Investing in Banned Books

Here’s some fun math for you…

Back in 2002, the U.S. Census Bureau released a study that compared the expected lifetime earnings of workers in the U.S. based on education level. The results were pretty much what you’d expect: more education equals more income (see the chart on the right). A high school dropout could expect to earn about $1 million over a typical forty-year career, while finishing a bachelor’s degree bumped that number up to roughly $2.1 million. You can see the results in the chart on the right.

If you look at the bottom two entries on that chart, you’ll see that, over the course of a career, a person with a high school diploma will earn about $200,000 more than a person who fails to graduate ($1.2 million vs. $1 million). In other words, an investment in a high school diploma today will be worth a total of $200,000 forty years from now.

Say we wanted to know how much money we’d need to invest in, oh, the S&P 500 to get those same results: a return on investment of $200,000 in 40 years. Well, it turns out that it’s pretty easy to calculate.  The equation looks like this:

Where:

• PV is the number we’re trying to figure out, the “present value” of our $200k diploma. In other words, how much do we need to invest today to end up with $200,000 forty years from now?
• FV is the “future value” of our investment. We already know that’s $200,000.
• n is the number of years we’ve had the investment (forty).
• And i is the interest rate…

Since we’re talking about the stock market here, we have to make some assumptions when it comes to figuring out what value to use for i in that equation. You probably know that stock prices can fluctuate wildly from year to year, so there isn’t a single guaranteed interest rate to plug into the formula. We can, however, use something called the “compound annual growth rate” (CAGR, think of it as the average annual rate of growth over a period of time). It’s not exactly the same thing as an interest rate, but it’s close enough for this exercise. A little bit of Googlin’ tells us that the CAGR for the S&P 500 was 8.92% between 1971 and 2010.

Once we plug all the numbers into that equation, it just takes a little arithmetic to find…

…an investment of $6,557.30 in the S&P 500  in 1971 is worth $200,000 at the end of 2010.

For perspective, The Uprise Books Project could ship over 260 books to underprivileged teens for that same $6557.30. If just ONE of those books made enough of a difference in a kid’s life to keep him in school long enough to earn a high school diploma, we’ll have beaten the market.

Pretty amazing when you think about it… We only need to make an impact with 0.382% of the books we distribute to earn the same $200,000 return on investment as someone putting their money into the S&P 500.