as money today, so that calculation is not quite accurate.

I mean, you could say it, but finance guys will give you that speech about the time value of money that you don’t want to hear again.

With a salary jumped up by just $13,035, we can figure out what that amount is worth today by using a discounted cashflow formula. So let’s be sophisticated and apply our discounted cashflow formula to 30 years’ earnings, elevated by $13,035.
I have to assume a ‘discount rate’ which is some combination of taking into account inflation and future investment risks. I’m going to assume a 5% discount rate. 3

Using my 5% discount rate, I estimate the value today of my elevated salary to be $200,379.90. That’s the sum of 30 years’ worth of $13,035, but ‘discounted,’ or translated back, into today’s dollars.

That discounting allows us to more accurately compare the $16,000 tuition for Codeup with the total financial value, today, of that education.

money_booksBy that measure, you pay Codeup $16K today for something worth on average, $200K, today. 4  Another way of saying that is that you are buying something today worth 12.5X that amount. Stated that way, Codeup sounds like pretty good deal.

Statistic #2 – The average web developer, nationally, earns $91,750. That’s $61,525 more than the average pre-Codeup salary of surveyed Codeup students

So that’s interesting.

We can imagine a number of reasons for that difference that don’t have to do with the value of Codeup. Maybe the average web developer is older and more experienced on the job than the average pre-Codeup student. Maybe national salaries are higher than San Antonio salaries, on average. I mean, I’m sure they are.

But still. If one of your goals is to swim in a higher-paid talent pool, it might pay to learn the butterfly stroke.

How much would 15 peak years of earning $61,525 more than you earn now be worth, like, right now?

Again, I don’t think it’s as high as 15 times $61,525, or $922,875, because of the whole discounted cashflow thing about money in the future not being worth as much as money today. Also, to be fair, you probably won’t earn the average national salary until you had a few years to ramp up your career.

But what about discounting 15 years of an additional $61,525 per year, at a 5% rate, starting 5 years from now, using the exact same formula that we used before? 5

Discounting those 15 years of earning the average industry salary gives me a value, today, of $500,366.44. Which, to state the obvious, is 31X the price of tuition. With those kind of numbers I start to feel like that salesguy from Entourage: “What if I was to tell you that you’d pay $16,000 tuition to Codeup for something worth $500K today. Is that something you might be interested in?”


Look, seriously, there’s a lot of assumptions embedded in my statement that you could pay $16K in tuition today for future salary jumps worth $500K, today. Most important of these is the assumption that by training as a programmer you can earn the national average salary for programming jobs. And we all know there’s no guarantee that happens.

But – and this is a big but 6 – it’s not a crazy assumption.

Because, really, it’s an assumption that the average happens. It’s an assumption that you could be paid what other people in your industry are generally paid. It’s an assumption that markets are somewhat efficient. It’s an assumption that if you have valuable skills you can find employers and work situations just like other people.

All of which makes me pretty confident that the financial return on a skills upgrade like Codeup can be somewhere between 12 and 31 times the upfront tuition cost.

Back to the value of an education

As I said before, education leads to more sparkling conversations as well as to living a more fully actualized life. Of that, I have no doubt. But I appreciate my friend Girdley’s business-like approach to showing that the value of his program can be somewhere between a 12 and 31 times multiple of your investment.

Just thinking like a finance guy, is that something you might be interested in?

Shut_up_beevis

 

 

 

 

 

 

 

Post read (1403) times.

  1.  Notice I haven’t gotten a dog because – I ask you – where’s the profit in that?
  2.  I’m still working on monetizing my teeth-brushing. Actually, a friend of mine recently posted that in today’s ‘sharing economy’ of AirBnB and Uber he wants to make his toothbrush available, when he’s not using it. Like, $5 for every two uses, for example. He’s quickly on his way to a Billion dollar valuation, Unicorn-style.
  3. How did I come up with 5%? Sorta kinda I used art in addition to science. You could call inflation 2%, so that’s a baseline for discounting the value of money in the future. Then there’s the future risk of actually earning the elevated salary, which after all is a big assumption, and also an average, and as we always say in finance ‘results may vary, past performance is no predictor of future results, etc,’ so there’s a few % points added to the inflation rate to account for that kind of risk. If you don’t like my 5% assumption, make your own, I can’t promise you I’m “right” about a 5% discount rate. You might be just as right with a different assumption. Also, remember the faux philosopher and native San Antonian Jack Handey is a good guide to these disagreements: “Instead of having ‘answers’ on a math test, they should just call them ‘impressions,’ and if you got a different ‘impression,’ so what, can’t we all be brothers?”
  4.  In addition to the $16K tuition of course you have to do a lot of work to not only learn to code, but also, you know, earn a salary in the future. So there’s still that whole ‘work’ problem. But if you have to work, it’s nice for the finance part to at least make sense, no?
  5.  Why did I choose 15 years and not 30 this time? Mostly because I don’t think it’s fair to assume a Codeup graduate’s salary jumps immediately to the average national salary. You work up to that. For that same reason, I calculated the value with a 5 year delay, to account for a slow ramp up. Again, Jack Handey comes to mind: “If you ever teach a yodeling class, probably the hardest thing is to keep the students from just trying to yodel right off. You see, we build to that.”
  6.  Hhhnn-huh. Heh. (Shut up, Beevis.)

3 Replies to “What Is The Value of A Skills Upgrade?”

  1. I’ll take a stab at the toothbrushing thing: The replacement value of a tooth is upwards of $2000 each (the toothfairy might not agree in our household but Kaiser Dental would). So, toothbrushing would be like normal maintenance costs to avoid tooth replacement. With 24 teeth, that’s $50,000 present value of teeth. So, lets assume that if you don’t brush teeth all your teeth will fall out in 10 years…which if I read this blog enough I could probably calculate on my own…instead I found a web applet that I think says it would cost 81,000 in 10 years…not counting the aesthetic value of being toothless…So…I suppose dentists do offer good financial advice. The better question is why do dentists tell you to brush your teeth when its not in their own best interest? Whoa, could it be true that dentists in general are both good at financial advice and altruistic? I am going to go floss.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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