Reader Case Study - South American Mustachian evaluating MBA

[perummm]

Hi guys!

Have been reading MMM for some time, and although I am kind of frugal and good with money, I discovered a completely new level of money management.

Before I presnet the facts and questions, I want to say that I am incredibly grateful for my current situation. I want to begin by giving you a brief overview at my country's finnacials, so you can better evaluate the situation.

Ok, so here we go (LONG)

Peru:

In Peru, salary is mostly expressed in monthly gross amount. We are paid once a mont, but also double on July and december (by law) and once in november (the money is under your name in a separate bank account, accesible only when unemployed) so basically the normal employed peruvian charges 15 monthly wages a year, of which he can only spend 14.

Mínimum wage : S/.750 a month (Exchange rate with USD is 3.02, so we will go with USD 250 a month)
Average Income: S/.1,250 a month ( Around USD 6,250 a year)

The economists use a 5 tier system to determine socioeconomic status, and is categorized between A,B,C,D AND E according to gross monthly income:

A: Over S/.9,600 soles a month (USD3,200)
B: Between 1,200 and 2,400 a month (USD 400-800)
C: Over 800 and under 1,200 a month (USD 266-400)
D: Between 600 and 800 a month (USD 200-266)
E: Lower than 600 a  month ( USD 200)

Poor developing country, yes, but also lots of money in the higher status.

So, to start with case study:

32 years old, married with a 7 year old kid. Like to work (have been doing it since I was 18) and probably will until 45-50. retirement age in Peru is 65.

Education

Bachelor of Business. Master's Degree in Marketing (ESIC, SPAIN). Graduate Diploma in Finance.

Income:
Only income is my job, I am a territory manager for a big corporation.
Gross montly is 6,150 (USD 2,050),
Take home pay (after taxes and 10% pension)  = USD 1,433
My company pays a hefty profit share and the end of each year, so total annual take home pay is USD 34,400 (49,200 GROSS)

Wife is also employed (at a lower salary in different company), and has an annual take home pay of USD 12,000

My employer gives me a 8.25% yearly raise (inflation is about 2%)
 http://www.ibtimes.com/6-percent-gdp-growth-lowest-inflation-rate-latin-america-peru-2014-1538248


Current Expenses:

We try to live a modest life (compared to our peers in same income bracket)

* Condo HOA: USD 66 a month
*Utilities (Water, electricity and gas): USD 42 a month on average.
*Cable and Internet : USD 43 (the only sell the package.. no internet without cable)
* Country Club fees : USD 93 (long story, my family have been ,members forever) Also get free gym and private beach Access. (www.clubregatas.org.pe)
* Groceries : Between USD 260 and 233 a month, we try to buy in bulk.
* Private School : USD 200 (cheapest opf the good quality private schools. Not facepunch worthy, our public schools are rated worst in the world... Google before facepunch please).
*Transportation: USD 20 ish
* "Fun" Money  (wine, tickets, etc) : USD 150 a month.

My employer pays for my car, gas, insurance and registration. Wife takes public trasporation to work (USD 0.80 round trip).
Employer pays for my lunch ( Up to USD 10 a day)

Assets:

- Condo : 990 sq ft, valued at around USD 130k . Upper middle class neighborhood, 3 bedrooms 3 bathrooms.
-Savings : Total savings is USD 12,800. Currently in high yield CD (6%)

Liabilities / DEBT

Absolutely NONE. Have worked my ass off to pay for everything I own in COLD HARD CASH.


So, DW and I are facing a dilemma:

GRAD SCHOOL (MBA)

This is the program I'm thinking about:

a) Top MBA in the country (USD 25,400 considering the mandatory trip to europe for double degree) http://www.centrum.pucp.edu.pe/es/contenido.php?8201/presenciales/mba_gerencial_internacional.html

Program is part time, employer will not help with tuition, as buying another company ( a USD 650 million deal) has company "short". Also, profit sharing has been steadily declining for the last five years (dollar fluctuation, company aquisitions) from around 14 salarys to the actual 9.

The thing is, that having a "good" job, a nice annual raise and a relatively high savings rate make the decisión to further my education really hard, because:

* It will be really hard to get a promotion in the company, as most people are "lifers" (40+ years in the company... extremely rare everywhere else in the country)
* Most other Jobs I could get with the MBA pay around USD 4k to 4.5k Gross a month, so take home pay would be around USD 45k.. and in Peru, most companies don´t give annual raises.

So basically, I would be getting the MBA to "be prepared" to take on additional responsability within the company, and also to "hedge" against job loss (quicker to get a job with an MBA).


What would the Mustache do?

Comments, suggestions and reviews welcome!!!

[CashFlowTurtle]

So, let me say that my knowledge of Peru is fairly limited - I spent two weeks in the country and I have some friends from there from my MBA, so I may know more than the average American, but the subtle dynamics are more difficult to analyze, that being said, I shall endeavor to help you with a framework by which to analyze your decision.

First - you need to be sure you have a clear goal behind the MBA.  My wife and I both went to top MBAs, and those that are most successful post-MBA have a clear defined goal in mind, and a priority of objectives they hope to achieve (for me, academics was #5 on the list).  The most fruitful goals revolve around either switching to a more prestigious function/company within your own industry, or switching industries altogether.  Usually people try and switch either function or industry, its challenging to switch both.

Second - remember the MBA is branding, so be sure the school you wish to attend has a brand that is worthwhile the cost.  Two years of savings plus the financial outlay, plus any interest expense or foregone interest is a large figure.

Finally - you need to do a discounted cash flow model.  Speak to MBA grads and try and understand what a post-MBA after-tax cash flow looks like, compared with yours.  You know the MBA cost, you can estimate foregone savings and some sort of interest amount (either borrowed or foregone), and compare that with your expected increase in salary in the next 5-10 years. For me, I know pre-MBA i was savings about a decent amount every month, post MBA I was saving less than this for the first 2-3 years as I had large student loan payments to make (so it took me 5 years to catch up), but I had the benefit of being in a better industry and having a more fulfilling job (but it will probably take me 7-9 years for my networth to fully recover). 

At the end of the day, it's the qualitative factor of quality of life you need to evaluate once the math is done.  I knew I was going to dig myself into a 7-9 year hole in terms of net worth, but on a 10-15+ year horizon I'll be much better - plus I really enjoy my job.

My guess is that going from 2k usd to 4k usd/mo (gross) makes it a fairly worthwhile venture, depending on when you plan on retiring.  My guess is it'd take you 7+ years to be in a better situation than you are today (but if the raises are guaranteed you might be making 4k in 10 years without an MBA, so a dcf is key).

If you need help building out a discounted cash flow model, PM me.

[ShoulderThingThatGoesUp]

By my math you have $10,488 US of annual expenses and $34,400 + $12,000 = $46,400 of annual income. Why are your savings only $12,800? I must be missing something.

If you've only recently achieved that level of spending due to paying down the condo or something similar, and assuming you can consistently make 6% on savings and inflation is 2% so your real rate of return is 4%, the FI formula from MDM says:

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln (1+i)

Where A = Asset amount currently invested in funds to be drawn in retirement (525k for me)
E = Total annual expenses in retirement, including taxes (estimating 40k for me)
i = Real return on invested retirement funds (Which I'm assuming is return less inflation?  I was assuming 3%)
S =  Annual amount invested in funds to draw on in retirement (Which I assume is my contributions to retirement funds, = 21k for me now)
WR = Withdrawal rate = 4% for me

So, approximately, A is $12,800, E is, say, $15,000, i is 4%, S is $30,000, and WR is 4%:
LN((30+0.04*15/0.04)/(30+0.04*12.8))/LN(1.04)= about 10.

Maybe I'm doing the math wrong, but it looks like you're 10 years from being financially free. Your son will presumably go to college at some point and I don't know if that increases or decreases the expenses, but after that he'll be supporting himself. If your job is stable it seems like the MBA might be a big risk.