Author Topic: Case Study: Diversifying Savings as a Young Mustachian  (Read 4823 times)

Abel

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Case Study: Diversifying Savings as a Young Mustachian
« on: January 24, 2016, 12:08:32 AM »
Hello! New to the forums, long time MMM lurker and fan. I borrowed the Case Study template to ask you all here for some advice!

Life Situation:
I am single, no dependents, mid 20s. Hope to get married in next couple years. ND resident, active duty military. Gross Salary/Wages: $6700/mo.
Pre-tax deductions, Other Ordinary Income, Qualified Dividends & Long Term Capital Gains, Rental Income & Depreciation: None.
Adjusted Gross Income: Same as above, 6700 monthly.
Taxes: $1200 a month for Federal, state/local, and FICA. Take home pay $5500.

Trends in monthly expenses:
This is how I *was* living until recent Mustachian conversion in California.
$1200 Rent for splitting 2BR apartment near the ocean + Utilities / Upkeep
$70 Gas (often lower, I bicycle commute nearly every day 15 miles one way, only driving to San Diego or LA to see friends or explore as a weekend guilty pleasure)
$100 Phone (luxury AT&T plan, I need to learn from MMM and adopt a low cost provider)
$500 Groceries, Restaurants, Bars (Good at groceries, bad at restaurants / going out)
$120 Sports Massage Membership (Luxury, but supporting friend's small business)
$300 Shopping (Bicycle gear / race entries are a trend / delightful weakness.)
$100 Cash for miscellaneous (weekly military haircut, random etc.)
$500 Tithe to Church
$500 Travel (long distance relationship, try to fly out to see her once a month)

$3390 in expenses monthly! The remainder ($2200) goes into maxing my Roth IRA and Wealthfront taxable index fund investment account.

Now, enter the beginnings of Mustachianism. What have I done, and what am I still planning to do?

Done:
1. Downsized from a shiny pickup into a cheaper fuel efficient hatchback, pocketed the difference, paid off all debts, and put it in a Wealthfront taxable index account. Gas bill has dropped tremendously for the limited driving that I do.
2. Moved out of apartment, downsized stuff and sold furniture, now living rent-free in spare room of old retired church couple's huge house up in the hills, my rent is paid through ~5 hours / week of odd jobs and manual labor (using exquisite tools for enhanced DIY training in carpentry, cleaning/restoration, plumbing, home repair...priceless!).
3. Dropped the monthly massage membership, which I feel guilty about because of my friendship with the owners. Also, massages feel great so I miss those.

What I still need to do:
1. Slim the food/restaurant/bar budget. I have simple tastes. My groceries are Costco and reflect that simplicity - but I am terrible when it comes to restaurants and going out with friends. My best strategy has been to convert friends into fun and nearly free activities, like park picnics with sports, or board games, or hiking and biking.
2. Move my Roth IRA out of Edward Jones to Wealthfront to save $ on fees. EJ is where I got my start when I was younger. I have been putting $50 a month in since I was in high school, before I started maximizing my contribution when I entered the full time working world. Fees are silly high and wasteful.
3. Need to get my iPhone 6 out of my $100 AT&T monthly contract and into a low cost plan - need to learn some more about carriers like Consumer Cellular / H20 / etc.
4. Would like to get married / end the long distance with my SO and attending costs.

End result in expenses / savings ratio? Minimum 60% savings rate going forward.

Assets: $20,000 Roth IRA with Edward Jones. $30,000 in Wealthfront taxable account (rapidly increasing as most of my monthly savings go here). Typically $1000-2000 cushion in checking account. $5000 in American Express High Yield Savings account (.90% APY). My vehicle is worth $15,000 and owned outright.

Liabilities: No debt. In my early 20s I was a foolish sillypants consumer zombie with a vehicle payment and motorcycle payment and student loan payments etc. etc. and I soon realized how insanely foolish that was. Paid the price and got out of the Debt Emergency as quickly as I possibly could. Life is simpler and better now. I don't want to ever go into debt again, unless it is to produce an investment income.

Specific Question(s):

My dream is to "retire" in my late-30s, FIRE in order to pursue meaningful and high-impact work without having to worry about making ends meet. I want time to raise a big family, live simply, and have the freedom that is possible with a materially simple life. MMM has been very inspirational in this regard.

Near term, I am considering leaving the military for graduate school (law or business) and trying to pursue a very high-income job to accelerate the FIRE goal and open up more diverse "retirement" career options. For the sake of this case study, assume that I leave the military, get married to my SO who continues working for a similar salary as me, and we move to a high-COL-Anti-Mustachian city (will miss living rent-free in sunny California!) to pursue a fancy pants degree for a post-degree fancy pants job while evangelizing everyone about the virtues of a simpler way of life. Work like crazy for a few years, have children, and "retire". (Note: my SO isn't as Mustachian as me. She has little savings, but we're growing together in a Mustachian direction.)

I believe the Mr Money Mustache model of blending real estate with rewarding side gigs would be most ideal for me based on my skill set and disposition. I'm a handy, DIY kind of guy. I'm a huge people-person, and feel like I could be a good landlord that enjoyed the work and solving problems for people. I love having roommates and community, and could see myself renting out bedrooms in a future home with my family/DW.

So, before TL;DR ---> how should I be allocating my savings to successfully reach my short and long term goals? I'm saving ferociously and I don't plan on that changing soon. Going to graduate school would temporarily slow the savings rate, but I would not debt-finance a graduate degree due to working / GI Bill scholarship.

I anticipate living in anti-Mustachian cities like Boston, NYC, Washington DC, coastal California for a fancy pants job...does it even make sense to consider the MMM real estate investment model? Or should I reconsider ever owning a home with such exorbitant costs, and just plan on renting simple apartments to live in and investing all of my savings as I have been doing? If I go this home-less route, am I making any mistakes by continuing to max my Roth IRA and plowing the rest into Wealthfront?

If I could convince my SO / future DW to look at the low cost of living gems of the American West (I absolutely love cities like Bend, Albuquerque, Missoula, Boise, Tucson) I feel like it would make more sense to look at buying real estate and renting as an investment as we FIRE in that specific area. If I anticipated making a move like this in 5-10 years, should those funds be set aside now in a low-risk savings account? Or should I invest the funds now in a taxable Wealthfront account with the attendant volatility until I need them? What if plans change and we accelerated the "homeownership" timeline, and planned to take on a mortgage in a year or two...is it prudent to assemble a future down payment in a safe high yield savings account versus an index fund?

Thank you for your advice on getting from here to there - especially from those navigating the opportunities and perils of anti-Mustachian cities and weighing the seeming default of homeownership against what is actually best for family and financial stability.


Shortlist of inspiration for me:

http://www.mrmoneymustache.com/2011/12/28/prospering-in-an-anti-mustachian-city/

http://www.mrmoneymustache.com/2013/11/11/get-rich-with-the-position-of-strength/

http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-convert-your-so-to-mmm-in-50-awesome-steps/


MDM

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #1 on: January 24, 2016, 02:23:33 AM »
Life Situation:
I am single, no dependents, mid 20s. Hope to get married in next couple years. ND resident, active duty military. Gross Salary/Wages: $6700/mo.
Pre-tax deductions,...: None.
Adjusted Gross Income: Same as above, 6700 monthly.
Taxes: $1200 a month for Federal, state/local, and FICA. Take home pay $5500.

Nice write-up.  A couple of questions:
1) Is some of your income tax-free?  Even assuming $0 for state tax you will pay ~$1600/mo in federal and FICA taxes on $80,400/yr income.  See the spreadsheet linked in the case study sticky.
2) Even if some is tax-free, if you are paying $1200/mo in taxes then you are likely paying 25% on some of that income.  Have you considered using traditional instead of Roth, at least until you drop your taxable income into the 15% federal bracket?

Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #2 on: January 24, 2016, 03:06:01 AM »
Life Situation:
I am single, no dependents, mid 20s. Hope to get married in next couple years. ND resident, active duty military. Gross Salary/Wages: $6700/mo.
Pre-tax deductions,...: None.
Adjusted Gross Income: Same as above, 6700 monthly.
Taxes: $1200 a month for Federal, state/local, and FICA. Take home pay $5500.

Nice write-up.  A couple of questions:
1) Is some of your income tax-free?  Even assuming $0 for state tax you will pay ~$1600/mo in federal and FICA taxes on $80,400/yr income.  See the spreadsheet linked in the case study sticky.
2) Even if some is tax-free, if you are paying $1200/mo in taxes then you are likely paying 25% on some of that income.  Have you considered using traditional instead of Roth, at least until you drop your taxable income into the 15% federal bracket?

Thanks MDM!

1) Yes, due to the structure of military pay (besides "basic pay" there are tax-free housing allowances called BAH) some parts of pay are tax-free. I believe this accounts for the discrepancy - my annual taxable gross income would fall around 53k.

2) This is something I've thought about. When I started on this Roth IRA trajectory I assumed "Oh of course I'll be working like a machine until my 60s, so when I'm old and successful I'll have a huge income and it would be better to pay taxes now!" Now, I'm starting to see the value in reducing my current taxable income, and paying no taxes later due to my low bracket.

I could easily see myself FIRE at the <15% income tax bracket by drawing a small monthly sum from an investment 'Stache. I appreciate the simplicity of knowing "This money is mine post-tax, free and clear, throw it in the Roth and when I need it, it's mine and tax-free to withdraw."

I need to learn more about the mechanics of a Traditional IRA. Working for the military, the typical/automatic "pre-tax" investment option would be the Thrift Savings Plan...but based on my plan to retire early, the 10% early withdrawal penalty of the TSP has always warded me off. In addition they have high expense ratios for their actively managed funds. EDIT: Totally mistaken about the TSP. The TSP offers index funds at sub-Vanguard expense ratios. And it's not too hard to work the withdrawal piece in FIRE post-military: http://the-military-guide.com/2011/04/25/tsp-withdrawal-options/

« Last Edit: January 25, 2016, 02:19:43 AM by Abel »

Retire-Canada

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #3 on: January 24, 2016, 06:28:54 AM »
Congrats for thinking about this at your age. I joined the Canadian Army at 17. I did get a free university education out of the deal, but I did not do any other of the smart MMM type stuff. I wish I had.

At the time the army offered a pretty sweet pension I could have taken at 20yrs or ~37-38. That pension plus some modest savings would have set me up for a great retirement.

I ended up leaving after 10yrs to do some other things so I didn't get the pension.

Anyways I am from Canada so I won't give you any advice on all the US FIRE options. I just wanted to say awesome job starting so early. You'll do great. :)


Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #4 on: January 24, 2016, 06:35:58 AM »
Congrats for thinking about this at your age. I joined the Canadian Army at 17. I did get a free university education out of the deal, but I did not do any other of the smart MMM type stuff. I wish I had.

At the time the army offered a pretty sweet pension I could have taken at 20yrs or ~37-38. That pension plus some modest savings would have set me up for a great retirement.

I ended up leaving after 10yrs to do some other things so I didn't get the pension.

Anyways I am from Canada so I won't give you any advice on all the US FIRE options. I just wanted to say awesome job starting so early. You'll do great. :)

Thanks RC! I love my work (USMC infantry) and it is hard to even consider leaving. Everything in life has tradeoffs, including choices about careers (trading money for time, stability for freedom, etc.) and that finitude is ultimately what makes it all so sweet, I guess. A big part of my decision is a desire to have a family - hard to imagine doing fatherhood the way I would like with frequent training and combat deployments.

(Reminded me of a great essay I read this month: http://paulgraham.com/vb.html)

GrOW

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #5 on: January 24, 2016, 07:08:04 AM »
"Near term, I am considering leaving the military for graduate school (law or business)"

Are there opportunities to remain in the military, go to law school, and graduate without debt but some years of required additional military service? That sounds like a win-win but I would have to imagine extremely competitive for those types of opportunities.

Retire-Canada

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #6 on: January 24, 2016, 07:14:41 AM »
Thanks RC! I love my work (USMC infantry) and it is hard to even consider leaving. Everything in life has tradeoffs, including choices about careers (trading money for time, stability for freedom, etc.) and that finitude is ultimately what makes it all so sweet, I guess. A big part of my decision is a desire to have a family - hard to imagine doing fatherhood the way I would like with frequent training and combat deployments.

I left for some of the same reasons. Not to start a family, but I was getting pretty tired of living someplace for 2-4yrs and just as I had a GF and friends I would have to leave and start over.

There were other senior leadership reasons that made another 10yrs in the army seem like too long to deal with to get the pension.

So I can appreciate your rationale. Ultimately time is the most precious resource you have to spend and if you can't allocate it well enough in the military to meet your personal goals than looking elsewhere makes sense.

Your training and experience in uniform will serve you well anywhere you go.

MDM

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #7 on: January 24, 2016, 01:06:04 PM »
I need to learn more about the mechanics of a Traditional IRA. Working for the military, the typical/automatic "pre-tax" investment option would be the Thrift Savings Plan...but based on my plan to retire early, the 10% early withdrawal penalty of the TSP has always warded me off. In addition they have high expense ratios for their actively managed funds. I've seen MMM post articles about how to withdraw money from investment / retirement savings accounts but I don't know if those techniques would work with the federal TSP.

See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ for getting money out.

Don't know about actively managed funds in the TSP, but from all I've heard the index funds there have about the lowest expense ratios in the world.  E.g., from http://the-military-guide.com/2013/07/17/three-reasons-to-keep-your-retirement-savings-in-the-thrift-savings-plan/:
Quote
Even Vanguard funds canít compete with the low expenses of TSP funds. For example, take the Vanguard Total Stock Market ETF (VTI) with an expense ratio of 0.05% per year, or Vanguard FTSE Developed Markets ETF (VEA) with fees of 0.10% per year. Compare this to the current TSP funds expense ratio of 0.027% per year. Thatís 2-4 times cheaper than owning the Vanguard funds! Would you turn down an opportunity to save 50-75% on your grocery bill every week? I didnít think so.

tj

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #8 on: January 24, 2016, 01:27:20 PM »
When did the TSP add actively managed funds?! I thought the TSP has a bunch of index funds that are cheaper than anything us privately employed folks have access to.

I would absolutely be putting as much as possible into your TSP. This will save you a ton on your taxes also.

StacheInAFlash

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #9 on: January 24, 2016, 04:10:11 PM »
Sounds like you're in a great place right now to really set you up for a nice early retirement based on your current income and your age! I agree with others just said that the TSP is absolutely the place you should be putting a full $18k a year into right now. There fees are absurdly low, and accessing the money before 59.5 is no different than how anyone else with a work 401k is going to do it using the Roth ladder.

I have to ask, though, what does a person in their mid 20's do in the USMC Infantry to earn $80,400 a year? I'm blown away by that! Starting to wish I would have looked into the military when I was out of high school if that is the kind of money you make a few years in! Based on what I see on Facebook and the general media, I always thought infantry folk made like $20k a year....

Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #10 on: January 25, 2016, 01:41:29 AM »

Don't know about actively managed funds in the TSP, but from all I've heard the index funds there have about the lowest expense ratios in the world.  E.g., from http://the-military-guide.com/2013/07/17/three-reasons-to-keep-your-retirement-savings-in-the-thrift-savings-plan/:
Quote
Even Vanguard funds canít compete with the low expenses of TSP funds. For example, take the Vanguard Total Stock Market ETF (VTI) with an expense ratio of 0.05% per year, or Vanguard FTSE Developed Markets ETF (VEA) with fees of 0.10% per year. Compare this to the current TSP funds expense ratio of 0.027% per year. Thatís 2-4 times cheaper than owning the Vanguard funds! Would you turn down an opportunity to save 50-75% on your grocery bill every week? I didnít think so.

You're completely right on this MDM - I realize that I totally misread the "expense ratio" of the TSP offerings when I first read about them a few years ago, misplacing the decimal point or something like that. I haven't even read up on them again until now. That's an error of a factor of 100! Big difference between 2% and .02% - and the crazy thing is, there are so many Americans losing tons of their investments unknowingly to high fees that probably approach the former number.

Long story short: going to make changes now to add these pre-tax TSP investments to my existing plan.

Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #11 on: January 25, 2016, 01:44:59 AM »
When did the TSP add actively managed funds?! I thought the TSP has a bunch of index funds that are cheaper than anything us privately employed folks have access to.

I would absolutely be putting as much as possible into your TSP. This will save you a ton on your taxes also.

I erroneously believed that TSP had a high-fee actively managed fund - for example, the C Fund is their S&P 500 index (run by Blackrock if I remember correctly from their educational materials I read today) and I definitely misread their expense ratio as a 2% annual fee. So you're absolutely right - they just offer indexes at a very low cost. I happily stand corrected!

Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #12 on: January 25, 2016, 02:17:12 AM »
Sounds like you're in a great place right now to really set you up for a nice early retirement based on your current income and your age! I agree with others just said that the TSP is absolutely the place you should be putting a full $18k a year into right now. There fees are absurdly low, and accessing the money before 59.5 is no different than how anyone else with a work 401k is going to do it using the Roth ladder.

I have to ask, though, what does a person in their mid 20's do in the USMC Infantry to earn $80,400 a year? I'm blown away by that! Starting to wish I would have looked into the military when I was out of high school if that is the kind of money you make a few years in! Based on what I see on Facebook and the general media, I always thought infantry folk made like $20k a year....

Stache, definitely good advice. I'm making a change. Regarding your good question: First, all branches of the military and all specialties have equivalent basic pay, determined by rank and years of experience. A grunt doesn't get paid any more than a cook who doesn't get paid any more than a truck driver or mechanic. Pay is purely rank and experience. There are some special / unique incentives for dangerous or arduous work (pilots flying aircraft, underwater work, hardship due to sea duty, combat, etc.) but that's the general scheme. Within that scheme, officers are outnumbered in the ranks by enlisted at about a 10:1 and are paid more for a given amount of experience. Pay for all military ranks is easy to google and view online. In my case, as an infantry officer, I feel I am paid incredibly well, far more than I need to live and save well - but the progression is unique. One's first year is dominated by training with a paycheck of $36,000...for a typical second year, you're leading 35 Marines for training/deployment with life seriously subordinated to the job and a pay boost. Typical third year, you're leading a motorized platoon with millions of dollars in equipment, or serving as the second-in-command for a company (150 Marines). This is where I am right now, and my gross salary just rose to the attendant $80,400 amount.

I would recommend the military to anyone who is suited for it (many are not), but far more for the leadership than the compensation (with both still being good). In my mid-20s, I am responsible for many tremendous young men, millions of dollars in equipment, and decisions of great consequence. The infantry is also unique because you learn a lot about yourself and others when exposed to the human factors of the environment, combat, fatigue, hard training, violence, etc. You realize how little it takes to be happy, what brotherhood and deep community / mutual reliance feels like, and this lets you derive tremendous satisfaction from the simplest things in life (shade / sun / shelter / warmth / fresh food / running water / vegetables and fruit / family / friends / etc.). Impossible not to be transformed by the experience, some ways bad, most ways very good. I wouldn't trade my experience thus far for anything, there is nothing that I am prouder of. Cheers!

Abel

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #13 on: January 25, 2016, 02:35:57 AM »
"Near term, I am considering leaving the military for graduate school (law or business)"

Are there opportunities to remain in the military, go to law school, and graduate without debt but some years of required additional military service? That sounds like a win-win but I would have to imagine extremely competitive for those types of opportunities.

Redcedar, good question. There is a program called FLEP, very competitive as I understand it, that does just this - but I do not know if the mandatory service obligation is something that would appeal to me.

FreedomInc

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #14 on: January 26, 2016, 01:24:47 AM »
If you want to retire in less than ten years, I would not recommend going to business or law school. The total cost for a good business school is at least $90,000 tuition plus living expenses plus lost wages. You're making 80,000 now and lets say you spend 25,000 a year, so total actual cost of business school is 90,000 (tuition) + 50,000 (living expenses) + 160,000 (lost wages) = 300,000. The numbers for law school are probably worse.

On top of that, you're already making a high enough income that you could FIRE in 10 years easily, especially on a dual income. From a safe/low-effort/retire ASAP perspective, I would 100% stick with your current salary and no debt. 

Of course, the decision to go to business/law school involves much more than just finances, as these could open doors to opportunities that you find extremely fulfilling.

lakemom

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #15 on: January 26, 2016, 07:56:04 AM »
"Near term, I am considering leaving the military for graduate school (law or business)"

Are there opportunities to remain in the military, go to law school, and graduate without debt but some years of required additional military service? That sounds like a win-win but I would have to imagine extremely competitive for those types of opportunities.

Redcedar, good question. There is a program called FLEP, very competitive as I understand it, that does just this - but I do not know if the mandatory service obligation is something that would appeal to me.

If you are looking for an additional degree (Masters?) you might consider looking into what both YOUR branch of service and other branches of service are in need for (JAG's, etc.) and see what training/retention bonuses might be available.  If you have (or acquire) skills that others are in desperate need for the ease of transfer between branches becomes a pretty simple deal (simple as defined by the military LOL).  If you are thinking of marriage and family explore career fields with few or no deployments to maximize at home time.  You might also look into the civilian side of the military.  Many of the jobs that are done are held by civilians and the military is given preference when applying for these jobs.  If you are not already familiar with it check out usajobs.gov.

tomatops

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Re: Case Study: Diversifying Savings as a Young Mustachian
« Reply #16 on: January 26, 2016, 02:03:36 PM »
You and I appear to live very similar lives. Also mid-twenties, roughly the same income level (though higher taxes where I am), no debt, getting 60% savings each month living in a major city centre. However, I already did my MBA to get to the level I'm at for my age, meaning if you did your MBA, you could easily get a nice raise if you knew what you were going to aim for with said degree.

I think the real question is why do you want your MBA? To gain business skills? To network? To get into iBanking?

All business schools will largely teach the same content, but it's the network and intangible "brand prestige" that you pay the premium for. There were schools in major city centres asking for $95K for the MBA. I didn't do it because all I wanted was to gain knowledge, and not necessarily networks into the major banks because working in banking or consulting wasn't really my thing.

I went with a Tier 2 one with a respectable name that cost $33K in a town where the cost of living is low. And then networked like heck beyond the school, worked my butt off in class and in case competitions to get scholarships and expand my contacts. Started a job the first Monday after my exams concluded.

To pay for it, I was lucky in that I entered debt free with about $40K in savings due to living frugally beforehand. My program offered 8 months of paid internship throughout the 20 month program + scholarships allowed me to almost break-even on my business education.

So really: it's more a risk assessment: how much are you willing risk for a greater reward? If you go to a tier 2 school, you'll get a raise, but it won't be enormous. If you go to a tier 1 school, you might get a significantly larger raise, but also risk a lot of your finances today in a competitive job market. For me, my risk tolerance was "No debt for MBA" so I went the cheap route to never have to deal with it.

Not sure if that helped...
« Last Edit: January 26, 2016, 02:05:36 PM by tomatops »