Obviously this is a tricky question with many factors to consider but I thought it would be interesting to look at how university, particularly the modern UK system affects our financial prospects in the long run.
Let say our candidate Jim takes a full time job on minimum wage after leaving school at 18. This equates to £15,000 a year and £13,921 take home in the UK. We assume Jim never gets above minimum wage and this grows with inflation until retiring at the state pension age of 67 (which might be higher by the time Jim gets there.) At this point he receives the state pension which is currently £8500 but has also grown with inflation to £23000.
Jim has a will of steel and decides to live on £10,000 a year. No if's or buts, except he does allow this to also go up with inflation as well to maintain a constant lifestyle.
So how does Jim do?? Well it all depends on the interest rate he can get, Financial Trajectory shows that if Jim sticks to his plan and finds himself a 4% average return on his investments he will be financially independent by 55. If he can achieve 8% (the average historic return of the stock market) then he can retire at 48!
So the future looks pretty good for Jim right? Well sort of, but only if he sticks to the plan. It is much more likely that Jim will get rightfully tired of the frugal living or give up halfway, before compound interest has had a chance to help out, or not be risk tolerant enough to get the 8% return that the stock market might offer him. If Jim hides the money under his bed then we end up with the situation below.
This scenario looks at the outcomes for Harriet who has decided to go to university and get a degree. Now there are many degrees out there and they are not all equal in financial outcome. In this scenario we have taken the average UK graduate wage of £23,000, which equates to a take home pay of £19,178 and (for fairness) assumed it to increases with inflation up to a retirement age of 67. We have also assumed Harriet is very strong willed and manages to live on £10,000 a year. Harriet takes a three year degree course and doesn't work whilst busy studying.
So how does Harriet get on?? Once again it depends on the interest rate. If she can achieve 8% (the average historic return of the stock market) then she can retire at 46... note this is only two years ahead of Jim.
So what if Harriet doesn't study finance at University and no one tells her about the importance of getting that extra couple of percentage points of interest. If Harriet hides all her money under her bed then she still has a fair amount spare but she's done no where near as well as Jim if he consistently achieves a 4% interest rate.
Obviously these financial trajectories are highly simplified and fairly hypothetical, but the main take away seems to be that the interest rate on your productive assets is perhaps a stronger indicator of your financial success in the long run than your earning power is. We certainly wouldn't recommend living quite as strictly as Jim and Harriet have here and it's important to do the things you really want to do when you're young. But it's worth bearing in mind that we need to keep some daylight between our income and outgoings if we can as the long term benefits are huge.
If you're interested in playing with your own possible trajectories head on over to the home page.