Chemist Seeks Financial Elements of MBA

Two years out of college, Paolo Beltran is making the kind of money many newly minted graduates would die for.

But the 23-year-old nuclear chemist sees his $50,000 annual paycheck as simply a means to a more ambitious end. What he really wants to do is use the money he has already earned to pay for a master’s degree in business administration, which would give him the education he needs to launch a new career. Instead of radiochemistry and spectroscopy, he’s interested in e-commerce and information technology.

His goal: Expand the Internet economy in developing countries such as the Philippines. He wants to invest in start-up high-tech companies, and he dreams of launching a business to offer brokerage and banking services online.

“I’ve always enjoyed following the business and financial worlds, and an MBA will open up many doors for me to actually work in those fields,” Beltran says.

First, however, Beltran has to figure out how to pay for that MBA, which he will begin pursuing full time beginning in September 2001. And he wants to do that without racking up more debt--a decision based on his experience as an undergrad at UCLA, when he piled up more than $12,000 in student loans.

It’s a tall order, especially because he has to come up with at least $73,000 for school and living expenses during the two years it will take to complete the advanced degree.

Moreover, Beltran doesn’t want to work full time while he’s in school, tap his retirement savings or ask his parents for money. And he still wants to indulge his outdoor passions, which include camping, hiking, mountain biking, snowboarding and traveling. In fact, he and his girlfriend are planning a trip to Maui early next year.

But Beltran may be up to the challenge. He has already saved more than $20,000 and is paying off most of his student loans by using education vouchers he earns as a volunteer at Interval House Crisis Shelters in Seal Beach through AmeriCorps.

Beltran’s goal is realistic and very doable, says Scott Leonard, a fee-only financial planner from El Segundo. In fact, if he attends a public university such as UC Irvine or UCLA and works full time during the summers, he should be able to earn his MBA, graduate debt-free and still save for retirement. The outlook is more problematic if he opts for a private school. That would jack up the price tag by 40% and would almost certainly require him to borrow money.

In either case, Beltran is off to a good start. He has about $20,700 in savings split among money market accounts, common stocks and mutual funds. He has an additional $13,000 in retirement savings--$10,633 in a 401(k) and $2,527 in a Roth individual retirement account.

Beltran works full time for Products Laboratories in Burbank. In addition to the $1,360 he invests every month, about 15% of his monthly income automatically is deducted as a contribution to his 401(k)--usually $1,150 to $1,200. His employer provides a 50% match of up to $1,375 a year.

Aside from a few hundred dollars on a credit card, debt is not an issue. Beltran has $11,231 in student loans, but his current income and education vouchers for $9,450 will cover that before he starts graduate school. To help cut costs, he recently moved from a $680-a-month apartment in West Toluca Lake to a Lakewood home owned by his parents. He splits rent with his sister, paying just $300 a month. The trade-off for the savings is that he has to get up at 5 a.m. to catch the Metrolink train to his office in Burbank.

Beltran figures that a two-year MBA, including his projected living expenses, will cost him $73,254 if he attends the public UC system, or $103,254 at a private school MBA program. Fortunately, he has several financing options.

He plans to work for his current employer until he starts school, then work full time during the summers, probably in an internship. He also could work part time for Products Labs--perhaps 10 hours a week--during the school year at $24 an hour. As a fallback, he could turn to his parents for help. But that’s a last resort. “They have already helped me a lot,” he says.

Reevaluate Expenses and Investments

As a first step, Leonard suggests Beltran review his budget for ways to cut his $23,700 in yearly living expenses. If Beltran continues saving at his current rate, when he’s ready to start school he would have an additional $16,750 socked away in his money market account, based on a 5% return. Combined with his current savings, that should fund the first year of school, Leonard says.

Beltran also needs to take a more conservative approach to investing, Leonard says, to maximize savings and ensure the money will be there when he needs it. That means pulling his non-retirement savings out of the stock market now. Otherwise, if there is a big downturn, he could end up without the needed cash.

Leonard suggests investing the money in a term trust. Term trusts are similar to mutual funds but issue a set number of shares and have set expiration dates with targeted returns. Term trusts trade on the stock market like closed-end mutual funds, and like closed-end funds, they sometimes can be purchased at a discount to the actual value of the securities held by the trust.

Although they sound esoteric, Leonard says term trusts can be useful, low-risk investment tools. The caveats are that they must be selected with care--only high-quality investment-grade bonds, please--and the trust should be held until maturity or close to it to reduce the chances that rising interest rates will erode the trust’s market value.

Leonard recommends that Beltran invest $20,669 in Hyperion 2002 Term Trust (ticker symbol: HTB; on the New York Stock Exchange), which matures on Nov. 30, 2002. The Hyperion trust holds short-term bonds with an average rating of AAA, and it has outperformed the average bond mutual fund over the last three years. There’s no sales charge, the expense ratio isn’t out of line and Beltran can purchase the trust through his existing Charles Schwab brokerage account for a low fee. Best of all, it’s selling at a 7% discount.

Leonard estimates the trust would provide Beltran with an annual return of 8.75%, 50% of which would be long-term capital gains if the assets are held for at least 12 months. The other half would be taxed as interest income. In 12 months, his initial investment would be valued at $22,426, Leonard says, including commissions and expenses.

If Beltran opts for a more conventional approach, he could consider an open-end mutual fund that invests in short-term, high-quality bonds, such as Vanguard Short-term Bond Index (VBISX) or Payden & Rygel Global Short Bond Fund (PYGSX). Taking the more familiar road, however, could cut Beltran’s return by 3 percentage points, Leonard estimates.

Public or Private School? Big Difference

Using Leonard’s investment strategy, Beltran would have a projected $39,076 in savings for his schooling, leaving a $34,176 shortfall over two years if he goes to a public university and almost double that, $64,178, if he opts for private school.

That shortfall could be made up by a combination of part-time work during school, full-time work during the summer or student loans.

If Beltran works just 10 hours a week at his current job during the school year, he would bring in an additional $8,640 annually--probably enough in combination with a full-time summer job to finance public school tuition.

However, if he insists on a private school, Beltran almost certainly would have to go into debt to pay the bills.

Because Beltran’s investments and savings probably would cover most of his expenses if he attends a public school, he also could opt for a lower-paying summer job, such as an internship. Or, if part-time work is too difficult during the school year, he still could take out student loans. In an emergency, Beltran always could tap his MasterCard with its $10,000 limit, or as a last resort, yank funds and pay penalties from his 401(k) or Roth IRA, or even turn to his parents, Leonard adds.

“The great thing is Paolo is bright, and he understand the pros and cons, so this is going to always be a work in progress over the next few years,” Leonard adds. “And he’s flexible enough to be able to do that.”

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Susan J. Marks is a regular contributor to The Times.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Investor: Paolo Beltran, 23

* Profession: Nuclear chemistn Annual income: $50,000

* Goal: Pay for two years of grad school to earn an MBA (total cost: $73,254 to $103,254) withoutincurring debt.

Current Portfolion About $7,000 in money market accounts; $4,855 spreadamong several common stocks, including AppliedMaterials Inc., Cisco Systems Inc. and Oracle Corp.;$8,891 in mutual funds split among Fidelity DividendGrowth, Stein Roe Young Investor and TransamericaPremier Aggressive Growth

* A Roth IRA worth $2,527 invested in Janus TwentyFund; $10,633 in a 401(k) retirement plan andinvested in Fidelity Aggressive Growth, FidelityContrafund and Fidelity Worldwide

* 1992 Nissan Pathfinder

Debt: $11,231 in student loans

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Recommendations

* Invest assets from money market accounts, stocks andmutual funds (total: about $20,669) in Hyperion 2002Term Trust, which is expected to provide an annualizedreturn of 8.75%. Estimated value in 12 months: about$23,000.

* Continue monthly savings of $1,364. In a 5% moneymarket fund, the value in September 2001: $16,753.n Look for ways to make cuts in projected yearlyexpenses of $23,667.n Apply for financial aid if necessary.

* Continue contributing to 401(k), but put all of themoney into Fidelity Worldwide Fund, which has 50-50U.S.-international large-cap growth stocks.

* Consider switching Roth IRA investment from JanusTwenty Fund to small-cap and/or value stocks to diversify portfolio.

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Meet the PlannerScott Leonard is a fee-only certified financialplanner and registered investment advisor.His firm, Leonard Capital Management, isin El Segundo.