Return on Investment?

The fun of the GMAT is over, and I'm getting my essays written and my recommendations lined up. I should be happy that things are moving forward, but lurking in the shadows is that deep, dark concern that haunts all B-school applicants: ROI.

If tuition were the only cost involved, getting an MBA would be a no-brainer. Even at $80,000, it would be a great deal. But if you make any sort of reasonable salary, losing almost two years' worth of income can be a collossal blow. For most people, the total cost in lost earnings and tution is around $200,000. (Living expenses aren't part of that calculation, because they are a sunk cost -- you pay them whether you're in school or not.)

Even making tax adjustments, which reduce the amount of salary "lost" by 30% or so, an MBA is still terribly costly. In the end, every spreadsheet analysis I do shows that I need to make an additional $30,000 per year (pre-tax) in my post-MBA career to justify the expense. The spectre of needing to earn that additional money is what scares me the most.

You already know the sorts of careers that can guarantee you huge salaries like that. They are the standard post-MBA careers: management consulting and I-banking. The problem is that I have no desire to do either of those things. I am unwilling to take a job that I don't like in order to make more money and make my MBA investment valid.

I've known investment bankers; they're not a happy bunch. One of them told me after he left his associate position, "I would rather die than go back to that job." The stories of insane hours are true. The way I see it, most MBA applicants make in the vicinity of $60,000 per year, and they probably work about 50 hours per week (these would be averages). By going into IB, they get the opportunity to make $120,000 working 80 hours a week. Hourly, you're not doing much better, but after about 50 hours a week, those next 30 hours are much more costly to your personal life.

The incremental cost of my time
There are 168 hours in a week. You should be sleeping 56 of those. Commuting takes most people an hour each way, so take out 10 more hours. Running a household and a life takes at least 12 hours a week. That leaves 90 hours. Those remaining 90 hours must be split between work and "life." I'm willing to give 50 of those to work, but the other 40 are for my family. The incremental value of every hour over 50 that work takes increases quickly. A 60 hour week means 10 hours less with my family. Those extra 10 hours have a very high value to me. To get another 10, you're really going to have to pay me a lot. The incremental value of each working hour over 40 per week steadily increases.

In other words, it's not a very good deal to work twice as many hours for twice the pay. This obvious idea is reflected in the idea of overtime. But salaried MBAs are less likely to think of it that way.

Intangibles
The ROI equation has some intangibles, though. There is value in the security that an MBA provides, in the fact that you are more likely (theoretically) to land a job with the degree, even in hard times, than someone without the degree. Part of this is due to the contacts one makes in B-school.

Also, there is the value of personal pride in having an MBA, and the knowledge you gathered while seeking the degree.

So the amorphous equation that is floating in my head looks something like this (all values reduced to PV):

Value of MBA = Total increase in income vs. not having MBA
+ value personal satisfaction
+ value of risk-reduction by increased job security
- lost salary for 2 years
- tuition & fees & books
- value of lost quality of life inherent in many post-MBA careers

Given a personally selected range of values, with arbitrary probabilities assigned to each outcome, is the final net value expected to be positive or negative? It's close.

Caution ahead
Looking over the beautiful brochures, I have to be careful that the near-term goal of "getting accepted" doesn't obscure the ultimate goal of "getting an MBA" and all that entails. Getting that acceptance letter can be elating, but long before the letter arrives, one has to decide whether the whole process is worthwhile.