I'm looking for some professional/educated opinions on an upcoming series of financial decisions I have to make. I'll attempt to keep things simple and figures round, it's more the thought process and ideology I'm seeking advice about. Here goes...
I'm recently 31, have a good job with a decent salary and am socking money away in both 401k and pre-tax corporate stock program (which has netted me 40% over the last 3 years thanks to our company's performance). I have a modest emergency savings ($10k), and another small amount in the market (about $5k). I have negligible credit card debt (<$1k), owe about $1k left on my car loan, and about $16k in student loans remain from undergrad.
I was recently accepted to a top part-time MBA program, and am planning to accept and go through the program while still working. Obviously the cost of these programs is substantial, and with my level of savings/investments I'm nowhere in the ball park of being able to pay for it straight up (salary is nice, but not nearly that level).
The company I work for is publicly traded, and I have a generous option package that I received upon taking the role. Obviously stock prices fluctuate, but our underlying financials are very strong, we've acquired some of our bigger competitors and are now realizing the profit boosts from those, and are definitely on the upswing price-wise, still being relatively undervalued (and subsequently on almost every stock watchlist as a "strong-buy"). My vested options are worth about $150k on the market now, while the options that will vest over the next year and a half (all my remaining options) are worth about another $90k.
My question is- and yes, I understand that predicting the value of the stock in the future is purely guess-work- I need to figure out how to finance this MBA, so the options that have already vested are looking very appealing. My question is what is the smartest way to take advantage of this bonus? Would it make sense to sell a substantial chunk of those options, just to lock in that money (in case of something catastrophic or a downturn in the market/company's fortunes), and then take out loans anyway? With an increased salary after graduating as well as having a substantial amount of money in savings/the market (if I were to invest/save all of the profits of these options' sales, I would have enough capital to cover the entire cost of the program), I would probably have little trouble paying off the student loans.
So the question is whether it makes more sense to sell my options, pay for school and avoid student loans entirely- while also passing up an opportunity to amass a (to me) huge personal savings that could be used to buy a house... Or sell some options, save/invest the bulk of it, while taking out student loans, and paying them off in the future as though I never had these options in the first place- that way I could still use the money for a down payment on a home.
I know that was long-winded, I just figured I would get the best answers with the best context. I appreciate any feedback anyone has to offer. Thank you
Sun Jan 08, 2017 4:58 am
oldguy Senior Member
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quote: Obviously the cost of these programs is substantial, and with my level of savings/investments I'm nowhere in the ball park of being able to pay for it straight up
When I was your age (long ago) most listed (SP500) companies paid the tuition - ie, take a class, turn in your grade, and get reimbursed - in engineering, some went MS, some went MBA, both were considered applicable to our jobs. But maybe the rules of the world has changed?
Also, what MBA costs north of the $250k that you have, plus what you will cash-flow? And a part of that trade - what will your benefit be. Eg, you might not want to front a $250k degree if it adds only $20k to your salary?
quote: and yes, I understand that predicting the value of the stock in the future is purely guess-work-
Good. But you may not understand in total. (BTW, it is liberating to fully understand market timing). The generic US Market (The SP500 Index) has a longterm return of 11%/yr. "longterm' is about 30 yrs, that time block allows statistical averaging to occur and converge on 11%. Fortunately, 30 yrs coincides with the period that most workers have for wealth-building, then you transfer to wealth-preservation. As you narrow that baseline, you add risk. If you invest in sectors (ETFs, etc) you add the risk of ETFs to the SP500 Index. And if you invest in individual stocks, you add the risk of an individual stock (bk?) to the risk of ETFs to the risk of the Market. And the two additions are UNCOMPENSATED risks, ie, ultimately, over time, the two added risks converge on the Market (the sectors and the stocks are selected from that same population of 500 stocks.)
In general, I always assign my income stream to its highest and best use. That simple concept builds millions for you. Eg, if I had a $200k 30 Yr 5% mortgage, I would never prepay any of it. Most folks tend toward prepaying cuz it is a 'guaranteed" 5% return. Instead I pay the minimums and I retain the use of my $200k. That $200k, at 11%, is $1.6M in 20 yrs, $4.6M in 30 yrs. (With my rental houses, I refi them, remove equity, and invest elsewhere.)
Another eg of the concept - say that a worker puts $5000/yr in a savings account for 30 yrs, $150,000. Or, he puts that same $5000/yr into an 11% fund, that's $1,150,000. Same $5000 input - but a very different outcome due to highest and best use.
In your case, I would cash out most of the individual stock (get rid of the uncompensated risk) and reinvest it for the longterm (decades). (your company's 40% in 3 years is not much more than the compounded 11yr (37%) of the generic market. And w/o the extra risk.
Then borrow "low & long" fixed rate capital for the MBA - and retain the use of your own capital. As for saving for the DP on a home - I always negotiate for the biggest loan/lowest DP. Again, retaining my capital for other investing - sometimes more houses, sometimes SP500 fund.[/i]
Sun Jan 08, 2017 4:41 pm
thecooloasis New Poster
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Understood and really appreciate the thoughtful response.
Total cost of the program is just north of $110k actually, so I can reasonably deal with that with what I can make off of my options. So you would suggest it would be best to cash out some options and re-invest, while taking out student loans and then just deal with those payments once I've graduated (and presumably moved on to a higher salaried position)? I know taking on more loans is daunting, but I just can't get over the opportunity these options provide to really build a nest-egg/legitimate investment account.
Of course, student loan interest rates aren't nearly the 11% s&p return you mention, so from that perspective it's better to have that money working at 11% than borrowed at say 5%. It's just more my leave of mind- just want to make a smart financial decision, and while I literally work in corporate finance I found myself wrestling with this one.
So long story short- you feel it'd best serve my interests to go the loan route and use my options to build my investment base. I appreciate your perspective and anything else you can add, thank you sir
Sun Jan 08, 2017 6:38 pm
oldguy Senior Member
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Joined: 21 May 2006
quote: $110k actually
The 'now' cost of the MBA is $110k, the 'time-value' of money puts it about $2.5M when you are age 61, So the MBA has to add $2.5M to your income stream - and it probably will -
Yes, I would sell some options, invest elsewhere - and borrow for college. And if you can get a good rate, retain that money for the full term.
Got much of my borrowed capital by refinancing my rental houses. I had a concept that served me well - ie, keep my money source safe and keep my risks on the investment side. I avoided the 'designer' loans - no balloon payments, no 15 yr loans, no reverse amortization, I always used 30 year Fixed Rate capital, even tho it cost more.
Sun Jan 08, 2017 8:19 pm
bob5000 New Member
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Location: midwest USA
Your options are your only real asset. The rest is pocket change.
The MBA may be a good investment. The odds are it will pay off, assuming you will be able to supplement it with good hard skills not learned at school. In and of itself, no business degree will teach you much of anything. They will provide tools you can put to use. An exception might be with Accounting. My CPA license would have been impossible to get without an Accounting education. With that exception, it's more about you than your degree. For example, lots of people know what a NPV is but really smart people see it as a tool for something useful. If you see the MBA as a means to open doors and as an icing on the cake it may be a good idea. In reality, you will use little you learned there.
To pay for MBA school, you will obviously have to borrow. The options may be a means to pay it off quickly. School debt is a boat anchor around your neck. If the options will someday be worth millions, then hold on to them and use a few down the road to pay off the loans. If their value is static or maxed out, sell them and use that $$$ for school. A bird in the hand ...
Tue Jan 10, 2017 2:55 pm
Anil V New Member
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I don't think doing an MBA is a good option. If you really want to succeed and become a millionaire or want to get higher yields prepare your mindset. If you think you can you can. I agree with this fact MBA teaches us tools that no other business course can, but with that said, strong determination is must and you need to be penny wise wise.
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Thu Jan 12, 2017 10:21 am
shawdenise777 New Member
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Location: 2318 Maud Street Wilmington, DE 19802
I also agree that MBA is a trusted option. Better try things up than to retreat. It's also proven that MBA got excellent tools and incomparable.
Thu Jan 12, 2017 5:51 pm
shipedgoods New Member
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Actually minimum MBA is an option near to me. You cant take risk with a non professional in this field. Too many my friend in www.oship.cc also MBA and also managing this very well. I am agree with you guys.[url][/url]
Mon Jan 16, 2017 1:55 pm
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Joined: 24 Oct 2016
Seeking personal finance advice
I think you have pretty good options available there. Investing in education is always better. Just try to explore which banks or financial institutes give you a low rate of interest. Maybe you should check out credit unions as an option.