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Learn how you can grow your finances with an investment – in yourself.
Last week, I wrote a review about the site Lynda.com and answered the question, is it worth it?
After using it for a bit more, I realize I was missing a bigger picture. I wasn't looking at whether I was spending my money wisely, I was think about it as an investment for the near future.
I talk a lot of about finances and goals, but I haven't addressed in detail about spending money now (oh no!) to get a bigger return later (oh yes!).
How You Can Be a Great Investment
Investing in your skill set can be a hard decision for some. People don't know if they're wasting money or if they're making a sound choice until the see the results.
Is there a way for someone to figure out what to do with their money (and time)? I've learned from experience that it is possible to improve your decision making on it and
I'll share how we evaluate opportunities for our family's finances and our small business. I'm going to go through the process with two real-life examples.
The first example I'll share is taking online courses and subscribing to Lynda.com.
The second is sending an extra principle payment on our mortgage.
As always, I'd love to hear your feedback and your process for making the evaluation.
What's Your Motivation?
The first thing I look at is my motivation for spending the extra money. After all, you can have the right idea, but your motivation can throw you off track.
You can spend money on home office equipment to give you a slight leg up or you can use that money to improve a skill set and keep the used stuff for now.
I'd like to offer client more related services that would could help immensely and improve my income.
With our mortgage we'd like to save some big money, without spending a ton up front now.
We'd also like to gain some peace of mind with our monthly expenses and cut years off our mortgage.
What's the Cost of Investing in Yourself?
After you've decided that this might be something you'd be interested in, you have to compare costs between your main plan and some alternatives.
While costs include more than money, I'll highlight the finances here. When my friend told me about Lynda.com I decided to investigate how much it would cost me for the monthly subscription and how much I would have to spend at local colleges to get the same lessons.
Paying down the mortgage was a bit trickier (I'll explain below), but I was still able to see what was the best option for us to meet our family's financial goals by looking at the alternatives.
Here's what the local colleges offer (based on recent course catalog)that's comparable to the lessons on the site:
- Community College (Continuing Education)
- Material: XHTML, CSS, Dreamweaver, Flash
- Time: 50.5 hours
- Cost: $570
- University (Webmaster Certificate Program)
- Time: 96 hours
- Cost: $3,700
Here is a comparable program with Lynda.com:
- Material Covered
- Time: 38 hours
- Cost: $75 (based on $25/month with an average of 4 hours/week of lessons)
The bonus with Lynda is that if you're willing to put more hours into it, you should be able to cover material quicker which will lower monthly costs.
Paying Extra on Our Mortgage Principle
I mentioned before that keeping a mortgage just for the interest deduction is crazy. You’re just sending over more money to your mortgage company instead of paying a fraction of the amount in taxes.
The numbers don’t add up.
By paying our mortgage earlier than the 30 years scheduled, we’re going to save tens of thousands of dollars in interest. Following the mortgage amoritization schedule, most of the money goes towards paying interest in the beginning of the loan.
As the mortgages draw to a close, the payments are increasingly going towards paying the the principle owed.
Some people may think I wold compare paying down our mortgage versus investing in the stock market, but that wasn't our plan.
We really had no plan to invest more than we are doing now until we get some of our other financial goals in place.
If you remember, there are some medium and long term savings goals that we'd like to reach as a couple:
- Car Replacement Fund: My husband and I have been trying to avoid car loans for awhile. We paid off the car loan on the Jetta and haven’t looked back. we're hoping to get a new (to us) car in 2012.
- Freedom Fund: We'd love to have enough money saved up for both of us to have the option to work from home.
With the car replacement fund, when we do purchase the car, we'll be losing money as soon as we purchase it.
Cars depreciate and we intend on driving the next car until we have to replace it.
Our freedom fund is harder to measure as it's kind of a career emergency fund. We wouldn't want to access it until we needed it.
Paying Down Mortgage Numbers
Here’s where we stand today with the mortgage:
- Total Loan Amount: $113,037.36
- Interest Rate: 5.00%
- Loan Term: 30 years, fixed rate (we've shortened it by 4 years recently with a big payment)
If we continue to pay an additional $150/month, we’re looking at paying off the 30 year mortgage off in 18 years and 2 months!
That’s for a total savings of $60,768.76 in interest! The bonus with our mortgage is when we sell it, we'll get some money back.
Determining Your Return on Investment
You have to consider your return on investment (ROI) when looking at your choice.
If you want to calculate a numerical result for yourself, here's the formula for determining your return on investment:
ROI = [(Payback – Investment)/Investment)]*100
After weighing everything, we decided to pay down the mortgage a bit faster and I've decided to take some courses on Lynda.com to add and improve my skill set for current and future clients. I found this to be a facinating topic, so I'll definitely be updated our progress and ROI in future posts.
Thoughts on Spending vs Investing
I'd love to hear your thoughts on the process. Have you ever had to weigh the pros and cons of spending money in hopes of getting more?
How do you calculate the risk? How has it turned out for you? If you have any tips, please share them in the comments.