BTW, here’s the ROI on my MBA

When I first told my mom I wanted to go to grad school, she got a pained expression on her face.

“But you’re going to be in so much debt!”

What could I say? It was true. From a purely short-term perspective, getting an MBA looked really scary. I was losing two years of income while accumulating more debt than most people ever carry aside from their mortgage. There were a lot of reasons not to go back to school, and I couldn’t be sure that the benefits would outweigh the costs.

The question of ROI

Unless scholarships or generous family members take cost out of the equation altogether, most aspiring MBAs have to grapple with the question of ROI, or return on investment. Of course there are other reasons people get MBAs besides the expectation of making more money (to advance their careers, switch industries, or sharpen their business skills, to name a few). But at the end of the day, you have to be able to pay back any loans you take out to pay for that fancy education.

For me, the decision was relatively easy. I was bored out of my mind at my job. I felt trapped in an industry with low salaries and few advancement opportunities. Plus, I was making so little in media and entertainment that I couldn’t imagine my post-MBA salary could be any lower. Yes, the prospect of getting into debt was scary as heck, but I suspected that it would pay off in the end.

So who was right, me or my mom?

Was getting an MBA the right decision for me? From a career advancement perspective, the answer is a definite YES. I’m in a prestige role at a top technology company. I work with awesome, smart people. I’m stretching myself and learning new things every day. If I ever needed to leave the company, I feel like I could find another job with relative ease. My MBA opened up opportunities for me that I never could have imagined.

From a financial perspective, the answer is less straightforward. On one hand, my yearly salary got a 225% bump (crazy, right??). On the other hand, my income taxes increased by 285%. On top of that, the nice folks at the student loan servicing company take $2,000 out of my bank account every month. That debt will follow me for the next 10 years like a shadow hanging over all of my big life decisions (getting married, having kids, buying property, etc.). 

Looking at these numbers, it’s easy to start feeling a little like Debby Downer.

debbie_downer

I wanted to reassure myself that I’d made the right decision.

Even if my finances will be tighter over the short term while I pay off my loans, I posited that my investment would at least pay off over the course of my career. So using my shiny new spreadsheet skills, I calculated the NPV of my earning potential with and without the MBA.

For the uninitiated, NPV stands for Net Present Value, which is basically a fancy-sounding way to analyze the profitability of an investment. You take the projected revenues, subtract the projected costs, and discount it all back to present day. I’m listing my assumptions here for the finance nerds among us, but others can feel free to skip down to the big reveal.

  • I calculated earnings over a 35 year period, after which I would retire.
  • Salaries in both scenarios increase by a steady 3% per year, with no major promotions (which would probably only amplify the differences).
  • I deducted federal taxes, state taxes, and social security at 2016 rates.
  • My student loans are paid off at the end of 10 years.
  • I used a discount rate of 3% just to cover inflation. (I could have used a higher rate but, as you’ll see, it doesn’t change the final conclusion.)

The result

The MBA won by a wide margin with an NPV of $2.3 million vs. $850,000. (At a 9% discount rate it was $400,000 with the MBA vs. $187,000 without, so MBA still wins.) Even in the short term, when I’m paying off student loans at a rate of $24,000 a year, I’m still twice as profitable with the degree than without it. Short answer, my MBA was a fantastic decision, both for my professional advancement and my long-term earning potential.

I share this not to brag, but to encourage everyone considering an MBA to do their own cost-benefit analysis. This especially important if you’re leaving a high-earning job where your post-MBA salary lift won’t be quite as dramatic as mine. Of course there are other factors that you should consider, like your career goals, your trajectory without the MBA, and your appetite for risk. But while most people consider the non-quantitative costs and benefits pretty readily, it takes some effort to sit down and crunch the numbers. So in the words of angry Arnold Schwarzenegger: “DO IT! DO IT NOW!”

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2 thoughts on “BTW, here’s the ROI on my MBA

  1. agirlsmba says:

    Wonderful post! 🙂 You mentioned your pre-MBA career was media & entertainment? I’ve recently switched from consulting to media . Although I don’t see myself in this field for a long time, I took up because the profile was extremely challenging. I plan to apply this fall.. Would you mind if I shoot you an email?

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