Recently, I was talking to a friend who is working but plans to quit her job in a few year’s time to pursue a 2-year full-time MBA. Her idea was to fund her master’s degree using her own savings.
I could relate to this as I walked down a similar path myself about a decade back.
After working for a few years, I also quit my job to pursue a full-time MBA. And I funded my degree using my own savings, which got good help from the rising stock markets (read how to make wealth from stock markets).
Many people opt for doing MBA after gaining some work experience. While many others prefer to do it just after their graduation. An MBA degree still remains one of the most sought-after degrees in the world. Whether we may agree or not, having one of these on your resume does make your profile an attractive one for companies looking to hire. But MBA courses are not cheap. They require a ton of money if you know what I mean.
But my view is that it’s better to gain some experience before going for MBA. That way you’ll be more clear about what you really want from your career, you will have better soft skills that are a must-have these days and most importantly, you will have more financial stability.
These days, it’s also possible to do your MBA degree online. It is best for people who are in full-time employment. But at least in India, a full-time MBA from a good college definitely scores over this remote mode of degree.
But whatever path one chooses, it’s also about a lot of investment as MBA education ain’t cheap. You need to have sufficient savings or you need to be willing to take a private student loan.
Let me just share a few comparative options for funding this goal of MBA.
A typical MBA in India can cost anywhere from Rs 10 lakh to Rs 30 lakh. Let’s proceed with Rs 15 lakh as a guesstimate for this example.
If you take the education loan route, then here are the maths for it:
- Loan amount – Rs 15 lakh
- Loan tenure – 5 years
- Interest rate – 10-11%
- EMI – Rs 31-33,000
- Total Interest – Rs 4.1-4.6 lakh
So once you complete your MBA (assuming it’s full-time 2-year course), you will have around a 6-month moratorium post which your monthly EMIs will begin. As you can see, it will cost you about Rs 31-33,000 per month as EMI.
Now assuming you are like my friend who is planning to do her MBA using her savings. Here are some of the details she shared with me.
She currently earns Rs 1.5 lakh per month. She plans to do an MBA that will cost her Rs 20 lakh. She has been saving some money for the last 3-4 years and has accumulated Rs 8 lakh till now. She doesn’t plan to take financial help from her husband or parents and instead, wants to fund her education herself. She wants to complete the remaining savings in the next 2-3 years and then goes for an MBA.
Let’s see how much she needs to save every month now:
She already has Rs 8 lakh. In addition to this, she needs around Rs 12 lakh more. For this, she needs to save about Rs 30,000 per month for 3 years (assuming about 7% returns) or Rs 47,000 per month for 2 years.
Given that she earns Rs 1.5 lakh per month and only has Rs 50-60,000 of monthly expenses, it’s very easy for her to save About Rs 1 lac per month too. So she is well on course to save for her planned MBA in 1-2 years’ time.
Generally speaking, once you have decided to go for a self-funded MBA, it will take you about 2-3 years to save up a substantial amount for your course. Any remaining gap can be bridged via help from family or education loans.
Studying while working a part-time job is also an option that is popular if you are planning to do your MBA abroad. Many students studying an MBA program do take up a part-time job to fund their living expenses and studies. While a part-time job doesn’t offer the same level of financial benefits as a full-time job, it is better than nothing. Countries like the USA, UK, and Australia just to name a few do allow their students to have part-time jobs as long as it doesn’t interfere with their studies. Students are allowed to work no more than 20 hours during term time and can work up to 40 hours when they are on holiday. And when it comes to doing MBA abroad, student need to deliver good quality dissertations which they can do it themselves or take professional help from various MBA essay writing service.
But coming back, it is always advisable to plan and save well in advance if you want a smooth transition back to student life. If you have a long horizon, some equity investments in equity funds can also be considered. But if you plan to do your MBA in the next 2-3 years, then it’s best to park a major chunk of your savings in debt instruments like debt funds, fixed deposits, recurring deposits, etc.
In 2020, many people’s MBA plans have been jolted due to the pandemic. Even those who were about to graduate are finding it tough to get good jobs. But it is what it is. Some things are beyond one’s control. I had been quoted in the business daily Mint (here and here) regarding tips for students looking for jobs after MBA in the troubled pandemic times. I had mentioned that if a student had taken a fat education loan to pursue that course and is unable to bag the job they were expecting to, they can even ask their parents for help. Though I strongly oppose the idea of treating your parents as a source of emergency funds, the fact is that these aren’t normal circumstances. If parents can pitch in temporarily for loan repayments, it could provide some relief to these graduates. Also, in these troubled times, the “dream jobs will be tough to come by in the near term. Therefore, graduates should readjust to the new reality and try to make the most of it.”
But coming back to the discussion of funding the MBA using your own savings, it is worth mentioning that it will require a lot of disciplined savings from one’s end. You will regularly have to look at saving about 50% or more every month. Just saving 10% of income won’t be enough.
The idea should be to save a major chunk of your income and use whatever amount is accumulated in the next 2-3 years for education. And any shortfall can be met through an education loan though genuine effort should be made to reduce the education loan component.
Like all other goals, even this goal of self-financed MBA requires you to have a structured plan in place:
- The first step is to figure out the approx. cost of the MBA course from the college you wish to enrol in.
- Second, figure out how much you need to save every month from your income to save up the money in your chosen timelines
- If you want to do it in the next 2-3 years, then stick to debt instruments like debt funds, recurring deposits, fixed deposits, etc. No need to look at equity for such short timelines. But if you have 5-6 years at hand, then consider investing at least a small part in equity funds and the remaining in debt instruments.
- Now check whether saving the above-calculated amount is feasible for you or not. If yes, then that’s great. Else, try to save as much as possible and get ready to take an education loan for the remaining amount. Having a good credit score at this time helps so make sure you pay your full credit card dues on time. And if you have any other loan running, then make sure you pay EMIs on time to keep your CIBIL score good and high.
Once you have taken a call about doing an MBS, it’s best to start saving for your MBA program application as early as possible. This will give you more time to save the required money. And the more you save, the less you need to borrow. And lesser you borrow, better it is.
Talking of borrowing, almost all Indian banks offer education loans to deserving borrowers. But from what I know, the public sector banks are more student-friendly than their private counterparts.
You can even ask your employer to pay for your MBA! Sounds heavenly isn’t it? But it’s not very common practice in India. Very few employers are willing to pay the full tuition fee or part of it for their employees. Employers will offer to pay for MBA programs for their employees when they notice that they are lacking a certain skill that they will learn by enrolling in an MBA program. Why would companies want to do this? Because they look at this as a cheaper alternative to hiring someone with the skill sets they’re looking for and paying them a very high salary.
It is also important to note that most banks offer differential interest rate schemes for an educational loan for MBA in IIMs and other top-rated MBA colleges vs the non-top-tier MBA colleges. That is, education loans are generally available at lower rates for MBA courses in good colleges like IITs, IIMs, IITs, XLRI, MDI, NMIMS, SPJIMR, IMT, IIFT, etc. And when it comes to loan, having a lower rate of interest matters a lot.
Here is an example of a Rs 15 lac loan and its EMI and total interest paid over 5 years for different education loan rates:
- At 8%, the monthly EMI is Rs 30-31,000 and the total interest paid is Rs 3.3 lakh
- At 9%, the monthly EMI is Rs 31-32,000 and the total interest paid is Rs 3.7 lakh
- At 10%, the monthly EMI is Rs 31-32,000 and the total interest paid is Rs 4.2 lakh
- At 11%, the monthly EMI is Rs 32-33,000 and the total interest paid is Rs 4.6 lakh
- At 12%, the monthly EMI is Rs 33-34,000 and the total interest paid is Rs 5.0 lakh
As you can see, the difference in EMI is small but the total interest paid increases a lot more for the higher-rate loans. So it’s a no brainer to shop around for the lowest loan rates possible as long as feasible.
Also, a shorter loan repayment period helps you save a lot of money on interest costs. Here is an example of a Rs 15 lac loan and its EMI and total interest paid over different tenures at a 10% rate of interest:
- Loan Tenure 3 years: EMI is Rs 48-49,000 and total interest paid is Rs 2.4 lakh
- Loan Tenure 4 years: EMI is Rs 38-39,000 and total interest paid is Rs 3.3 lakh
- Loan Tenure 5 years: EMI is Rs 31-32,000 and total interest paid is Rs 4.2 lakh
- Loan Tenure 6 years: EMI is Rs 27-28,000 and total interest paid is Rs 5.0 lakh
- Loan Tenure 7 years: EMI is Rs 24-25,000 and total interest paid is Rs 5.9 lakh
As you can see, the total interest paid is lowest when the loan tenure is short. So it’s best to opt for a shorter repayment period if your finances permit. Also, try to pay the interest during the course period. This won’t be easy but if you can (or if your parents can), try and repay the amount of simple interest applied to your study loan amount. It would greatly reduce the interest burden when compounding of interest begins after 6 months of completion of the course.
That’s it.
My best wishes to those who are saving money to fund their MBA in a few years time. I am sure you all will find the above discussion about how to finance your MBA in India in 2021 or were looking for answers to how to fund the MBA after work experience in India.