Investing in experiences: the calculus of gap years

3 August 2020
3 Aug 2020

Paraphrasing from my tweet from last November:

It seems to me like investing [money] with compounding interest rather than spending it on travel / learning isn’t smart if the experience you’re investing in compounds in value over lifetime faster than market interest rate. I bet it’s more than just travel or education where this is the case.

A university education costs a fortune in the United States. But most people who have the chance to invest in it do without a hesitation, because the experiences and network and know-how gained in those first four years of adult life have lasting, compounding impact over our lifetimes. One way to look at this is as dividend or return on investment. The market rate of return on financial investments in a developed, growing economy like the United States is somewhere between 2% - 6% in the long run. Investing in an undergraduate education has a much greater rate of return over life – investing in that money will quickly return its principal in terms of income, and return its multiples in connections, career progress, prestige, social mobility, and many other less tangible ways. This means that an undergraduate education is worth investing in; its rate of return is greater than the market rate of return on investment.

I think investing in travel works the same way. Traveling (especially abroad) has gotten cheaper, but it’s still a luxury. But investing in travel makes sense, if one has enough disposable income, because traveling, like reading, colors our lenses and influences how we see the world and the people in it. These changes and experiences stay with us and lead to lasting, if incremental, changes that stay with us long after we return home. Excluding travel that’s merely vacations or holiday trips, which are luxury indulgences, I think traveling to see the world and find ourselves in new contexts and among new people has a return on investment higher than the market rate.

Risk-taking

My last example, and the example that initially made me think of this mental model of risk-taking, is taking an academic leave. In the decision to take a gap year or semester – or even a longer leave from university – you’re longer choosing between a financial investment and an experiential one. You’re choosing between two experiences. But even so, I think we can still apply our return-over-time framework.

Between spending a semester or year in school now then traveling or working later, or switching the order and travel-working now and graduating later, which has a higher cumulative compounded interest rate over time? I think this comes down to a simple question, of comparing two measures:

  1. The amount by which a year’s worth of work and travel improves your later investment in school
  2. The amount by which a year’s worth of school improves your later investment in work or travel

For the vast majority of people, I think 1 > 2. For people who have been in school for 12-13 years, a year of working and traveling independently will color and improve your later years in school far more than finishing school earlier will improve later work or travel.

When I’ve taken breaks from school, this was my calculus. For my first four semesters out of school, the math seems to check out.


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