What’s the ROI from an MBA?

What's the ROI on getting an MBA?

 

Executive Summary




The All Important MBA

 

As I currently grind away in the corporate finance world, the natural next step for me would be applying to business school and earning an MBA. Its something I’ve been thinking about and admiring since I was an undergrad. Now that I’m 27, I’m at a prime age to begin applying to business schools, which some of my colleagues are already doing. But over the past few years my thoughts on business school, particularly the cost versus the potential reward, doesn’t seem that great. So is an MBA really worth the 2 year dedication, foregone salary (full-time program) and over $100k in student debt?

 

The inspiration for this article came from a friend of mine who recently earned his MBA from a top 25 MBA program, as ranked by U.S. News. My friend accepted a corporate finance job at a Fortune 500 and was offered $90K base salary plus  ~$10K bonus. I thought about the opportunity cost of this particular outcome and realized I could make just about the same amount of income right now!

 

 

Opportunities Abound

 

This is a great time to enter the job market. With the labor force tightening and unemployment at all time lows, salaries are set to rise.

 

BLS data provided by TradingEconomics.com
BLS unemployment data, chart provided by tradingeconomics.com

 

As you can see in the chart above, the unemployment rate has been steadily recovering from the dark ages of 2008-2009. As the labor market tightens, employers have to begin fighting for talent. This is a good thing if you’re an employee that has developed some skills that these employers desperately need. Wage growth has averaged about 2% a year since the financial crisis, but recently has been ticking upward to around the 2.5% range. In the chart below, you can see that the average growth in wages is inversely related to the unemployment rate above.

 

 

 

 

I recently started sending out resumes to see what type of opportunities are on the market. After my first week on the job hunt, I’m currently interviewing for a pricing analyst position at a Fortune 500 company with base pay at $88K and a bonus that ranges from 10%-40%. A senior analyst position at the same company pays $95K-$105K base. The great news is that both of these jobs don’t require an MBA, and the salary potential is similar to what my friend was offered.

 

Over the next few years I believe this market will be a prime opportunity for job hoppers. I consider myself a prototypical Millenial. I’ve been job hopping since graduating from college back in 2012 and have been steadily moving up the salary ladder. The job market wasn’t exactly hot back then for finance guys, and I believe its only going to get better now that I have some experience under my belt.


 

MBAs Still Offer Value

 

Everything in finance is relative and I realize my analysis so far is pretty short-term minded. My friend’s situation was just one example, and he took a job in corporate finance, which typically doesn’t yield the big bucks unless you’re a CFO. An article by the Financial Times revealed that 3 years after completing an MBA, the average salary for a graduate was $142,000 – not too shabby.

 

MBA salary 3 years after graduation versus tuition and pre-MBA salary
MBA salary 3 years after graduation versus tuition and pre-MBA salary

 

In the same article, it is estimated that the opportunity cost is ~$300,000 when including tuition, lost wages, and living expenses for a 2 year full-time MBA program. That’s a pretty penny, however, making $142K a year should help dig you out of that hole pretty quick. There are also intangible benefits of obtaining an MBA. In particular, the network you build is arguably more valuable over the long-term than the actual job you obtain immediately after graduation. But since money is pretty damn important, check out this list by of MBA programs that offer the highest average salaries after graduation, provided by CNBC.

 

Best business schools by salary
Best business schools by salary

 

MBA ROI Breakdown

 

Below is my attempt to quantify the ROI for obtaining an MBA versus just working and investing my savings. First up is my analysis of an MBA.

 

MBA cost breakdown and post-MBA salary, which is used to calculate the ROI from obtaining an MBA

 

If I was to pursue an MBA, 5 years from now the ROI on that decision would yield a compounded return of 19%, which is pretty damn good. Let’s take a closer look at the analysis.

 

The MBA costs are pretty straight forward. I added all the various expenses that you would need to cover as an MBA student, including tuition each year. The tuition is based off of current estimated MBA costs assuming I attend Columbia University. I picked a top rated MBA program like Columbia, since I believe the top schools yield the best opportunities.

 

Assuming I got a job immediately after graduating, year 3 is when you start generating a return. I assume that you make the average MBA salary of $142,000 (didn’t factor in salary raises) and calculated all the various paycheck deductions including 401k contributions. I used the ADP paycheck calculator to get the actual bi-weekly paycheck breakdown and then annualized that number. Bi-weekly salary details below, cost assumes California residency.

 

Bi Weekly Paycheck calculator

 

I also make the assumption that my lifestyle remains the same and that I can save and invest 50% of my income. Of that 50%, or $44k a year, I now have to factor in student loans that I used to pay for the MBA. I utilized the MBA Student Loan Calculator at CommonBond to determine the loan costs, which I also had to annualize. It would be a 10 year loan term at a 6.00% rate, which equates to a monthly payment of $2,816 a month (that’s basically a mortgage payment!). See details below.

 

 

Last but not least is the actual return on investment, which includes pre-tax 401k contributions and actual cash savings every year. I assume that I can invest proceeds into stocks that can grow at a 6.00% rate every year. By year five I would be generating a 19% compounded return on an MBA.

 

Compare and Contrast

 

Making the decision between obtaining an MBA versus not obtaining one ultimately comes down to what you are aiming to achieve. If you plan on making the leap for an MBA, the payoff is better if you earn it while you’re relatively young (mid-late twenties). The payoff time period is longer assuming you work until age 65.

 

Over the past few years my personal goals have changed. I would rather continue saving and investing with the goal of retiring in my mid-late thirties than have to work until I’m an old wrinkly looking 65 year-old.

 

That'll be me someday. An old lady meme.
That’ll be me someday

 

Assuming I can nail that $88K analyst job and continue to invest 50% of my income, I believe I can continue striving for that goal of retiring early. Here’s the ROI breakdown for continuing to work without an MBA for comparison purposes, similar assumptions used.

 

ROI of staying in my current job and investing my savings

 

The only benefit here is that my investment portfolio would be 72% larger in year 5 compared to obtaining an MBA. However, the further out we look an MBA would close in on that gap, especially after year 10 when there are no more student loans to pay.

 

 

Although I’m a big believer in education and always trying to improve my own knowledge, an MBA wouldn’t financially make sense unless I work long enough to make it worthwhile. I also hope that I’ll have better returns than the 6% used in this analysis and also capture the effects of compounding in my current portfolio (read Miracles of Compound Interest) to achieve financial independence sooner rather than later. However, I do believe an MBA provides a good investment return over time.

 

I hope this analysis can help some of you out there in the world looking to earn an MBA one day. Let me know what you think, is an MBA right for you?

 

 

 

2 Comments

  • It seems like you are chugging along quite well so I’m not sure it would be a good investment for you. I am in a one-year program abroad, so less money and less opportunity cost and it worked out extremely well for me. It is a tough decision, but an acceptable way to catch your breath.

    • Hi Ten Bucks a Week,

      I agree, for my situation it seems more profitable to keep working for now. I hope you’re enjoying your MBA program, its definitely a nice break from the working-life and my friends have nothing but good things to say about their MBA experiences (minus the debt, of course). All the best and thanks for reading!

      -Dan

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