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Mastering Your MBA Finances – The Often-Ignored Opportunity Cost (Part 4)

Once you have been accepted to your target MBA program, things start to move very quickly, and you will need to begin planning for your transition to business school right away. Understanding the financial realities of your MBA education is an important first step, and we have created this comprehensive, five-part “Mastering Your MBA Finances” series to help you do so. In this fourth installment of the series, we examine the opportunity cost of an MBA—a very real, but often overlooked expense. (Be sure to read Part 1, Part 2, and Part 3 of this series if you have not done so already.)

For individualized advice, sign up for a free, 30-minute budget planning session with an M7 Financial budgeting coach.

In the previous installment of this series, we examined a student budget provided by a top MBA program and revealed the ways in which it was too conservative for most students. We therefore annualized our budget and adjusted it upward by approximately 10% (holding tuition constant), yet we believe that some of our new assumptions may still be too modest for certain individuals. The following table shows our new budget estimates for a number of leading MBA programs in both large cities and college towns, given that the cost of living differs between the two locales.

Mastering Your MBA Finances – The Often-Ignored Opportunity Cost (Part 4) - mbaMission

Note: Figures are calculated based on the original budget estimates provided by the individual schools; only living expenses were increased by 10% (not tuition).

Of course, another big cost we have not yet addressed is your 18 months of lost salary. Using data from Forbes’ September 2015 ranking of “The Best Business Schools,” we have converted the average pre-MBA salary for incoming students at these top programs into 18-month figures (not taking into account possible raises forgone). You will see in the following table that the average opportunity cost is significant, at approximately $110,250 over the course of one’s MBA program.

Mastering Your MBA Finances – The Often-Ignored Opportunity Cost (Part 4) - mbaMission

We will now take our 18-month adjusted sample student budget, factor in the average lost wages figure, and calculate the total real cost of earning an MBA at a few, selected top programs. You should do this calculation in your personal budget using your own pre-MBA salary data to get a more accurate picture of the expenses you will face.

Mastering Your MBA Finances – The Often-Ignored Opportunity Cost (Part 4) - mbaMission

As an average MBA student at a top program, you should expect a total cost of approximately $312,500 for the entirety of your MBA educational experience, when you consider both opportunity costs and direct costs. In the next installment of this series, we will create our final sample student budget, but we will not factor in the opportunity cost loss, because this component must be balanced by an increased salary over time, and we cannot predict or calculate where those increases might end. Theoretically, the benefits continue throughout your career, which may be part of why you have chosen to pursue an MBA—because you expect lifetime gains. Still, in the short term, if you plan to attend a full-time MBA program, keeping that opportunity cost in mind is financially prudent.

Check back for our final installment, when we bring revenue and expenses together to round out our sample MBA student budget.  And if you are looking for even more strategies for funding your degree and minimizing your debt burden, download the free M7 Financial Student Loan (Reduction) Primer or sign up for a free, 30-minute, one-on-one budget planning session!




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