The Ten-Day MBA 4th Ed.
Page 35
On the big life issues, coaches will help you create a detailed set of goals for yourself: company, professional, personal, professional relationships, family relationships and community. Then you will review it periodically with the coach to make sure that you are on track and that your actions are in line with your goals. Stephen Covey’s 7 Habits of Highly Effective People tells us to “take responsibility, make your mind up about what is important to you, and live by it. Seek first to understand, then to be understood.” His eighth habit, added in 2004, was “find your voice, your calling, your soul’s code, and inspire others to find theirs.”
Leadership coaches, as you can imagine, see themselves as life coaches as well and recommend regular exercise, healthy diets, not smoking, cutting back on caffeine, meditation, and getting proper sleep. They recommend a 360-degree evaluation to gain self-awareness from your superiors, your colleagues, and your direct reports. Coaches may offer other advice: Eat a piece a fruit each day and you are less likely to eat junk food. Smile more; your smile makes other people happy, which in turn makes you happy. Don’t accept the TV news’ picture of the world; it is a distorted, negative view. Give back; doing good for others is just as good for you. Many of these factors affect your general level of stress and anxiety and, therefore, affect your productivity as a business leader.
THE TEN-MINUTE FINANCIAL PLANNER
Business schools want their students to be as successful as possible in meeting their personal financial goals. Several top schools offer courses on financial planning and financial management. No subject is more important to MBA students than their personal wealth creation. The keys to becoming a millionaire are straightforward. Since the average MBA is earning a salary that puts him in the top 10 percent of earners, all it takes is discipline and some planning.
Rule 1: Pay Yourself First. Automatically save a minimum of 10 percent of your earnings.
Maximize your tax-deferred savings opportunities. Take full advantage of all 401(k) or 403(b) plans available. Take full advantage of employer matches. Take advantage of all the tax benefits from Uncle Sam. If you are in the 25 percent tax bracket, you are in essence already getting a 25 percent return on your savings by avoiding the taxes versus trying to save it from your check after you get it. If you get an employer match, you doubled your money. What you earn in a mutual fund investment is icing on the cake. It would be tough to beat those returns, even in the heady times of the Internet bubble. It is important that your investment is automatically taken from your check before taxes are taken from the money.
If your employer does not have a 401(k) plan available, you need to maximize your other tax-deferred savings options. Maximize available Traditional IRAs, Roth IRAs, and Simple IRAs. Automatically invest with systematic payments from your paycheck or from your own checking account if possible. If you have self-employment income, you are able to save much more money tax-deferred. Create an Individual Person 401(k) or SEP IRA.
If you follow this plan, you are assured to amass more than a million dollars over your working career even with a moderate income.
Rule 2: Own Your Home. Own your home; don’t rent if you plan on staying for an extended period of time. Renting a place does not build up any wealth for you, but it does for your landlord. As with the tax-deferred accounts, the federal government is subsidizing your home. The subsidy is your tax deduction for your mortgage interest. If you have a 25 percent tax rate, the government is paying 25 percent of your interest. In the first years of the mortgage, when most of the payment is for interest, the government will be paying 25 percent of your entire mortgage payment. That deal is hard to turn down.
Thirty-year and fifteen-year mortgages are available if you plan to stay more than just a few years in a home. The fifteen-year mortgage has a lower interest payment, takes half as long to own your home, and forces you to save more with a higher monthly payment. The thirty-year has a little higher interest rate, but takes twice as long to pay off. On the positive side of thirty-year mortgage, you can afford a larger house, which in a market of rising values allows you more financial leverage. Few investments allow you to have the same amount of leverage as your home mortgage. In a 20 percent down-payment situation, you control five times the value of real estate with your real estate investment.
If you want to accelerate your ownership and your savings, set up biweekly payments, make extra payments to principal each month, or make an extra month’s payment to principal each year. You could own your house totally in ten years if you wish. Make sure to shop to compare interest rates and fees. Use bankrate.com.
Own rental property. When you are further along with the payments on your house, you will have built up considerable equity. You can use the equity in your home to buy another home for yourself or to buy a rental property. In that case the renters will be saving for you, as they pay off your mortgage on that property. See “The Ten-Minute Real Estate Investor” for guidance on the economics of real estate.
Rule 3: Create an Emergency Fund and an Investment Portfolio. Everyone needs an emergency fund. Experts suggest three to six months expenses as appropriate, but longer is okay if that is what makes you sleep well at night. You need to pay yourself first to create this nest egg with a set amount each month until you reach your goal. This account will not have the benefit of a government subsidy because it comes out of your paycheck after taxes have been taken. The money should be inaccessible. Shop for the highest money-market rates and CD rates at bankrate.com to ensure you get the best deal.
Once your emergency fund is created, you need to invest the same amount or more in an investment account holding longer-term investments. This account can be earmarked for education, to start a business, and or retirement.
Rule 4: Invest Wisely. Investing your portfolio is not a place to express your creativity. Choose the long-term mutual fund winners as rated by Morningstar.com and Forbes. Diversify stock investments across asset classes such as large, mid-, and small-capitalization company mutual funds and across investment styles such as value, blend, and growth investing. Bonds should likewise be diversified, across short-, medium-, and long-term maturities. In addition, choose funds with low expenses. Lower expenses have been highly correlated with higher returns. You must also monitor your entire portfolio, not just individual holdings. Track and analyze your entire portfolio with Morningstar.com’s portfolio tracker. Shop for CD and money market rates at bankrate.com.
You may choose to take a portion of your savings to invest in risky opportunities, but be disciplined, keep it to a small portion of your nest egg.
Rule 5: Be Selectively Extravagant but Pervasively Frugal. The expense side of the ledger can be just as important as the saving and investment side. Of course you must enjoy life; life is not a dress rehearsal. But you need to be selective about how you spend your money. To feed your passion, whatever it may be, golf or even wine collecting, you may need to be selectively extravagant, but for things that are not important, you need to be prudently frugal.
As widely reported, over a lifetime a $5-a-day caffe-latte or cigarette habit can cost you more than a million dollars of lost retirement saving. Driving a moderately priced reliable car for one hundred thousand miles instead of trading frequently for a pricey luxury car permits you to avoid many car payments, the steep cost of depreciation, and interest charges. This plan also is worth a million dollars to you over your lifetime.
Another area for savings involves the use of credit cards. Some experts say that you should not use them because it psychologically divorces your spending from the actual use of cash. If you do choose to use your credit card, use one that provides a cash benefit such as cash-back from Discover. Do not roll over a balance from month to month, as the interest charges are far more than you can earn from your other investments.
Appendix:
Quantitative
Analysis Tables
TABLE OF THE NORMAL DISTRIBUTION
Each number in the table is the are
a under the normal density curve that lies between the mean and Z standard deviation units from the mean.
MBA Abbreviation Lexicon
Abbreviation: ABC
Translation: activity-based costing
Subject: A
Abbreviation: AIDA
Translation: attention/interest/desire/action
Subject: M
Abbreviation: BCG
Translation: Boston Consulting Group
Subject: S
Abbreviation: CAPM
Translation: capital asset pricing model
Subject: F
Abbreviation: CDF
Translation: cumulative distribution function
Subject: Q
Abbreviation: CDS
Translation: credit default swap
Subject: F
Abbreviation: COGS
Translation: cost of goods sold
Subject: A
Abbreviation: CPM
Translation: critical path method of scheduling
Subject: OP
Abbreviation: CPM
Translation: cost per thousand
Subject: M
Abbreviation: CRM
Translation: customer relationship management
Subject: OP
Abbreviation: EBIT
Translation: earnings before interest and taxes
Subject: F
Abbreviation: EMV
Translation: expected monetary value
Subject: Q
Abbreviation: EOQ
Translation: economic order quantity
Subject: OP
Abbreviation: EVA
Translation: economic value added
Subject: S
Abbreviation: FASB
Translation: Financial Accounting Standards Board
Subject: A
Abbreviation: FIFO
Translation: first in first out
Subject: A
Abbreviation: FRICTO
Translation: flexibility, risk, income, control, timing, other
Subject: F
Abbreviation: FSI
Translation: freestanding insert
Subject: M
Abbreviation: GAAP
Translation: generally accepted accounting principles
Subject: A
Abbreviation: GDP
Translation: gross domestic product
Subject: E
Abbreviation: GNP
Translation: gross national product
Subject: E
Abbreviation: GRP
Translation: gross rating points
Subject: M
Abbreviation: IPO
Translation: initial public offering
Subject: F
Abbreviation: IRR
Translation: internal rate of return
Subject: Q
Abbreviation: IT
Translation: information technology
Subject: OP
Abbreviation: JIT
Translation: just-in-time inventory
Subject: OP
Abbreviation: LBO
Translation: leveraged buyout
Subject: F
Abbreviation: LCP
Translation: low-cost producer
Subject: S
Abbreviation: LIFO
Translation: last in first out
Subject: A
Abbreviation: M&A
Translation: mergers and acquisitions
Subject: F
Abbreviation: MBO
Translation: management by objective
Subject: OB
Abbreviation: MBWA
Translation: management by walking around
Subject: OB
Abbreviation: MNC
Translation: multinational corporation
Subject: S
Abbreviation: MRP
Translation: material requirements planning
Subject: OP
Abbreviation: NNP
Translation: net national product
Subject: E
Abbreviation: NPV
Translation: net present value
Subject: Q
Abbreviation: PE
Translation: price-earnings ratio
Subject: F
Abbreviation: PLC
Translation: product life cycle
Subject: M
Abbreviation: POP
Translation: point of purchase
Subject: M
Abbreviation: QWL
Translation: quality of work life
Subject: OB
Abbreviation: RIF
Translation: reduction in force (layoff)
Subject: OB
Abbreviation: ROE
Translation: return on equity
Subject: A
Abbreviation: SBU
Translation: strategic business unit
Subject: S
Abbreviation: SEC
Translation: Securities and Exchange Commission
Subject: F
Abbreviation: SEO
Translation: Search Engine Optimization
Subject: M
Abbreviation: SKU
Translation: stock keeping unit
Subject: M
Abbreviation: SMSA
Translation: Standard Metropolitan Statistical Area
Subject: M
Abbreviation: SOX
Translation: Sarbanes-Oxley Act
Subject: ET
Abbreviation: SPC
Translation: statistical process control
Subject: OP
Abbreviation: SWOT
Translation: strengths, weaknesses, opportunities, threats
Subject: M
Abbreviation: TRP
Translation: total rating points
Subject: M
Abbreviation: TQM
Translation: total quality management
Subject: OP
Abbreviation: WACC
Translation: weighted average cost of capital
Subject: F
Abbreviation: YTM
Translation: yield to maturity
Subject: F
SUBJECT KEY: A = Accounting; E = Economics; ET = Ethics; F = Finance; M = Marketing; OB = Organizational Behavior; OP = Operations; Q = Quantitative Analysis; S = Strategy
Permissions
Grateful acknowledgment is made for permission to use material from the following:
DAY 1: MARKETING
Assael, Henry. Consumer Behavior & Marketing Action, 4th ed. Boston: PWS-Kent Publishing Company, 1992, p. 100.
Cullum, Leo. Cartoon, “Down in Accounting Flexing My Muscles.”
Cullum, Leo. Cartoon, “I Have Credibility.”
Newton, Derek A. Sales Force Management—Text and Cases. Copyright © 1990 by Richard D. Irwin, Inc., pp. 7–9.
DAY 2: ETHICS
Cullum, Leo. Cartoon, “Out of My Depth.”
Freeman, R. Edward, and Daniel R. Gilbert. Corporate Strategy and the Search for Ethics. Copyright © 1988, pp. 24–41. Adapted by permission of Prentice Hall, Englewood Cliffs, N.J.
DAY 3: ACCOUNTING
Cullum, Leo. Cartoon, “The Phoenicians Were the First Accountants.”
Cullum, Leo. Cartoon, “New from Accounting.” The New Yorker, March 18, 2002. Copyright © 2002 by The New Yorker Magazine, Inc.
DAY 4: ORGANIZATIONAL BEHAVIOR
Clawson, James. “Organizational Structure,” Darden School Case UVA-OB-361, Figure 1–8, pp. 11–18. Copyright © 1988 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.
Clawson, James. “Survey of Managerial Style,” Darden School Case UVA-OB-358, Figure, p. 14. Copyright © 1988 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.
Clawson, James. “Systems Theory and Organizational Analysis,” Darden School Case UVA-OB-214, Figure 1, p. 9. Copyright © 1983 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.
Cullum, Leo.
Cartoon, “Ice Water in Your Veins.”
Cullum, Leo. Cartoon, “Lovely Parting Gifts for You.”
Gabarro, John J., and John P. Kotter. “Managing Your Boss.” Harvard Business Review (January/February 1980), Exhibit, “Managing the Relationship with Your Boss,” p. 99. Copyright © 1979 by the President and Fellows of Harvard College; all rights reserved. Reprinted by permission.
Greiner, Larry E. “Evolution and Revolution as Organizations Grow.” Harvard Business Review (July/August 1972), Exhibit II, “The Five Phases of Growth,” p. 41. Copyright © 1972 by the President and Fellows of Harvard College; all rights reserved. Reprinted by permission.
“Why People Behave the Way They Do,” Darden School Case UVA-OB-183, Figure 5, p. 16. Copyright © 1986 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.
Zierden, William E. “A Framework for Understanding Organizations,” Darden School Case UVA-OB-183, Figure 5, p. 16. Copyright © 1986 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.
Zierden, William E. “Introduction to Job Design,” Darden School Case UVA-OB-91R, Figure 1, p. 2. Copyright © 1975 by the Darden Graduate Business School Foundation, Charlottesville, Virginia.