How To Think About Your Salary And An MBA

We see it often. You’ve been admitted to your dream program. The euphoria is beginning to wear off. You’re now faced with the prospect of paying absurd tuition fees. Meanwhile because you’re the kind of individual who can get admitted to an elite program, your company just offered you a substantial pay raise. Sacrificing it all to go into debt for an expensive MBA program suddenly seems to have become a lot riskier.

It hasn’t. It’s important to distinguish between the opportunity cost of pursuing an MBA and the financial risk of pursuing an MBA. The opportunity cost is, in this case, the salary foregone by the individual leaving their job to pursue an MBA. Receiving a salary boost certainly increases the (already substantial) opportunity cost of pursuing an MBA.

But having a high salary does not increase the financial risk of pursuing an MBA. If anything, a high salary is an indication that pursuing an MBA is relatively low risk. This article from The Economist effectively explains why:

“Say, a young person’s human capital, which determines his future earnings, is 90% of his lifetime wealth, with the balance in stocks. And say that for an almost-retired person the proportions are reversed. If the stockmarket crashes by 40%, the young person has lost only 4% of his wealth. But the nearly retired person has lost 36%, which is much more serious…Human capital is low-risk. If you have lots of it, you can take more financial risk.” (Emphasis added).

Being paid a high salary is a sign that you’re really awesome! Your company loves you and finds you indispensable. You’re innately talented and your human capital is high. In this context then…it’s actually not all that risky to leave your job to pursue an MBA. Your awesomeness is an indication that you’ll do really well both during and after the MBA program. You can bet on yourself because this is a low-risk bet. Your potential has been validated by both your employer and the admissions committee.

The opportunity cost remains and is a strong reason not to go. Your dream program may not be all its cracked up to be anyway. But worrying about the financial risk is probably a mistake.

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