Vacation vs Savings Dilemma

[tryintosave]

Hello,

I've been a long-time Boglehead lurker but recently faced a dilemma which I need some input on. A little background about myself:

Age: 23
Income: ~70k+/year (salary+bonus), another raise coming mid-year (been working fresh out of college a year ago)

401k: ~$20k in various low expenses index funds (maxed pre-tax 401k last year)
Roth IRA: ~$11k in Vanguard funds
HSA: ~$2k in various low expenses index funds (maxed HSA last year but had to use 1k for contacts and some injuries)
I-Bonds: $10k (at 2.2%, emergency fund)
Checking: ~$2k
Paid-off car: ~$30k (admittedly I was trading options during college and was lucky and made it big. No more though)

No debt

Monthly expenses: ~$1,500 * 12 = ~$18,000 ($20,000 with some allowances)
Total Annual Expenses: $20,000

Max pre-tax 401k: $17,500
Max Roth IRA: $5,500
Max HSA: $3,250
Max I-Bonds: $10,000 and another $3,000 from next year's refund
Buff-up emergency fund: $5,000 (Mango 6% savings)
Total Annual Savings: ~$45,000

Total Taxes: ~$8,000 with maxed 401k

Now here is my dilemma:
According to my budget, I should have around $4,000 left (due to performance bonus and upcoming mid-year raise, I'm very confident these will happen). I was planning to use the money for a vacation to the Far East this year, but a part of me is telling me to open up a Vanguard taxable account and save it for my MBA (I'm thinking to get a MBA from a top 5 school next year...). What do you guys think?

Thanks in advance.

[Cooperd0g]

While it doesn't hurt to save more you also want to live your life. Your savings rate is pretty high already and very tax advantaged. I would worry about saving for the MBA when you know you want to go and have a definitive timeline you can create a savings plan for.

But I'm in the military and have a lot of dead friends at a relatively young age so savings is a big goal, but so is living. Maybe take a cheaper vacation and save some.

[Kosmo]

Will work pay for the MBA, or part of it? Will you be working while in school (I have a few friends that went to Wharton and they don't allow part time students). If not, how will you be paying for living expenses?

When I was 23 (6 years ago) I did a masters degree in engineering part time while working full time...I would definitely choose a vacation. Having only been in the work force for 1 year, how do you know an MBA is right for you?

[FrugalInvestor]

While it doesn't hurt to save more you also want to live your life. Your savings rate is pretty high already and very tax advantaged. I would worry about saving for the MBA when you know you want to go and have a definitive timeline you can create a savings plan for....

I would save for the MBA until you know that you will not be pursuing it. If you make the decision to not get the MBA the money will still be there for a vacation. If you spend it on the vacation it will not be there for the MBA.

[steadyeddy]

You're not consumption smoothing, you're deferring virtually all consumption into the future. My question is, "To what end?" If you don't have a logical reason, then loosen up and take the vacation!

[tryintosave]

Hello,

Thanks for the replies. In my industry (consulting), it's very common to get a MBA after 2-3 years to go up to the "next level". Unfortunately, I do not plan to stay with the same company since they are not very competitive in compensation compared to other consulting firms. If I do decide to get my MBA though, I would not be working part-time. For financing, I was thinking something along this line (assuming next year I will repeat the same savings strategy for 6 months):

MBA Cost Over 2 years = ($180,000) all in

Savings:
Projected 401k Balance at Matriculation (assuming very conservative 5% growth) = ($20k + $17.5k + $10k) * 105% = $50,000 (Liquidating over a period of 2 years. With the Lifetime Learning Credit, I could liquidate up to $30k annual income a year tax free)
I-Bonds = $10k + $10k + $3k = $24,000 (including a year of interest ~$1,000 tax free for educational purposes)
Sell Car = $25,000 (an extra year of depreciation)
Total Savings for MBA = $99,000

I'm hoping to get some scholarship (hopefully at least 10k a year, which should be very realistic) = $20k

I will also get a month's pay (unused vacation days) = ~$6k (I would liquidate $3k of my paper I-Bonds to compensate for the tax withholding and purchase the bonds back during tax filing time)

Deficit = ($55,000) - I would finance this sum with SoFi student loans (~6% alumni funding for certain schools, 0% origination fee)

Finally, even after liquidating my 401k and most of my I-Bonds, I would still have my Roth IRA ($11k+$5.5k+$5.5k = $22,000), some I-Bonds ($5k+$1.5k = $6,500) and my Checking fund ($2k+$5k+$2.5k = $9,500) for any unexpected emergencies. In addition, I will also get some income from my summer internship (probably around $10k) and sign-up bonus after MBA (around $20-30k for most consulting firms). That being said, I should be able to pay-off my loan 1 year after I graduate from MBA.

Anyway, from the previous replies, I suppose I'm leaning towards vacation. I think my plan is pretty reasonable (unless anyone else have any inputs). It's pretty sad that I kinda forgot to "live my life" though.

[Watty]

Some things like travel can be done a lot easier and are less expensive when you are young, presumably single, and don't have kids. Now is a great time to do things like the travel you talked about and you are doing amazingly fantastic at savings and your current situation spending $4,000 will not make a significant change in your situation.

When looking at choices like this one of the things that I do is to look at the most likely "worst case scenario" if things go badly. To me it like you might come out of the MBA program with about $5,000 in student debt with some additional interest added in. Compared to you likely career path that does not sound like a huge problem.

But, there is always a but, you need to choose what you spend your discretionary income on and the expensive car was likely a mistake that you need to be careful about. Some people are "binge spenders" sort of like some people that don't normally drink much end up being "binge drinkers". The car and the trip sort of look like that to me. There is a saying that goes something like this, "You can afford to do anything you want to do, but not everything you want to do."

I enjoy travel and it is one of the things I choose to spend my money on in a way that I can afford. The way that I budget for my travel is that I opened up a separate account that is my travel fund and I have about $100 automatically deposited into it out of each paycheck. Since I have saved up for it I have no problems spending it on travel when I want to. I hope that you can see how this is a lot different than waiting on a bonus check that you can blow on a vacation.

If the car is one that will be expensive to maintain and will depreciate a lot if you keep it through grad school, like a BMW, then you should consider swapping it for a car that would get your through grad school better.

[Watty]

MBA Cost Over 2 years = ($180,000)

Did you include the loss of two years income in that figure? That could bump the cost up well over $300K.

With the student loans it sound like you will be around 30 by the time you get your net worth back up to zero after getting the MBA.

The way you are currently saving you will easily have a net worth of well over half a million by the time you are 30, possibly even close to million if the stock market does well over the next seven years. With the way that the compounding of savings works you would also likely have enough in your retirement accounts when you are 30 to already completely fund your retirement.

Draining out your retirement accounts in effect has a higher cost since the tax advantaged space is worth a lot and you will never get that back no matter how much your earn. If you are not fully vested in any employer match in the 401K you may lose that too.

Finding a GOOD MBA program that you could take in the evenings while working might be a more cost effective option. It might not be as highly rated a program as the one you are looking at but you would also be getting work experience at the same time which could help your career some.

Lots has been written questioning which MBA programs are cost effective. Be sure to research this well and look at what all the MBA graduates earn, not everyone that starts the program will finish and half the students will earn less than the average starting salary so the value of the degree is hard to figure. Also watch out for "average" figures when the median number should be used.

[Spirit Rider]

Here are a couple of quotes, I know not from where they come and they are likely not the exact words.

One learns to regret those actions not taken far more than actions taken. AND You can make more money, but you can not make more time.

From your description you are probably ahead of 98% of your peers, take the vacation. Try to get the best deal you can, but enjoy your twenties, your sixties come soon enough.

[bdpb]

At your age and savings rate, I would expect the trip to the Far East for 4k might be a good educational experience as well as a much needed post college vacation. At least as much as a 180k MBA unless you've done it all before.

[VictoriaF]

A first-hand Far-East experience can also help writing MBA papers.

Victoria

[Rainier]

Take the vacation, but travel don't sit at a resort in Phuket the whole time.

[Rodc]

Take the vacation, but travel don't sit at a resort in Phuket the whole time.

Agree. Live experience has value in many dimensions. Saving is great, but you have that well under control.

I do wonder if you need to spend that much on an MBA, but I don't know that market.

[Kosmo]

In my industry (consulting), it's very common to get a MBA after 2-3 years to go up to the "next level".

Let me preface this with I don't know too many consultants, but those I do know all have MBAs. They also have at least 5 or so years of experience working in the industry for which they are consulting. Consulting itself is not an industry.

Projected 401k Balance at Matriculation (assuming very conservative 5% growth) = ($20k + $17.5k + $10k) * 105% = $50,000 (Liquidating over a period of 2 years. With the Lifetime Learning Credit, I could liquidate up to $30k annual income a year tax free)

I don't know how the lifetime learning credit works, but wouldn't you still have to pay the 10% penalty for early withdrawal of 401k funds?


One more thing to add: A good friend of mine completed an MBA part time (from a very good, but not top 5 school) and his class took a trip to China as part of the curriculum. (Financed individually, not part of tuition.) So a trip to the Far East and an MBA are not necessarily mutually exclusive. I still vote for a vacation.

[leonard]

You should make a decision first about whether you are going to get your MBA AND when you will get it. The rest follows from there.

[ResNullius]

I took a number of foreign vacations in college and immediately after, plus I traveled all over the place for work over a period of about 30 years or so. Truth be known, at least for me and as I sit here today fully retired, I hardly remember much about the trips I took during and after college, and the travel I did for work certainly wasn't a vacation to remember. Bottom line: Investing the money today will do you a lot more good 30 years from now than the trip you're thinking about. As for the MBA, I surely would think long and hard about whether it will float your boat any higher than your current degree, but that's up to you and your research. Good luck.

[Random Musings]

It's a no-brainer. With your diligence for saving, it's time to pay yourself and take that vacation.

When you look back, you won't regret it.

RM

[sls239]

Well sometimes a trip to a foreign country is part of the MBA experience. If you are interested in international business, then consider holding off on going by yourself. It is easy to add on some vacation to such trips.

[JupiterJones]

I do think you should ideally pay for education out of savings rather than taking out a loan. So having the goal of saving up for an MBA is a good idea.

But at your income, with your expenses, spending $4K on a vacation isn't going to set you back much at all. You can "re-save" that up in no time.

So for me, it's not so much a question of "should I spend this money or save it" as it is "should I wait a short while longer to start my hypothetical MBA in order to take a cool vacation now?"

And I say, with reservation, heck yeah! Go for it!

JJ

[DualIncomeNoDebt]

OP, I'd read Watty's response. Like ten times, absorb what s/he is saying. Knowing what I know about postgrad MBAs, I'd keep working and stash away that loot.

[JupiterJones]

half the students will earn less than the average starting salary so the value of the degree is hard to figure.

Technically, you can only say that about half the students will earn less than the median starting salary. The average tells us little about percentiles, and can differ greatly from the median in highly-skewed data sets (such as I suspect MBA starting salaries would be).

Also watch out for "average" figures when the median number should be used.

Agreed!

JJ

[porcupine]

[...]Now here is my dilemma:
According to my budget, I should have around $4,000 left (due to performance bonus and upcoming mid-year raise, I'm very confident these will happen). I was planning to use the money for a vacation to the Far East this year, but a part of me is telling me to open up a Vanguard taxable account and save it for my MBA (I'm thinking to get a MBA from a top 5 school next year...). What do you guys think?

Thanks in advance.

You are coming across as a classic case of a Boglehead not having fun. Just to illustrate my point: You need $4k for travel but $180k for your MBA (your numbers not mine). But you are willing to defer the fun that you could buy outright for the sake of dropping pennies (relatively speaking) into the MBA bucket.

GO do the travel first. You can pay $4k more against the MBA later!

BTW, can you not get your work to finance your MBA? Does it really cost ~$180k nowadays?!!

- Porcupine

[bhead33]

My 2 Cents as someone who has a brother as well as a sister-in-law in your profession as well as numerous friends in your age bracket who (a) have quit their jobs and done an MBA (b) not quit their jobs and done an MBA part-time and then quit after to get a new job. I have also been thinking about doing an MBA myself for the last 5 years only to put it off.

(1) Take the vacation - I do remember very fondly all the trips I took in undergrad as well as post grad.
(2) Don't quit your job to do the MBA full time - there is no guarantee that you will get a new job that will make the investment worthwhile. Several of my friends in the same age group as yours ended up without a 'better' job. Is that truly a gamble you want to take with your $180k ?
(3) Get a new job that will let you do the MBA part-time

My job will currently pay for my MBA at any top school that i can get admission into. I struggle every year if I want to do it. I come to the conclusion that it is not worth it for me to make the time investment when it is not *truly* required for me to advance in my career. if I do change my mind and do it, it wont cost me a single penny [unless I get less than an A- in the class].

[tryintosave]

Thanks again for the replies. I'm convinced to take the vacation now. Will be going to Hong Kong, Japan and Singapore. I will start another thread with regards to the MBA plan. Thanks again everyone!

[HomerJ]

Vacation definitely. You're already saving a ton for your age. Live a little. Plus, writing and talking about your experience will help with getting into a good MBA program...

One question... How in the world can someone go straight from college to consulting? With near-zero experience, how can you be advising other companies?

[NYBoglehead]

Thanks again for the replies. I'm convinced to take the vacation now. Will be going to Hong Kong, Japan and Singapore. I will start another thread with regards to the MBA plan. Thanks again everyone!

Good plan. Take the vacation. I agree with the others though about liquidating your retirement accounts to go for the MBA. Look at NPVs and FVs of each. I'm not sure the MBA is worth what it used to be.

[KyleAAA]

Dude, go to Asia and borrow money for your MBA.

[Frobie]

23 years old, makes $70k, lives on $20k?

Add me to the "go on vacation" group.

[zaboomafoozarg]

I'd just think about what that $4k could be worth in say 40 years. If it's not a big deal, go for the vacation, otherwise save the money. Historically I've only gone on a big vacation involving lots of travel once every 7 years or so, makes it more memorable and you can save a lot not spending a few grand on travel every year.

[Polar_Ice]

Vacation... Since you question this enough to open this thread you must have already asked yourself the question will I regret it if I don't go on the vacation.

If you ever can take a long break from work, I would do this:

http://www.wwoof.org/

[SimonJester]

You only get one ride on the merry-go-round, and as I am finding time is one thing you can not get back.

You are single and you and have a good paying job, I would take the vacation.

[cosmicblue]

I think are saving more than enough for your age. Take the vacation while you're young and single.

Have fun!

[Dandy]

people need a vacation but not necessarily an expensive one. an Asia trip sounds like it will cost a lot. Then again once you start work and the rest of your life you may not get another chance. So, if it is realy, really important to you then go for it. If it is just a wish then maybe saving and banking on doing Asia later will be a better choice.

[Rainier]

Um, he's already going, read his post. Case closed.

This was a no brainer for most of us.

Have fun!

[tj]

people need a vacation but not necessarily an expensive one. an Asia trip sounds like it will cost a lot. Then again once you start work and the rest of your life you may not get another chance. So, if it is realy, really important to you then go for it. If it is just a wish then maybe saving and banking on doing Asia later will be a better choice.

Asia is certainly expensive to get to, but meals and lodging are dirt cheap compared to many other regions.