Cost and benefit. It’s like yin and yang. Two sides of a coin.
You know I wrote about the real cost of an MBA: https://richard-from-anderson.com/2020/01/22/calculating-the-real-cost-of-an-mba/
So let’s talk about the benefit a bit. See if getting an MBA is worth it.
As usual, let’s use figures from my school UCLA Anderson.
Assumptions:
1. You’re working in LA making 80k/year
2. You’re the average Anderson alumnus (sounds cryptic, but you’ll see what I mean in a sec)
3. Discount rate is offset by salary raise (this is a pretty big assumption – it takes too much thought to come up with something accurate, so I’m passing on that for now)
4. You start your full-time job right after school
5. You work in LA after school
6. Your loan amount is 100k, with a 5% interest rate
Let’s take a look at Anderson’s employment report: http://www.anderson.ucla.edu/Documents/areas/adm/cmc/FTMBA_Class_of_2018_PARKER_CMC_Employment_Report.pdf
All right cool, let’s get to the numbers. Quick stats straight from the report: on average, an Anderson alumnus has a base salary of 122k for the first year out of school along with a 30k bonus. For tax calculation purposes, let’s say you make 61k with the 30k sign-on bonus in your first year, and then 122k with a 10k performance bonus in your second year.
Using this tool: https://smartasset.com/taxes/california-tax-calculator yields 66k take-home pay in the first year and 90k in the second year. Your 80k pre-MBA salary gives you 60k all-in each full year. So after 1.5 years out of Anderson you’ll have made a surplus of 66k+90k-30k-60k=66k.
Let’s not forget the student loan. 5% interest on 100k is about 5k per year. 1.5 year yields approximately 7k in interest payment. So your surplus is 66k-7k=59k.
In perpetuity, let’s say you make 132k per year (net 90k) and pay 4k in interest each year. Your annual surplus is 90k-4k-60k = 26k.
In order to break even with the cost of 232k, you’ll need (232k-59k)/26k + 1.5 = 8 years approximately.
8 years to finally make a financial gain from business school. Sounds like a long time, doesn’t it?
Yeah, I know my calculations have a lot of assumptions built in and are full of holes, but you see the ballpark.
One critical thing you need to know when calculating the financial ROI of business school is the income tax. See, the difference between an 80k gross income and a 130k gross income is 50k. Net, the difference is only 30k. If you thought it’d take 5 years * 50k to come out ahead, the bad news is, it would actually take 8 years * 30k to get there.
They say that death and taxes are the only sure things …
Richard Anderson 