Analyzing an MBA as an Investment

Other than buying a house, there is likely no other expense in your life as substantial as graduate school.  But have you analyzed the decision like you would any other investment?

Most MBA hopefuls dive headlong into the opportunity without much thought about the financials, since they know the utility and opportunity they will receive generally outweigh the fiscal burden.  Coupled with the ready availability of student loans (some schools even offer their own loans), committing to a six figure graduate business education can be as simple as signing on the line that this dotted. 

The ROI on business school is tricky, mostly because there are so many assumptions that must be made. 

You can’t walk two paths, so you must assume that the b-school path will earn you more money in the long term, that your old path would have been slower up the corporate ladder, and whatever you achieve post MBA would have generally been more difficult or even impossible without the MBA.  These assumptions in many cases are completely valid.  Just take a look at the statistics from the great recession.  When unemployment hit 14%, the comparative rate of unemployment of those with an MBA was 2%.  That’s not a bad insurance policy it would seem. 

But there’s more than just job security at work here. 

Certainly post-MBA earning power is easily demonstrated.  The average salary of someone going into b-school is about $75K, but on the backend, there are usually low to mid six figure offers, not including signing bonuses and stock options in some cases.  Seems like a no-brainer.  The real kicker, however, is the cost.  As we previously detailed in other blogs, the high tuition and lost income during two years of full time business school can be staggering at first blush.  Even considering you can make a prorated six figures during your summer internship, you must give some serious thought to the price tag.   Would two more years of work experience put you in the same position to earn and grow professionally?  Most likely not.

Considering the common assumptions and making numbers round for ease of calculation, let’s create a simple balance sheet for looking at an MBA as an investment. 

Know that looking at an MBA this way is overly simplistic, but it’s a good exercise. First, the costs.  Let’s say the two year tuition, books and fees will come to $150,000 (after all, we’re talking about a top MBA, right?)  Living expenses can vary widely of course, depending on whether you are single or married, have kids, must live in an expensive city like Boston, or an inexpensive one like Durham, North Carolina.  For married couples, having one spouse who can work and earn income is a real advantage, but let’s assume you are single, just to make the analysis as conservative as possible.  Room and board for two years is going to run you at least $36,000 if you are sensible.  So, we’re up to a total outlay over the two years of $186,000.  Factoring in unexpected costs, we can round up to $200,000. 

As for income, you really only have three things:  your internship, your signing bonus and your investments.  Let’s figure your investment income is zero, since you’re basically going to use all your cash to pay for school.  An internship will likely earn you about $25K, and let’s be optimistic and say you will get a $25K signing bonus when you graduate and accept a job.  That knocks $50K off the $200K, leaving you with $150,000 in total net costs.  If you earn $125K after b-school and earned $75K before b-school, it’s only going to take you three years to break even on the net cash outlay (not counting for salary increases, which are common in the first several years post MBA).  Factoring in a 15% annual raise and a $30K annual bonus, along with $2000 per month in living expenses post MBA, at the end of the five year period beginning with b-school, you will be in the black to the tune of $422,062. 

Now let’s look at the same five year window, but under the scenario you forego b-school. 

Assuming a 10% annual salary increase on that $75K, your total income over the five years will be $457,882.  To be fair, we can use the same cost of living figures we used for b-school, of about $1500 per month, which totals $90,000.  Finally, assuming you had $200K to use for business school, you could invest that for these five years at, say, 6%, providing you with $60K in simple interest. That leaves us sitting at year five with a net pile of $427,000. 

Of course not everyone pays cash for b-school, but the difference on the surface between the two scenarios is pretty negligible--less than five grand. 

What does this mean?  If you are comfortable with a five year plan, b-school could be putting you on track for a substantially better career journey well into the future.  The best money you will spend is up front-- on professional guidance to gain admission to your dream school.  

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