Posted on No Comments on Going Back to school, is it worth it?

Going Back to school, is it worth it?

After working for some time, many realize that what they’re doing isn’t what they would like to do their whole life. Going back to school to change career paths can be daunting and even financially devastating. Recently, I’ve started looking into going back to school to get an MBA. Here are a few things that I am looking at as I work towards this decision.

 

1) ROI

ROI stands for Return on Investment. In this situation, it’s how well you are doing after school. Are you making more money? Is the payback period on your loans short enough that you won’t be in debt forever? As you’ve probably experienced, going to school is expensive. Taking out more student loans sounds like a drag. However, many programs publish the average salary of their graduates. Use this to start calculating how long it might take to pay back these loans. Obviously, we don’t want to be paying back debt until we’re 70. So plan conservatively with your payback timeframe.

 

2) School recognition

School recognition is huge when going back for another degree, consider it as brand recognition. Think of it like this, if you offered a random person on the street a can of Coke or a can of store-branded Cola, what will they pick? The Coke, right? Because it’s a known and trusted brand. The same thing happens with schools. Nationally recognized schools help assure organizations looking to hire you understand that you went through a rigorous program. Shoot for a top 50 school in your discipline with national recognition. Large state schools are a good option to get national recognition while reducing costs.

 

3) Career path afterward

To be clear, this is highly depended on the position you accept after getting your degree. Did you accept a senior position with a fortune 500 company? A consultant position with a top consulting firm? Did the company you’re working for promote you based on your new skills? Utilize school resources like the alumni network or job fairs to help you find that next position to put you on the career path you wish to follow. Personally, I’m looking to where I want to be in 10 years and whether or not the position will help me get there.

 

4) Financing (company pay vs student loans)

Unless you are an executive in a very large company, it is very unlikely that the company you work at will pay for your entire degree. However, a lot of companies do have continued education funding. For instance, the company I currently work for grants approximately $5,200 a year for classes. While this isn’t a lot, it’s still financing that I won’t have to get through loans. The thing to consider most through utilizing company funding is time to complete the degree.

Another option is to quit your job and go back to school full time. The issue with this is that you will be spending more due to having no income, possibly having to move, finding new housing, etc. For this situation, we’ve determined that the payback period is too long to quit your job unless you are accepted into a top 5 program nationally. Even then there is still a possibility that the expenses to get the degree are too much to provide a reasonable payback period.

 

5) Networking (online vs in class)

Going back to school is as much about networking as it is about studying hard and getting a degree. Creating a network of similarly thinking individuals and friends will help with finding potential opportunities in the future.

While it may be cheaper and more flexible to get a degree online, it sacrifices the networking potential of attending classes and meeting new people. If you have great networking skills this may be a non-factor. However, for the majority of us, meeting new people and struggling through class together helps build networks that we can use in the future to find financial opportunity.

One big positive from Online degree programs is flexibility in location.  If you are doing an MBA program where you are still working and going to school part-time, it may take up to 5 years to complete.  In the meantime, you might be asked to change locations for your job, or might take a new job opportunity in a different location.  The online program will allow you location flexibility without penalty.  Just be sure to pick an online program that has a good or even great reputation.  See point 2 above.

 

6) Time to completion

For me, the time it takes to complete a degree is probably the most important factor. Taking your time and using company financing is good, however if it takes you an extra 3 years to complete then you’re losing out on 3 years of financial gain. Transfer credits, overload your semester, or in general do what you can to reduce the amount of time you are in school. Doing so will help with reducing the payback period of your loans as well as with maximizing your earning potential.

Posted on No Comments on How to save for buying a house

How to save for buying a house

A friend of mine recently purchased his first house, and it got me thinking.. How do you plan for purchasing your first home to ensure financial stability and maximize long term growth potential? When looking to buy a house for the first time there are a few points that need to be evaluated carefully: 1) location 2) affordability 3) down payment 4) saving 5) timing.

  • Location

Location is everything when purchasing your first home. It will be the factor that determines whether your house appreciates in value or depreciates. Highly desirable housing locations will always appreciate in value over time. So what makes a location highly desirable? We want a house that will appeal to a large demographic. First and foremost, school districts. Owning a home in a great school district appeals to people with kids. Next, we want to look for proximity to amenities and entertainment. This isn’t as crucial as school district, but will help with appealing to a larger demographic.

  • Affordability

Unlike the traditional personal finance mind set of looking ahead, you want to look at what you can afford now. Doing so allows you to live comfortably and continue to progress towards your savings goals in other areas. If we planned ahead, purchasing a house that we could “grow into” we open ourselves up to needing roommates, or taking cash away from other areas (i.e. saving). In general, your housing costs should not exceed one third of your monthly income. A quick and easy way of determining what you can afford now is to use Zillow’s affordability calculator. This calculator also provides a great breakdown of expected monthly costs such as taxes, principle and interest, insurance, and mortgage insurance.

  • Down payment

Some banks will allow as little as a 3% down payment on a house. However, we suggest having a minimum of a 10% down payment on the house. For your first home, expect to pay PMI, or Premium Mortgage Insurance. This will increase the monthly payments to the mortgage company be a small amount. Essentially, PMI means that we weren’t capable of putting a 20% down payment on the house. Once 20% ownership of the house is accomplished, PMI can be dropped from payments.

  • Saving for a down payment

There are a few ways to save for buying a home. The first way is a conservative approach is collecting through a savings account. The benefit to this method is that there is little variation from growth. Meaning you can pull and use this money whenever you decide to place the down payment. The downside to this option is that it will take a while to save a significant amount. The second option is more aggressive in that you save through investing in a low cost index fund. This introduces more risk due to market variation. Though it also has the potential to grow with the market, reducing the amount of time needed save for a significant down payment. Utilizing this method means you need to know how the market is performing when you are ready to place a down payment. Our preferred method would be to save through investing in the market. Although its riskier due to market variations, history shows that more time invested in the market equates to less risk of loss.

  • Timing

Obviously, purchasing a home is expensive. Multiple fees come into play when proceeding through the closing process. Based upon the costs associated with buying and selling a house, we recommend that when purchasing a home you plan to live there for at least 5 years. This timeframe should be considered the time it takes to break even. Depending on the market, selling before this timeframe risks potential loss. If you plan on moving or making big life changes in a 5 year period it may make sense to rent rather than buy. The New York Times offers a great rent vs. buy comparison to help determine whether or not renting may be a better option.

 

Posted on No Comments on Why we focus on net worth

Why we focus on net worth

There are many ways of looking at your finances, but none more important than your net worth. Net worth signifies your assets and liabilities, or how much you have versus how much you owe. It shows you a snap shot of your financial worth at a certain point in time. This is the statistic most relevant to the journey of personal finance.

Net worth can be classified as the simple equation:

Assets – Liabilities = Net worth

For example, let’s say we have $50,000 in the bank and $30,000 in student loans, which gives us a net worth of $20,000.

It’s important to focus on and track your net worth as it gives a sense of how you are progressing financially. If your net worth is routinely increasing, that means you are saving more than you spend. Conversely, if your net worth trends downward, you are spending more than you make. Your net worth will fluctuate, don’t get discouraged, there’s always bills and life happens. That’s why net worth is so great, it quickly shows you how well, or poorly, you are doing financially and allows you to correct or improve habits.

Coming out of college it is extremely common to have a negative net worth due to student loan debt. According to the Federal Reserve’s latest Survey of Consumer Finances, approximately 50% of millennials aged 25-29 have a net worth of less than $10,000. About 30% have a negative net worth. While these numbers decrease with higher age groups, showing that net worth typically increases with age, millennials should begin to focus on this statistic now to increase long term quality of life.

The two ways to increase your net worth quickly are to either increase your assets (ie make more money) or decrease your liabilities (ie paying back debt). Since the former can be difficult to increase when you’re new to working world, the best way to increase your net worth is to focus on paying off debt.