Author Topic: Case Study: Business School and Being Mustachian  (Read 3692 times)

Kelliottmh

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Case Study: Business School and Being Mustachian
« on: January 20, 2014, 07:55:33 PM »
Income: $80K
Age: 28, Married


Current expenses:
- Rent: $480 (Living with in-laws second home during transition period; includes storage facility costs and payment of utilities)
- Cell Phone: $50 (Republic)
- Car loans: $512 (2 cars)
- Auto Insurance: $145 per month (2 cars)
- 401k: 5% of gross (company matches up to 5% + additional 2% automatically)

Assets:
- 401k: $55K
- Employee stock: $2000
- Proceeds from home sale: $17K
- Emergency fund: $8k

Liabilities: Car loans: $11,665K at 1.9% complete in 2016; $5664 at 2.75% complete in 2017

My Story:
I've recently sold my house in preparation for entry into business school. I've been accepted into School A with a full tuition scholarship, but my preference is to go to School B part time (School B is a better fit and allows me to maintain my current career and income). I'm awaiting confirmation on school B. I know it can be considered relatively anti-musthachian to pursue graduate degrees, however these are very prestigious schools that will serve as significant platforms to help me achieve my career goals.

If i am accepted into School B and depending on scholarships, I may have a hefty student loan to begin paying for in April when class begins. If I end up at School A, I will begin school full time in September with no student loan but also no income.

That said, I want to make sure I am making this $17K from my home sale work for me given this transient period. Given the relatively low rate of my auto loans, I feel I am better of putting the money in an index fund. Also, if I end up in school A, I will need that money to help me get through the next 2 years of lower income (living off my wife's salary). Any thoughts on how to navigate through this period in the most mustachian way possible is greatly appreciated!

Kelliottmh

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Re: Case Study: Business School and Being Mustachian
« Reply #1 on: January 25, 2014, 11:28:41 AM »
I've decided to invest the house proceeds in the Vanguard Total Stock Market Index Fund. I figured the rate of return would be more advantageous that trying to pay down the relatively inexpensive auto loan. Any feedback is much appreciated!

mlipps

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Re: Case Study: Business School and Being Mustachian
« Reply #2 on: January 25, 2014, 02:50:47 PM »
My husband is currently working on his MBA through a weekend program at a Big Ten school. We paying for it in cash each semester. DO NOT take out student loans for your MBA unless you absolutely have to. Graduate loans are only available as unsubsidized loans, so interest begins accruing on day 1. The rate is currently 3.9%, but adjusts every June 1, so it will likely be a bit higher for 2014-2015 school year. It's just not worth it except as a last resort.

I would put the money you just put into a taxable account into a 529. Then you can use the money for educational expenses w/o paying taxes on the gains. If you get a full scholarship, you can still take the money back out without penalty; you will just owe taxes as you would have if you left in a taxable account to start with. Plus, in some states you can take a tax deduction for the 529 contribution; here in Illinois we get a deduction up to $10,000.

Second, consider how the available tax credits & deductions for educational expenses can be used to your benefit. The Lifetime Learning credit offers 20% of your costs up to $10,000, and if you household income is $80k, you should be below the phase out, which starts around $105k I believe. Make sure to spread your payments across 3 calendar years to maximize the benefits; don't pay for you last semester in December, pay it in January. You can't claim the LLC for any payments you made using the 529, so make sure to plan those payments out. The way we do it is pay $10,000 out of pocket each year, then funnel the rest through the 529 to take the state deduction, which is less valuable but still helpful.

If your income increases in the next year or two, there is also a tuition & fees deduction that has a higher income cap, but the LLC is usually more beneficial. You can't take both for the same student (but you can, I have realized, take one for one student and one for the other, which is super helpful if you and your spouse are in school).

Finally, I would just stockpile cash during this period. Personally, I would not put money into the stock market that is needed within the next 5 years so make sure you understand the risks associated with that. At your income level & with your low expenses currently, you should have no problem saving up a nice chunk of change between now & fall to pay the tuition bill & live off of.

Weedy Acres

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Re: Case Study: Business School and Being Mustachian
« Reply #3 on: January 25, 2014, 08:13:43 PM »
How much extra cash flow do you have every month?  You've only listed a partial budget here. 

How much does your wife make and how much do you make?  That will help assess the 2 options better.

If you go to school B, what's the worst-case scenario for tuition costs?

Those 2 car loans need to be axed quickly.  If B-school is that important to you, you should be willing to give up your fancy car and live mustachian. 

I'd do 2 different budgets, one if you move and go to school A and the other if you stay put (I'm assuming, since you can keep your job) and go to school B.  If you go to A, you live frugally off your wife's income.  If you go to B, you've got a bunch more money to pay the tuition, so it might be close to even on the financials.

Kelliottmh

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Re: Case Study: Business School and Being Mustachian
« Reply #4 on: January 30, 2014, 07:49:54 PM »
Thanks for the feedback!

Mlipps, that makes alot of sense.  I never even considered a 529 as an option. Granted, my ability to really take advantage of the benefit is limited since I won't have a long ramp up time; if I choose school B, classes would begin 3/31. However, given that it's a 2.5 year program, I may as well store the money in a tax free vehicle during that period. Living in Georgia, my 529 tax benefit isn't huge ($2k per beneficiary), but better than nothing!

RE: LLC, I expect my household income to hit 6 figures soon, as my wife just completed her masters and will be working soon. I'm curious if a 'married filing separate' tax filing would enable me to maximize the LLC benefit so that I wont hit the $105K threshold.

Weedy, my wife is currently not employed, so that $80k is for my salary. She went to school to be a therapist, so when she does begin work, it will likely not be a game changing income ($30-45K). My cash flow for that $80K after tax, 401k deductions, etc, is about $4400 a month. So using my expenses listed in the OP, that nets about $3k every month. However if we choose school B,that will go up since we will eventually move from my in laws house and have to pay a full reasonable amount of lodging ($700-1000/month), though my wife should be working by then (adding around ~$2k per month in after tax income). So our long term monthly net will be be closer to $4500 assuming we continue our mustachian living, and even more if we sell my car.

To your point about our cars, i wholehartedly agree (though these cars are far from fancy!). We sold our big house far out in the suburbs in order to move to a more meager space closer in the city where I can leverage public transit. Once I do that, I will look to sell my car.

Worst case scenario for tuition/fees for school B is $120,000 over 2.5 years. Doing some rough numbers to compare school A vs School B: with school B, I will net $132,000 in after tax earnings (barring any increases) during that 30 month period. Assuming my wife gets employment in the next month, that jumps to $192,000, leaving $72K for living expenses in southeast U.S., where cost of living is relatively low. With School A, tuition is removed, but so is my income ($160K over to years), leaving my wife's prospective salary of $30K/yr (60K in for living expenses over 2 years) in the higher cost of living northeast United States (where school A is located).

To your point, while the tuition of school B is daunting, when taking into account my lack of income, the numbers come out to being very close to even. It simply becomes the tough decision of which school I want to dedicate the next 2+years of my life to. It seems my best option is to go ahead and put as much of my liquid assets into the 529 while doing what I can to free myself up from our car debt. While it hurts to do so, It may be best to use a good majority of that $17K in house proceeds to go ahead and pay of my wife's car since it carries the largest balance.




mlipps

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Re: Case Study: Business School and Being Mustachian
« Reply #5 on: January 30, 2014, 08:36:14 PM »
If you file MFS, you are not eligible for the Lifetime Learning Credit, nor a host of other tax benefits.

Kelliottmh

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Re: Case Study: Business School and Being Mustachian
« Reply #6 on: February 01, 2014, 03:30:58 PM »
Thanks mlipps, good point.

Also, I was also curious as to the most mustachian way to handle my 401k. I have about $55k in my 401k at my previous job that I have not yet rolled over into my current 401k, which has ~$15K. Is there a tax advantageous way I could leverage this given my two scenarios? Or is it best to simply consolidate them and not touch it?

mustacheindc

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Re: Case Study: Business School and Being Mustachian
« Reply #7 on: February 01, 2014, 04:24:12 PM »
I'd role the old 401k into an IRA. You'd have much more and cheaper choices in an IRA than your new 401k.

mlipps

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Re: Case Study: Business School and Being Mustachian
« Reply #8 on: February 01, 2014, 08:17:23 PM »
I'd role the old 401k into an IRA. You'd have much more and cheaper choices in an IRA than your new 401k.

That's not a given. My 401k has better choices than an IRA and so does my husbands.

Plus, an IRA will be an obstacle to back door Roth contributions in the future. I hope that if OP is planning on spending $120k on B-School he'll soon surpass the Roth contribution income limits. I would combine them if your new 401k has better (ie cheaper) fund options, and leave them put if it doesn't.

Weedy Acres

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Re: Case Study: Business School and Being Mustachian
« Reply #9 on: February 02, 2014, 03:29:47 PM »
It looks to me like you can do either option without incurring debt.  In a nutshell:
School A:  Tuition paid, you just cover living expenses.  You have $17K + $11K (cash from selling car) + $24K (what you can save from your earnings between now and Aug) + what your wife earns for the next 2 years to live off.  That should be more than enough.

School B:  You have all of the above plus 132K of your net earnings to pay max 120K of tuition.  Keep in mind that tuition is paid at the beginning of each semester, so you're not going to get a bill for $120K in April, you'll get $30K now, $30K in 6 months, or whatever.  You should be able to keep up with that.

A few other details to factor into your spreadsheet analysis:
-at school A you'll have a paid summer internship.  I don't know the current going rate for your school and focus, but in 2000 I made ~20K in the summer.
-school A is presumably a traditional 2 year program, which actually means 20 months, which starts in Sep and ends in May 2 years later.  School B is 22.5 years and starts earlier.  So you'll have 8 months of FT work before school A starts, and it will also make you into an employable MBA a little sooner.

Ultimately, since financially you can do both without debt, I'd make my decision based on which option was better for me career-wise.