Going to graduate school in any humanities field has significant financial costs – the job market is uncertain (to put it mildly), and the pay is relatively modest even if you land a permanent academic position. These facts are well known, but the actual monetary cost of the time spent in graduate school is often not fully appreciated. Drawing in part on discussion from my recent appearance on the Personal Finance for PhDs Podcast, I aim to remedy that problem in this post.
I do not view this argument as providing a decisive reason not to pursue graduate studies in philosophy or the humanities: most who are drawn to pursue such a path are motivated by non-monetary reasons. Even so, I think we do ourselves – and the students we mentor – a disservice if we do not seriously try to quantify the opportunity costs of pursuing a graduate degree in philosophy.
When I was still considering whether to apply for graduate school, I was asked to consider an alternate version of myself that worked an entry level job while I was in graduate school. So, for those 6 or 7 years, that hypothetical person would earn $50,000 – $60,000 annually, and as a graduate student, I might only make $20,000 per year during that time. So even if I was only in graduate school for 6 years and would have only made $50,000 per year in my alternative career during that time. That’s still a loss of pre-tax income of at least $180,000 – a sizable sum of money.
Later in life, some folks pointed out to me that in that alternative career, I would also reach my highest career earnings faster because the process of securing stable employment and earning promotions does not begin for academics until after graduate school concludes. The version of me that didn’t go to graduate school gets a 6 or 7 year head start on that endeavor. Combining that with the relatively modest salaries that academics tend to have, the potential loss in career earnings is much higher.
But neither of the two pictures presented above captures the real, long-term financial cost. To illustrate this, we need to imagine a slightly different scenario. Imagine that our hypothetical could-have-been philosophy graduate student takes a non-academic job with a starting salary of $50,000 at the age of 22. Each year for the next 6 years, he puts $5000 into a Roth IRA and invests the money in an index fund. Roth IRAs are retirement accounts that allow you to pay taxes on the initial contribution so that you can withdraw the money tax free later in life, and index funds are investment funds that give you a share of the stock in the companies associated with a particular index (such as the Dow Jones or the S&P 500). This form of investing is perhaps the most reliable way to build wealth over a long time horizon.
Over 6 years and assuming even just modest investment returns on the $5000 invested each year, this person will have $35,000 ($30,000 in contributions and $5000 in investment returns) in their account at age 28. Now let’s imagine, for the purposes of illustration, that this money is just left alone in that index fund – no further contributions are made. At a 7% rate of annual return – a rate significantly lower than the average annualized returns for some index funds since their inception – this money will double about every 10 years. So, at age 38, it will be $70,000. At age 48, it will have doubled again and be $140,000. Another doubling cycle pushes that sum to $280,000 at age 58, and one more would bring it to $560,000 at age 68.
This is the power of compound interest. It is an exponential growth function, and the variable that helps your long term investment gains the most is time. The numbers are even more staggering if we imagine a rate of return closer to what is normal in the history of the stock market – 10%. At that rate of return, it takes slightly longer than 7 years for a sum of money to double, so after 5 doubling cycles, that $35,000 would become $1.12 million at the age of 63.
Most people don’t go to graduate school in philosophy for financial reasons, but the financial opportunity costs are much greater than they may realize. Because the amount of time money is invested influences its value so powerfully, being unable to invest much money during your 20s is a heavy price to pay to pursue graduate studies. For those who take on debt to pursue their degrees, the costs may be even higher: paying off that debt may cause even greater delay in their ability to start investing and saving for their eventual retirement.
To reiterate, I do not think this consideration is a decisive reason for everyone to abandon the pursuit of graduate studies in the humanities. But imagine how different the deliberation is if you ask, “Would I rather go to graduate school in philosophy or have an additional $500,000 (or even $1 million) when I reach retirement age?”
Does this mean I regret going to graduate school in philosophy? No. But thinking about it this way would have changed some of my financial behaviors. The biggest thing I would have done differently is that I would have opened a Roth IRA in my mid-20s and started making small monthly contributions to it, and that’s something I would absolutely recommend any graduate student in their 20s do if they can save a little money to get that process started. Even if it is something seemingly trivial like $20 per month, the process of saving and investing is worth starting as soon as possible. Whatever you invest in graduate school could be worth anywhere from 16 to 64 times its original value by the time you are approaching retirement.
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