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Disclosure: This post might contain affiliate links. If you click through and make a purchase, I’ll earn a commission, at no additional cost to you. Read my full disclosure here.
I receive a lot of questions from many users asking about my thoughts regarding their careers and their finances. I find lots of value in all these discussions and I’m sure that others might be having the same questions as well. As a result, I’ve decided to start a new section in my blog, where I answer Reader Questions.
This post is about a 22-year old new graduate, who is starting a position as a Product Manager. The reader has been accepted by a top MBA program and will start the MBA in 3 years. The focus of the questions is on how to optimize financial decisions, in order to minimize the time for FIRE.
I want to clarify that in all cases I’ll anonymize the reader and make sure that there is no personal information in my post. Also, I always ask for permission before posting any of these discussions. I really value the trust that my readers show in my opinion and I don’t want to break it.
The reader’s email
This first reader case study is a very interesting one. Here is the email that I received.
Hello Engineer Seeking FIRE,
I hope this email finds you and your family well and in good health.
I am a frequent reader of your site who just graduated from university with a B.Sc. degree in Engineering, who will be starting at a large tech company (non-FANG) as a Product Manager next month, and who has just received an offer of deferred admission to a Top 3 MBA program.
I am incredibly excited to begin my own journey towards FIRE and just wanted to reach out with a few questions.
- I would love a basic how-to (and maybe even chronological advice) on physically distributing paychecks towards different areas. I (and I imagine a lot of my recent grad peers) have read up on all the high-level principles of FIRE, but I have no idea how to actually ensure my income gets distributed into all these places. Even if it is something as simple as “ask HR to put X% of your paychecks in the 401k”, knowing the steps to physically realize FIRE’s principles before I even step foot in my new job would be big (especially for my demographic)!
- If you were in my shoes and knew you would be attending Business school in three years, how would you alter your personal finance decisions? My Business school offers only need-based financial aid, so I feel like I should make financial decisions preparing for the worst – an approx. $250,000 price tag (not to mention the opportunity cost you discussed in one of your posts). Do you have any unique insights or advice for navigating my next three years at work with business school expenses on the horizon?
- What are your thoughts on the importance of a traditional emergency fund (High-Yield Savings, CD, or Money Market)? I am pondering something like $2000-$3000 in one of those traditional accounts and then using my maxed Roth contributions should any more significant emergency arise. Does this sound reasonable to you or do you have other perspectives?
- Any additional tips before I start my MBA?
Thank you so much for the content you create and for your insights! Your articles are pervasive within my network of incoming Tech PM’s so keep up the really incredible work, we truly appreciate it!
Wow, getting both into a top tech company and a top MBA is an amazing accomplishment! Congratulations! Judging by your email, your accomplishments, and the fact that you’re starting with FIRE so early, I’m sure that you’ll make it there before your mid-30s. Also, you might also find my previous post “Is an MBA Worth It?” interesting, as you prepare to start your MBA.
By the way, I’m really happy to know that my articles incoming tech PMs! I didn’t know that they were so popular in that segment.
Question #1: How to distribute paychecks (investing order)
Start by reading the Investment Order for your investments. Pretty much this is a set of buckets that you fill. When you fill a bucket, you go to the next one. For example, let’s say that your take-home monthly income is $10k and that you need $3k as living expenses. You have $7k left to invest. You start by putting all your money into an emergency fund. When this is done, you put all of it into the 401k to get the full match. After that, you pay the high-interest debt, etc.
One additional item is the 529. In your case, there is no reason to have any amount invested in a post-tax investing account. Instead, all your post-tax investments should be within a 529. This way, when you sell the investments, you won’t be taxed at all for the gains, assuming that you use all the proceeds to pay for your MBA. In that sense, the 529 goes just above the item #8 in the list. If you don’t invest within the 529, then you will need to pay taxes for your gains.
Question #2: How to optimize personal finance decisions during the 3 years before the MBA
1. Current year (2021) – Finishing your B.Sc. Working full-time for half of the year
During this year, you’ll only work for a few months, so your total compensation will be low, and your tax bracket will be low as well.
Maximize the Roth 401k ($19k) asap and get the full match from your employer. This is the highest ROI. For this year, Roth 401k will be much more preferable for you than traditional 401k.
If your employer offers ESPP, then take advantage of it.
If you still have enough money, then maximize the HSA, the after-tax 401k (do the mega backdoor conversion to roth 401k), the roth IRA (I assume that you’ll be able to submit directly to Roth IRA, so no need for backdoor roth).
Invest everything in a Total Stock Market Fund or an S&P500 index fund.
2. Calendar year 2022 – Working full-time for a whole year
This year you will have a full compensation, so your tax bracket will be high.
Maximize the traditional 401k as early as possible in the year and take advantage of theESPP (if you have one).
Do your best to maximize HSA, after-tax 401k and Roth IRA (you’ll have to do the conversion this year)
This might sound controversial, but I suggest that you use your current role at non-FAANG as a stepping stone.
When you are close to 1 year in your current role, I’d start preparing for Product Manager interviews. Your target should be Google/Facebook. They provide the top compensation for Product Managers and the best brand name. FB has higher total compensation than Google, but worse work-life balance. Getting a sign-on bonus will help a lot here as well. Also try other tech companies, e.g. Amazon, Netflix, etc. By switching at this point, you’ll be able to spend 2 years in your new role/company.
Here is the rationale behind this: Let’s say that you are now done with your MBA and you want to get a PM role in a tech company. Which company would you choose (assuming that it’s totally up to you)? My personal pick would be Google (great salary and work/life balance). You might prefer FB (even better salary, but worse work/life balance) or some other company. It doesn’t actually matter which one. What I’m suggesting here is that you move to that company pre-MBA. This way it would be easier to return there post-MBA.
If you decide to go through this route, I suggest that you read about the Compensation at the Top Tech Companies (this link talks about Software Engineering salaries, however the Product Management salaries are quite similar), as well as the Culture at the Top Tech Companies.
If you manage to switch companies, then remember that even if you max your 401k (pre-tax + after-tax = $57k) at your current employer, you can still contribute up to another $57k in the after-tax 401k of your new employer.
3. Calendar year 2023 – Working full-time for a whole year
Same comments as for 2022.
Up to you for how long you want to keep trying for Google/Facebook (if you get rejected once, you can try again next year). If you switch to Google/Facebook within 2023, you’ll have 1 year of work there, which is not bad, but also not ideal (i.e. you’ll have to leave shortly after starting)
Start researching all scholarships that you can apply to, in order to get funding for your MBA. Try national scholarships, local, state, associations for black students, etc. Anything that can help. Even if you spend 2 days doing an application that might get you $10k of scholarship money, remember that this is free money. You can start doing this anytime, but I assume that even if you start at the beginning of 2023, you should be fine.
4. Calendar year 2024 – Working full-time for half a year. Starting the MBA
This year you will start the MBA, so it will be another half-year of work. Same instructions as 2021 apply. Frontload everything.
5. Calendar year 2025 – Full-time MBA student
Your only income at this time will be your internship, so you’ll be at a very low tax bracket.
Convert your traditional 401k to roth 401k. This is very important, as it means that you will pay very little taxes for all your existing traditional 401k contributions.
Do tax gains harvesting (i.e. sell stock that has gained quite a bit and buy it back one month later. The idea is that your gains will be taxed in a low-income bracket). You can Google the term for more details.
6. Calendar year 2025 – Finishing the MBA. Starting a full-time position
At this point, you’re back in the same situation as you are today, i.e. the same tactics as in the calendar year 2021 apply. You can use your sign-in bonus to reduce your loan amount.
Also, don’t worry about the high amount of your MBA loans as much for the following reasons:
- You have a high cash flow. You can always repay them using your high post-MBA income
- If you want to reduce the amount of loans, you can always sell your stock (just wait until you own the stock for 1 year, so that your gains are treated as long-term capital gains and you pay 15% of taxes, instead of regular income for which you’d pay 33%+)
- You can use the sign-on bonus from your post-MBA employer to reduce the loan
- Getting scholarships will help reduce the amount
- Always maximize the subsidized loans first. This means that you’re not paying any interest during your MBA.
Question #3: Value of a traditional emergency fund
I am not a big fan of big emergency funds, just because in the tech space we have high income. So, even if you need e.g. $3 or $6k, you’ll be able to get that by selling some stock or waiting for your next couple of paychecks. If you want to have a small amount (e.g. $1k-$3k) in a high-yield savings account (e.g. Ally or Alliant, etc), then that’s fine. I think that emergency funds are a great options for people with lower salaries or less steady income, but in your case, as a single person, I don’t think that you need it. Also, you don’t need any life insurance, etc.
Question #4: Any additional tips before the MBA
Tip #1: Talk to the MBA recruiter in your current company
Before leaving for the MBA (or before switching companies), make sure that you talk to the MBA recruiter in your company. Ask them recruiting questions (e.g. what do they look for in MBA grads, etc) but it’s very important for the recruiter to know you. This way, if you decide to return to the company, you’ll have easy access to the recruiter
Tip #2: Talk to MBA alumnni from the top schools, who are in your current company
In your company, find the mailing lists with the MBA grads from your future B-school. Send them an email saying that you’ll be joining the school and want to understand the culture, the benefits, etc. You’ll get a great perspective on what the program looks like. Also, the interviewers that recruit from your current company will typically be recent MBA graduates. So, there is some chance that you’ll meet your future interviewers. And everybody (including people high the rank, e.g. Directors) are interested in speaking to future alumni of their MBA programs. So this is a great chance to network.
Good luck and congratulations!
Do you have any questions for me?
If you’re interested in advice about your career or your financial plans, feel free to Contact me.
I think it is better to be a boss and maintain a company than to graduate to work with someone else
surprised me. What will we do if the market crashes and we lose our job?
How many months of expenses do you recommend to save?
Your question assumes 2 things that need to happen at the same time:
1. The market crashes
2. The person loses their job
It’s not impossible for both of them to happen at the same time, but it’s quite rare. For example, in 2008 (real estate crisis) the market crashed, but most people in tech kept their jobs. In 2019 (global pandemic), some people in tech lost their jobs, but the market made new highs. Of course, the tech sector was indeed hit badly in 2001, when there was both a stock market crash and lots of layoffs, so this is not impossible.
The specific reader, who asked the question, is working in a large tech company that traditionally hasn’t laid off people so far, even during tough times (e.g. during the 2001 tech crisis). So, my assumption is that they are relatively safe. That’s why I suggested that they have a small emergency fund, in the order of $3k. If the stock market crashes, then they should keep buying VTSAX or S&P500 (at a discount, as the market crashes) and wait until the market recovers.
However, let’s say that somebody does get laid off during a stock market crash and has a small emergency fund, so they need money urgently. In that case, my recommendation would be to sell some bonds from their portfolio. Typically, stocks and bonds are inversely correlated, so in a stock market crash, the bonds will be flat or will increase in value. Having a stock/bond allocation that is less than 100/0 is probably good, if you are worried about a stock market crash.
Finally, if you are indeed worried because you are in a risky company that might lay off people and you believe that the stock market is too risky, but don’t want to sell bonds, then it would be up to you to keep some money in an emergency fund. I can’t tell you how much that would be, because it all depends on your risk level. Many people talk about 3-6 months of salary in an emergency fund. I find this to be too much, especially in the case of the reader, who is a 22-year old new grad.
It’s very possible that your risk level is different than mine, so please feel free to adjust my advice accordingly.