Is an MBA Degree Worth It in your late 20s?

As I breakdown the portfolio increase between capital contribution vs. FMV increase, the increase is predominantly attributed to capital contribution from my chequing account. This confirm that something we all already know, we have to earn our way to the first couple of hundreds of thousands. Sure, there are people who get lucky on a few option bets (you can find them in the wallstreetbets subreddit), I truly don’t believe that their success can be replicated with a systematic approach and therefore should be attributed to luck.

As I think about how to maximize my career earning potential, a question that has often come up is: is an MBA degree worth it? And the answer is always: it depends.

From what I’ve seem, if you are in the traditional ibanking/PE track, then a MBA is definitely worth it. Say you graduate at 22, spend 2/3 years as an analyst/associate in an investment bank. Go get a MBA at 24/25 for 2 years. Then start working as a private equity associate after graduation at 27/28 making bank. I would say that in this case, a MBA is always like a rite of passage.

However, what if you are not in the traditional track above, is an MBA degree really worth it when you are in your late 20s? First, let us examine the opportunity costs. What better way to do it than with a discounted cash flow. For the sake of simplicity and accepting that the fact that the future is uncertain, we’ll only project out to end of 30s. Basic assumptions that we’ll make: (I think the below assumptions are very realistic)

  1. It’ll be a 2 year program, and tuition net of summer internship pay will be $60,000 per year.
  2. We are say 27 making $85,000 per year in our current job. Our annual raises will be 5% every year.
  3. With a MBA degree, we’ll get a 30% pay-bump compared to our current salary and our annual raises will be 7%.
  4. Flat personal tax rate of 30%

The results are actually really close. Below is a graphical representation. Assuming the assumptions above hold, then the MBA route is projected to pay off in one’s late 30s. (The blue line in the group represents # of years after 27.)

The biggest risk with the MBA route is that what happens if the MBA degree doesn’t translate into higher pay. Assume:

  • The annual tuition costs is $80,000, and that interest on student loan is about 4%.
  • Investment return is about 5% per year.
  • The salary increase at 5% in both cases (we’ll still assume MBA result in a 30% increase in pay at the start)

What happens then?

Well, in that case, the base case is actually better in that case. Now, if we change the investment return from 5% to 10% per return and factor in the living expenses (say $20K now and 3% inflation) that will impact on your ability to repay your student debt and contribute to your portfolio, the difference is even more stark. Per the projections below, by the time you’re 31, you would have no net worth (due to student debt).

There you have it guys. In my view, since my goal is financial independence and retire early (FIRE), I don’t think a MBA is for me. I think it’d be incredibly stressful to go to MBA without a clear idea of the type of job that’s available to you post-grad. In addition, unless one uses MBA as a springboard to get into finance after, in any other industry, I’m not convinced that a MBA will result in a material higher salary than someone with two additional work experience in the same industry (sales, marketing, accounting/tax, tech).

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