Personal Finance —Ep.15 - 3 Reasons a Harvard MBA Won't Make You Rich

No, I did not go to business school. This is strictly my personal opinion. Before I start making my argument, I would like to clarify that I am NOT arguing an MBA degree has no value. Quite on the contrary, I think the learning and networking from an MBA degree are invaluable.

What I am arguing is that, given its value, it is not worth its cost. If a reputable program only cost $10k a year, I would be the first one to sign up! An analogy to that would be, we all know an iPhone is quite valuable. At the $700 price point, it is fine. But would you buy the same iPhone if it cost $10,000? That's precisely my point. I think an MBA degree has become too costly to be worth it.

Conventional wisdom teaches us an MBA from a reputable institution (let's say Harvard or Dartmouth) is a sure way to get ahead in life. But with the insurmountable debt associated with the degree and the changing world economy, I am not so sure if it is worth it for the following three reasons.

REASON #1: MBA KILLS YOUR ENTREPRENEURIAL SPIRIT

This may be a bit counterintuitive at first, because the product of an MBA program is to teach people how to manage businesses effectively. This is true. However, the vast majority of MBA grads leave the program to manage business for OTHERS, not their own.

If you don't believe me, let's take a close look at Harvard Business School's own statistics, specifically on the class of 2016.

Only 7% of students become THE MAN, while the other 93% work for THE MAN

According to Harvard's own statistics, only 7% from the class of 2016 start their own businesses. Is the class of 2016 an outlier? No! To make sure, I reviewed all the available statistics between 2012 and 2016. The highest class had only 9% of students starting their own businesses, still less than 1 in 10.

**Source: Harvard Business School Data & Statistics (http://www.hbs.edu/recruiting/data)**

$86k in debt forces MBA grads to choose well-paying jobs

According to US News, the average debt for a Harvard MBA graduate is $86,375. Would you risk everything to start your own business if you are $86k in debt? Probably not. In fact, I believe debt is the true reason that de-incentivizes smart Harvard MBAs from becoming entrepreneurs themselves. Here is what I'd say to the 7% who started their own business - you are truly brave! For my fellow Dartmouth friends who are reading my blog, do you know what's the average debt from Tuck Business School? It's $123,000!

2/3 of Harvard MBA graduates earn a starting salary of +$125k. On top of that, most also receive a signing bonus!

You get the point. As a result of how indebted these MBA students are, they are forced to make the logical choice to get into a career with a high salary. In other words, they are not taking the risk of being an entrepreneur. In fact, in the class of 2016, 72% of Harvard MBA grads ended up in three industries: consulting, finance, and tech, with median starting salaries of $145k, $150 and $125k. Not too bad.

REASON #2: IT TAKES A LONG TIME TO RECOUP YOUR INVESTMENT - 12 YEARS TO BE EXACT

In this analysis, I am comparing a person's cumulative after-tax earnings with and without an MBA. Let's call this person Mark Bryan Ang (MBA). The long and the short of it is, if he starts Harvard Business School at the age of 26, he will fully recoup the investment by age 38, in 12 years.

Obviously there are a lot of assumptions baked in. I've listed them all below.

**Assumptions on a career with a Harvard MBA**

Mark starts his Harvard MBA at 26 and finishes in two years.
He does not earn anything during the two years in school.
After the program, Mark makes the median base salary from Harvard at $135k. His salary increases 3% a year.
Harvard program costs $212k in total. After receiving $52k in scholarship (free money), he pays $160k with a combination of $80k from cash savings and another $80k from graduate loan.
At $135k/yr, he pays more taxes. After all taxes and deductions, he takes home 62%.

**Assumptions on a career without the MBA**

Mark makes 80k/yr pre-MBA and his salary increases at the rate of inflation of 3% every year.
Without the MBA, Mark gets a lower tax rate. With all taxes and deductions, he takes home 70%.
Mark is able to find employment continuously without an advanced degree.

REASON #3: YOU WILL MISS THE OPPORTUNITY TO EXPLOIT THE HOUSING CYCLE

Knowing that you probably won't start the company you've always wanted, and it takes 12 years to recoup your investment, are you still thinking about getting an MBA? Well, there is one more thing you should know.

You will miss the boom years of a housing cycle. Why does it matter? Well, you can make half a million dollars by simply buying a house in LA and holding on to it for 5 to 7 years. I won't spend much time on this point, because I explained it in detail in Episode 14 that we have 5 to 7 years to go before we a hit a housing peak. If you want to know more, check it out.

What's even better? When selling a house, you don't get taxed a penny for up to $500k if you are married. An after-tax profit of $500k is equivalent to $900k to $1 million of pre-tax income, because, at this level, tax takes close to half of it. I don't know about you, but it would probably take me many decades to save half a million dollars, even if I diligently sock away $1,000 into savings every month.

So...did I just crush your MBA dream?

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