Thursday, May 17, 2012

I went to Harvard so I must be smart

Though if you sleep through the econ and finance classes, maybe not so much;

When he graduated from the Harvard Business School three years ago this month, the economy was a wreck. Nearly one in four of his classmates didn't have a job at graduation in May 2009. Yet, Joe Mihalic, then 26, was able to land a job with Dell (DELL) in Austin, Texas, at twice as much as the $52,000 a year he made before earning his MBA.
But there was some overhang from his experience in Boston: roughly $101,000 in loans that he had to borrow to get the degree....
He borrowed $101,000 to land a job that pays $104,000 per year to start. So just what rate of return is that?

Ignoring the opportunity costs of the years out of the work force, it's about 50% per year--he doubled his salary--for however long he stays employed.  We should all complain about such a bonanza.

Obviously that return is complicated by the interest rate he was obligated to pay on the loans, and by the pay raises he'd be in line for as he accumulated more knowledge and became more valuable to an employer (though that may be a dubious supposition in his case when we assess his skills as a logician);

But what allows Mihalic to maintain this entertaining and often addictive narrative of what he calls "the walk to debt freedom" was his extreme goal. The challenge resulted in sacrifices that few of his classmates could ever endure. He gave up all dinner dates and didn't go to a single movie. He stopped contributing to his 401k plan, decided against going home for Christmas, and missed his friends' parties and weddings. When he went to bars with friends, he carried a flask with booze to mix with his purchased Coke (KO). He shared a NetFlix (NFLX) account and refused to buy a single article of clothing.
To earn extra money, he sold his second car and a motorcycle, rented his spare bedrooms to strangers through Craiglist, and started a side business doing landscaping work. Quickly, he chipped away at his debt. To start, he liquidated his IRA account for $8,000, sold stock worth $14,000, and used about $3,000 of available cash to wipe out one loan.
He liquidated his IRA!  He gave up the tax free income within it, plus paid a penalty of 10% for the privilege.  At least he's learning a valuable skill--landscaping--that he just might have to fall back on. 

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