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Your Side Hustle Really Is a Business and Other Tax Insights with Hannah Cole of Sunlight Tax

September 23, 2024 by Jill Hoffman

In this episode, Emily interviews Hannah Cole, an artist and the founder of Sunlight Tax. Sunlight Tax primarily serves artists and creatives in their business tax needs, but there are many overlaps between artists and the academic community. Hannah and Emily discuss the best practices and insights that graduate students, postdocs, and PhDs with side businesses need to stay on the IRS’s good side. Hannah clarifies exactly when a business starts, the first step you must take with your finances, and how to calculate and pay your additional tax liability.

Links mentioned in the Episode

Your Side Hustle Really Is a Business and Other Tax Insights with Hannah Cole of Sunlight Tax

Teaser

Hannah (00:00): You know, we have a whole tax industry out there trying to, you know, its marketing is based around making us all hate and fear our taxes and actually kind of implicitly training us not to even look at it, to just feel so fearful. And so, like, hands off that we don’t even look at it. And I’m just here to say I hate that. I disagree with it.

Introduction

Emily (00:29): Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

Emily (00:58): This is Season 19, Episode 3, and today my guest is Hannah Cole, an artist and the founder of Sunlight Tax. Sunlight Tax primarily serves artists and creatives in their business tax needs, but there are many overlaps between artists and the academic community. Hannah and I discuss the best practices and insights that graduate students, postdocs, and PhDs with side businesses need to stay on the IRS’s good side. Hannah clarifies exactly when a business starts, the first step you must take with your finances, and how to calculate and pay your additional tax liability. This whole episode is devoted to business taxes, but before we get started I want to ask you if you or your peers need help figuring out taxes on your academic income, your graduate student stipend or postdoc salary and the attendant benefits. Now is actually the best time to start the conversation with your graduate school, postdoc office, graduate student association, etc. about bringing my tax content to your university in the upcoming tax season—so that they have time to plan their budgets. In this upcoming tax season I’m offering live workshops that I will tailor to your university and state and also pre-recorded workshops that are widely applicable. I would be very grateful if you would issue a recommendation to a potentially appropriate host at your university. You can find links to more information from PFforPhDs.com/financial-education/. Thank you! You can find the show notes for this episode at PFforPhDs.com/s19e3/. Without further ado, here’s my interview with Hannah Cole of Sunlight Tax.

Will You Please Introduce Yourself Further?

Emily (02:56): I have a really special guest on the podcast today, Hannah Cole of Sunlight Tax. I have been listening to Hannah’s podcast, Sunlight, the Sunlight podcast for, I don’t know, definitely more than a year now, maybe closer to two. And she is an amazing, uh, podcaster and practitioner in her field because she teaches about taxes to her community. I’m gonna have her introduce her community to you, but I see a lot of overlap between Hannah’s community and our community of academics and PhDs and graduate students and so forth. So Hannah is really gonna be able to bring her insight into taxes and specifically self-employment taxes to our conversation today. Um, which is going to focus on self-employment situations that grad students and postdocs are typically in, which is like a self-employment side hustle. So Hannah, thank you so much for agreeing to come on the podcast. I’m really excited. Will you please introduce yourself a little bit further for our audience.

Hannah (03:48): Sure. Um, thank you so much, Emily. I appreciate it. Um, yeah, so I am an artist first. I, I went and got my MFA in painting. Um, and I have a degree in art history and, uh, started my life as a professional artist and was so upset at how I was treated by the world of accounting <laugh> by my dad’s accountant that eventually I, you know, went out to get the information on my own. I went all the way back to school for accounting and studied taxes. Um, ’cause I live with a, you know, artists are solitary creatures. You know, you, when you’re a painter like me, you’re in the studio for long, long hours alone. And the only way to build your career is through a network. So, you know, we are like, uh, super networkers and my community of artists was deeply in need of the same information that I was. And I, I like, knew there was a need out there, and I was like, I’m so upset by the way that this has been delivered to me, if at all. Um, there’s, there’s a market here. Um, so I started my business Sunlight Tax. Um, and that’s my mission is to, it’s much, it’s much bigger of an audience than just creative people, but it is really kind of for people who maybe where money is not the sole interest that they have when they do the thing they do. Right. And I think as academics, you can probably relate to that because most people who go into academics have a passion for their field. Right. They’re trying to do some research, and that probably is a little bit primary over money. And so, you know, that’s very similar to artists that’s very similar to sort of mission-driven people. So it’s kind of a big group of people where money is not the only thing, but these people need to do their taxes too.

Similarities Between Academics and Creatives

Emily (05:37): Yes. I see so much of an overlap between how you described your journey to what you do today, uh, in the tax world, at any rate, and what I do with, uh, as being a financial educator. Yeah. Um, I love you sort of got started comparing the community that you come from the artist community with the academic community. I totally agree about those, um, overlaps. Are there any, would you like to elaborate on that in any way? Specifically? I’m thinking of are there like mindsets or like skills that you’ve observed or perhaps lack of skills among your community, um, perhaps that overlap with ours that either are, um, helpful or not so helpful when it comes to running a business, which some academics end up doing.

Hannah (06:16): Yeah. Well, I’m, the, the world of academia is not foreign to me. I mean, I taught, I was a professor, uh, at Boston University for a brief moment, <laugh> before I realized that I, I, uh, the, the strictures of academia were not, not for me. I think for people like us, when you’re, when your identity is formed around a passion for a thing, um, money can become the enemy by accident. Not really on purpose usually. But I think, um, I see a parallel between people in creative fields where, you know, there’s no artist in the world who’s gonna tell you that they do anything except make the best possible art they can. Right. And I think the same is true in academia. You’re gonna do the best, highest quality research you possibly can. You’re gonna, you know, whether that’s the most innovative or, you know, you’ve got the best ideas, the best protocols, whatever, however you’re doing it. And I think when that’s the case, you can kind of lose, you know, what you focus on is what does well, and if your focus comes off of money, too much money can get, uh, it can atrophy, right? Your skills in it can atrophy. Um, when your attention is not there, you just, uh, it can kind of get away from you. Right? And so I think that that is a sort of similar issue that, um, people in academia have to people in the creative world. Um, and I think just, you know, we’re busy, right? We’re busy doing the thing, we’re doing <laugh>, and this is one of the reasons I didn’t wanna be in academia ’cause of how busy you get <laugh>. Like, I was like, I, I’m never gonna be in the studio again if I do this. Um, and, and you just, it’s hard to check like, you know, self-employment, you know, when you’re talking about like grant income or the types of income that, that we’re talking about here, like track doing, doing, setting up bookkeeping, paying estimated quarterly taxes, like things like that. You know, they are a little bit complex and they do require some ongoing attention. So that’s, that’s a challenge.

Emily (08:23): Totally agree with everything you just said. Underline that. Um, in addition, I wonder if you could speak to, because I think another commonality between these communities is a percep- a perception among ourselves that our work is undervalued by other people and then we end up undervaluing ourselves in some cases, um, which is really dangerous when it comes to business ownership

Hannah (08:45): Very much. Yeah. And I think it’s, it, it’s easy to get into a mindset like that, especially if people around you in your daily life have a mindset like that. You tend to absorb the attitudes of the people you are with all day. Um, and so yeah, if you have people around you who feel like, uh, you know, the good ideas are over here and the money is over here and they’re in opposite directions, you’re gonna start getting outta balance where with, where money is in your life, like, I, I like to think of it this way, that money is neutral, right? Money is a tool. It’s like a hammer. You can do good things with it. You can do bad things with it, right? Like it’s amplifying the power of the person who has it. So if you’re doing good work, if you’re an ethical person, you can do amazing things and you can do more of them when you have more money. I don’t know. Think, um, think Oprah, think, um, Dolly Parton, you know, these are people who have great amounts of wealth and who do truly world changing wonderful things with their money, right? Uh, we could also probably think of quite a few examples of people who do not so great things with their money <laugh>. But I think the problem is when you go from thinking of money as neutral, right? Money as just being an amplifier of your agency to being negative, that that’s where you start getting problems. You start getting in a sort of stuck space around it. Because if you think of money as negative, or if you think that somehow your motives or ethics will be corrupted, if you simply have money more of this tool, you won’t advocate for yourself properly, right? Um, you cannot walk into a job interview and really nail it, um, nail the salary negotiation part of it specifically. Um, you’re not gonna advocate the way with the fierceness in that interview that you would if you believed that money was good, right? Or, or money in your hands was a good thing. If you fundamentally think, you know, having a fully funded retirement is makes you kind of a yucky person, you’re not gonna ever fund your retirement. You know, these things are related.

How Do You Know When You’ve Actually Started a Business?

Emily (10:55): Mm-Hmm. That is so interesting. I’m really, I really like the way you put that. I haven’t thought about it quite that way before. So thank you so much. Um, okay. I wanna narrow down to talking about like business ownership for, again, my community, which has many similarities with yours. Uh, they’re gonna be doing this as a, we’re gonna say a side income though, right? They have their primary thing as being a graduate student or being a postdoc, and they’re pursuing that, but they have a self-employment side hustle as well. Oftentimes what I see is people acting as like consultants, for example. Um, or maybe they’re a writer or an editor in, in this kind of world. So these, these kinds of side hustles, whether maybe, or data science. They’re employing some skills perhaps that they have developed as an academic, but outside of that academic context as a business owner. So, and I love that you’ve talked about this extensively on your podcast, but the question to you is how does someone know when they’ve actually started a business? Because especially when it’s something on the side, it may be a little vague at first.

Hannah (11:50): Yeah. This gets really confusing if you start thinking of the other organizations that think of your business start time as different. Um, and I, I do have a whole podcast episode about specifically when each one thinks you start. Um, so if you want me to, you know, link to that in your show notes, I would be happy to send that link. Um, but, you know, that’s on the Sunlight podcast. So to the IRS and this, you know, I’m a tax person, so I’m orienting towards that. When it comes to when you report the income, when you report the expenses, um, to the IRS, your, your business begins the moment you advertise. And that actually makes a lot of sense if you understand what makes you a business. The IRS says that you’re a business versus being a hobby. Um, so your side hustle is a business and not a hobby. If you have a profit motive, if you are trying to make money with it, right? It doesn’t mean that money has to be, you know, you worship at the altar of money and there’s nothing else in your life and you throw all your ethics and your, you know, value and, and your amazing work out the window. Not that, but it has to be in there, has to be in the mix, and it has to be, you know, strong. Um, and so if you think about that, having an intent to make a profit, which is the IRS definition of you being a business that happens before you make a profit, that happens before you make money. And I think this is where people get confused. They think, I I, I, I only get to report it once I’m making money, but actually no, because you start that business with expenses, right? You have expenses first. Then once you’ve built something, um, let’s use an example of like a pizzeria. ’cause it’s very tangible and we’ve all been to one. Um, you don’t start generating income from that pizzeria day one, right? The pizzeria has to exist first. Like, you can’t sell a slice of pizza if you don’t have an oven <laugh>. You have to install the oven, you have to have a bakery, you have to have flour, right? So you’re gonna have a lot of expenses before you ever can even bring a dollar in the door. And I think it’s really important to get your head around that concept. You are not broken because that’s how your business is working. That’s actually normal, right? And we have in business school, they teach this concept called the break even point. Well, what is that? The break even point is the magical moment when you go from negative income, AKA, AKA spending <laugh> and, and, um, it’s that magical moment when you go from negative income to zero, right? And then over the zero, then the number starts getting positive. That’s the moment you become profitable, right? When your, when your income rises above the amount of your expenses for the first time, and you know what, there is no guarantee or promise that that will ever happen or that it will happen on a certain timeline. That’s all within your control and your profit motive should be driving that bus. But, uh, it’s, it’s good to know that it’s normal to have expenses first. And in fact, you’re entitled to file a Schedule C that is where you put this stuff on your tax return. You’re entitled to file one before you have a profit. So the title of the Schedule C is profit or loss from business. So one, you have to be a business, it’s in the title, but also you don’t have to have a profit that’s also in the title. So that’s kind of a good baseline. So remember, the moment you advertise, and if you think about it is, is the moment that you start that your business starts. And if you think about it, that makes sense. ’cause advertising says hello world, hello clients, I’m open, I have this thing available. If you’re the right person, if this will work for you, come and get it. Right? But also, you know, to somebody who is, let’s say, doing some freelance editing on the side, advertising is not gonna look the way it does for Coca-Cola, right? Advertising for you is probably gonna be an email to a couple of friends and family. You’re still advertising. You probably aren’t thinking of that as advertising, but whatever you do that’s signaling, Hey, hey, I do this thing, are you interested? So maybe that’s an Instagram post. Maybe it’s an email to friends and family. Um, maybe it’s a website going live. Those are all your moment when you started advertising.

Emily (16:14): I’m so glad you gave that example because as I said earlier, I see a lot of like service-based businesses as side hustles, um, for this community. And so just when you were describing that, I was like, yeah, if you put something up on LinkedIn, if you put your services out there on, um, whatever the current version of Upwork is, um, or like you said, an email to a friend putting up a website, Hey, it costs money to host a website. So like, you’re probably having your first expense when you do that. Um, or maybe you’re starting to pay for software to like get client scheduling set up or whatever it might be. Um, I think part of the confusion when people are asking this question is they think somehow it’s like a, a bad or like an onerous thing to be considered a business and have the attendant tax filing, uh, requirements along with it.

Emily (16:57): But what I really learned from your podcast and your attitude around it is no, this is a great thing to be considered a business, especially as you were just saying, when it takes some time to get to that turning point where you actually have profit. So like, if you have a whole year when you have some, some loss, even though you’ve started advertising, maybe you have some expenses, the income isn’t there yet. Um, you can use that to reduce your tax liability, actually. And so it’s not, it’s not a bad thing to be considered a business earlier. It does have some complications, but it’s, it’s, it’s actually a very positive thing to realize that you have a business

Hannah (17:29): Very much. I mean, and it, it tangibly lowers your taxes. <laugh>. I mean, we in this country are supporting business not out of a charitable purpose, but because it’s good for the u- US economy, right? Like when we support us small businesses and, and we count, you and me, Emily, we count <laugh>. Um, when you support a small business, you are, you are helping the US GDP grow, right? That’s in the interest of the nation we live in. Um, ultimately, you know, you’re gonna spend a lot of money, you get business deduction, you get business expenses, they are deductible on your tax return. That’s a incredible benefit given to you by Uncle Sam. I mean, I, I don’t think we all appreciate that quite as much as we should. Um, but that’s, that’s huge. Um, and yeah, and so you’re, you’re getting this subsidy <laugh> and it’s nice to take advantage of. It’s nice to know what your rights are and take advantage of it. Um, and of course, if you weren’t a business, if you were operating as a hobby, instead you wouldn’t get those deductions. So there’s a real difference.

Emily (18:38): Yeah. Thank you.

Commercial

Emily (18:41): Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, budgeting, investing, and goal-setting, each tailored specifically for graduate students and postdocs? I offer workshops on these topics and more in a variety of formats, and I’m now booking for the 2024-2025 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/financial-education/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutes enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Best Financial Practices for Early Career Academics With Businesses

Emily (19:59): Okay. So I’m thinking still about this grad student or postdoc or early career PhD who’s, has this business now they know they’re starting it on the side. What are some best practices that they should implement in their finances from day one to make things easier or like totally above board going forward?

Hannah (20:16): Sure. Um, the first is to open a separate bank account. Um, you wanna keep your business income and expenses separated from your personal bank account and personal expenses. Um, there’s many reasons why this is a good idea. All of it is a good idea. <laugh>, there is no negative, um, except that you have to go through the effort of opening an account. Um, but the magic that that separation does is now when you have that business bank account and you deposit all the money you earn from that freelance side hustle, you know, that gig, whatever it is, now you are creating a record of everything into and out of your business. That record becomes the backbone of your bookkeeping. So now from there, setting up bookkeeping, setting up tracking becomes far simpler. Um, Emily, when I started out as a professional artist, before I knew to do all this stuff, I was printing out bank statements going through, you know, like three days before tax time, going through my bank statement, line by line with a highlighter, trying to, trying to recall if that trip I made back in February last year to Lowe’s was for business or for my home, right? <laugh>, Like we don’t want that <laugh>. If you have a dedicated business account and you keep a mindset of I only spend this money on business expenses, then everything in there is deductible. You just have to sort out what category of deduction it goes into. So man, it makes your life simple. And then, you know, once your business grows, this is a thing that grows with you. Um, you can automate that bank feed into bookkeeping software. That’s a next step thing. You don’t have to do that day one, but it gives you the, you know, the easy option. Um, also if you one day create an LLC for liability protection, your LLC will be instantly invalidated if you don’t have a separate business bank account, you, when you have a liability, uh, limited liability corporation, the whole thing you’ve done legally is to separate your business and personal selves. And if you then don’t actually do it in the background, a court of law can say you don’t have an LLC, you don’t have any liability protection, and basically your LLC is thrown out, you’ve wasted all that money. Um, so <laugh>, there’s no downside, in other words, to a business bank account. PS it doesn’t actually have to be technically a business account according to your bank’s rules. It can just be a personal account. That’s another separate account. It’s the separation that’s important. So it can be, you know, technically a personal account according to the bank. That’s fine. Just use it like it’s your business account.

Emily (23:05): Thank you so much for that. Um, that clarification, and actually you threw out a couple of terms there. So I just want to, this is partially some things I’ve learned from you, clarify for the listener. Um, this, this term LLC, the limited liability company, this is a legal status and it’s not, it doesn’t necessarily confer a specific tax status. So when you’re first starting out out, when you’re first starting out with a, a side business or something, you’re likely gonna be operating as a sole proprietor. Then maybe for the entire lifetime of the business, you’ll be a sole proprietor. Whether or not you open an LLC as well, your tax status will stay a sole proprietor. That is, unless you decide that you want to grow your business to the point where becoming a different kind of tax status would make sense, like an S selection, et cetera. But for people who keep businesses on the side, I would imagine many of them continue to operate as sole proprietors indefinitely.

Hannah (23:55): Yep. I would say that’s probably true. Yeah.

Preparing for Tax Season as a Business Owner

Emily (23:58): So you just mentioned this core first step, which is to open a separate bank account, and I totally agree with it. You know, when I first started out my very first side hustle, I didn’t have that, but I knew by the time I started this business that it was important. So that was the first thing that I did when I started this, um, this business, even though I’ve been a sole proprietor the whole time as we were just talking about. So is there anything else that someone should do, um, like at this point in the year, you know, we’re sitting in September when we’re recording this. Is there anyone, anything that, uh, business owners should do outside of their actions during tax season to set themselves up to, you know, prepare a tax to return easily to minimize their tax liability beyond this core, as you said, the backbone of having a separate account?

Hannah (24:39): I mean, there’s a whole world of year-end tax planning. I would say independent of year-end tax planning, which is coming up, we are coming upon that time of year. But independent of that, I would say from your separate business bank account, just setting up some basic bookkeeping is a good idea. Having the separate bank account isn’t bookkeeping itself, though. It forms a basis for it. So if you don’t love the idea of like sitting with your bank statements and pulling everything into a category, you know, before tax time, doing that in advance is quite nice and quite helpful. <laugh>. And I actually think if it’s at the level of a gig or a side hustle, I actually think you don’t need bookkeeping software at all. I think bookkeeping software, if I’m just being totally honest with you, it’s very easy to make very expensive mistakes that compound and, uh, that you can only get undone with very expensive accounting help. Um, so I actually don’t really think people with very, very small like side hustle level businesses maybe even should have software for bookkeeping at all. Um, but that doesn’t mean you do bookkeeping. You can just do it on a spreadsheet. So have a spreadsheet, lay out your expense categories, track your income, and just do the tallies. Um, because knowing if that will help, you know, in an ongoing way if you’re profitable or not, which is a, a big deal, it’s also what your taxes are based on. So, um, paying estimated quarterly taxes, for example, if you need to, is only going to be possible when you know what the number is, <laugh>. Um, so you wanna be able to know what your profit was for the quarter. So you can do a little calculation about what percentage of that you need to pay to the IRS and to your state for taxes.

Side Hustles and Estimated Tax

Emily (26:29): This is a little bit nuanced. Um, what I’d like to specifically talk about is how to like sort of add the estimated tax process on top of an existing salary, right? Because this is a side hustle business, so. What would you tell someone who’s, uh, who has that situation, how they should handle their estimated tax?

Hannah (26:50): Yeah, I might tell them to avoid it altogether. Um, honestly, because human behavior being what it is, estimated taxes are manual. You have to do the calculation, you have to make the payment. And we just know from data, you know, from behavioral science that people don’t do things like the, they do the default more often than not. So if you can default your taxes, that’s what you wanna do. So if you’re in the side hustle zone, the thing you wanna understand is that your taxes are holistic. They are all of your income lumped together and your spouses lumped all together and put onto one tax return with one number of what you owe, or you know, what you got a refund for if you overpaid. So if three quarters of your income comes from a job, you know, where you’re an employee and you have payroll withholding your taxes throughout the year, and one quarter of your income is coming from this gig or side hustle, you have enough proportionally money that you could take out of your W2 to never have to pay quarterly taxes. But what you need to do, the action you do need to take is to file a new W four with your employer to adjust your withholding at your day job to over withhold. In other words, you don’t wanna withhold only enough taxes to cover the tax obligation formed by the employment. You wanna overdo it and go into taking enough taxes to account for your self-employment. Um, your gig, your side hustle income that is considered self-employment income. FYI, um, and the taxes on that are always higher than you think because self-employment tax applies to self-employed income. So your employer is paying one half of that amount. It’s one of your wonderful benefits as an employee. You pay both halves when you’re self-employed because you legit are the boss <laugh>. You pay the employee and the boss half of Medicare and social security. And we call that self-employment tax. So my tip there is pull a W 4 off the internet, go to irs.gov, grab yourself a W 4, fill it out. You might need some old pay stubs. You might want last year’s tax return. If you have any bookkeeping from your business year to date, that’s great. Um, or just last year’s tax return. Um, hopefully if that gig was going already last year. And then you just wanna fill out the little, um, paycheck checkup tool on the IRS website that will help you, um, adjust your withholding to essentially give you, you know, the refund level that you wanna have. Um, I recommend zero <laugh>

Emily (29:34): I, it’s the same way I would approach things. That’s how I also teach. Um, anyone, anyone who has a fellowship income, which does not have withholding on it, but who also has W2 income, their spouse or them, that’s the same thing. I say, make this easier on yourself, just fill out a new W 4. But let’s add the added wrinkle of they don’t have the W2 position. Let’s say they’re receiving a fellowship, it already doesn’t have tax withholding on it. Maybe they’re already doing estimated tax because they have that fellowship. Um mm-Hmm. How should they incorporate the self, the self-employed income and, and the income and the self-employment tax from that, um, in with their ongoing like fellowship type income, uh, calculations?

Hannah (30:12): Yeah, well they’re gonna, you’re gonna need to do some degree of bookkeeping or else it’s gonna be a very stressful moment before the tax deadline. Um, and you will, you know, you’ll need to pay quarterly taxes every single quarter that that’s your legal obligation. So under US tax law, if on last year’s tax return you owed more than a thousand dollars, then you have to pay quarterly taxes this year or else you’ll get penalties and interest. Um, and you can pull out last year’s tax return and you can check if you’re in this category. So line 37 of your 1040 personal income tax return is gonna tell you what you owed last year. And if you see a number on there and it’s greater than a thousand, you gotta be paying quarterly taxes this year. Um, PS line 38, the line just below that is your estimated tax penalty <laugh>. So you can look at that line to see if you’re already being punished for not doing this. Um, I think that people, you know, we have a whole tax industry out there trying to, you know, its marketing is based around making us all hate and fear our taxes and actually kind of implicitly training us not to even look at it to just feel so fearful. And so, like hands off that we don’t even look at it. And I’m just here to say, I hate that I disagree with it. Your taxes are yours. Your 1040 is your information and you can, you know, the first two pages of it summarize every single thing that is in that big tax packet. And if you just look at every line on the first two pages, you have massive power. You know what’s happening. Um, and I just told you two lines, the power in those two lines, line 37 and line 38 and that, you know, that will, that will help you kind of get your head around <laugh> whether you have to pay quarterly or not. If you do, um, you know, if you think about what line 37 tax, you know, what you owe, like owing something at tax time is not supposed to happen, right? It does happen. It’s okay. It’s a reconciliation document where we reconcile the actual amount paid versus the expected amount, um, and we settle up the difference. But essentially owing anything means you underpaid your taxes throughout the year. ’cause we live in a pay as you go tax system. You’re supposed to pay your taxes as you go through the year, not all on April 15th.

Emily (32:40): I think what I would say, in addition to what you just said, um, the, the form form 1040, ES, the estimated tax worksheet is a very helpful document in calculating your estimated tax due. Um, people in the audience listening may already be familiar with this for their fellowship income, but you just have to add in a few more lines relevant to the business income and so forth. But if they don’t wanna do more calculations, I think I would tell them just to kind of, as a rule of thumb, set aside an additional 15.3% of their business profit. If there is a profit for that self-employment tax pay, that plus whatever their marginal tax rate is, let’s say it’s 12% usually for graduate students, maybe 22% for some postdocs. Um, if they’re single and just doing that much, if you don’t wanna do like a full calculation is gonna get you, that’s an 80 20 <laugh> on that is to add mm-hmm, that additional amount of money in with either your W 4 or your estimated tax payments if you’re doing it on your fellowship already. Um, but doing the detailed calculation is always gonna be the most, uh, thorough and the most accurate way to go. But Hannah, uh, when you were.

Hannah (33:46): Sure, although keep in, keep in mind ’cause it’s stressful for people. I think like especially if you’re coming to this and you’ve not learned about how estimated quarterly taxes work, um, it’s really important to remember the first word. It is an estimate and you’re not gonna know, like fundamentally you can look at your tax rate from last year, but last year’s tax rate does not guarantee this year’s tax rate, right? So even if you do it in good faith and you did the best possible job, you could, you can still be wrong. And so really, I just encourage you like 80 20 is a good attitude on this because it is called an estimate because you don’t have a crystal ball, like the law cannot compel you to accurately predict a future. So we can all just breathe a sigh of relief and just estimate and that’s okay.

Emily (34:35): The other good thing about paying those quarterly taxes, um, as you go, as you were saying is that, um, there’s never gonna be such a huge balance built up. Like something that often happens in our community with fellowship income is that people get to tax season and they realize they owe three, four, $5,000 because they never paid estimated tax or had tax withholding during the year. And that is a huge shock on like this level of income that we’re talking about. And it can happen with business income too, um, especially if you’re taking distributions from your business and then you’re spending that money. Um, so either keep the money in your business account and don’t take the distributions or as you take the distributions, make sure you’re putting aside something for either your quarterly or your annual tax bill so it doesn’t, doesn’t get away from you <laugh>.

Hannah (35:17): Absolutely. Yeah.

Sunlight Tax and the Sunlight Podcast

Emily (35:19): So just a few minutes ago when you were talking about how, um, you know, our, our system, mostly the tax industry that’s built up around our regulations, they want you to feel a certain way about taxes and in fact you should be empowered about this, et cetera, et cetera. This is a taste of what people can get on your podcast. So I would love you to take a minute and just tell everybody where they can find you, what you put out there, what you do in your business, and if they want to learn more from you or work with you in some way, how they can do that.

Hannah (35:46): Sure. Thanks Emily. Um, well, so my business is Sunlight Tax. If you go to sunlighttax.com, you’ll find everything there. So if you miss something, sunlighttax.com, I have my podcast, which comes out every Tuesday, Sunlight, um, you can find that on my website, sunlighttax.com. Um, I also have a bunch of free resources like, uh, deductions guide, a visual Guide to Tax Deductions, which you can also find on my website. Um, I offer a lot of free courses, including a recent one about, um, LLCs. If you go to sunlighttax.com/llc, if you happen to have formed an LLC for your side hustle or your business, um, there’s a mandatory, a mandatory new report required, um, from the US Treasury <laugh>. Um, but also I have a program called Money Bootcamp where I teach, um, people how to set up very simple systems to track your taxes, um, pay your estimates and fund your retirement using tax advantage accounts. So, um, all of that you can find @ sunlighttax.com and,

Emily (36:51): Excellent.

Hannah (36:51): Yeah.

Best Financial Advice for Another Early-Career PhD

Emily (36:52): Yes, and I will definitely personally vouch for the podcast because I am a listener every single week and I learn something new every week and I think it’s great. Um, okay, Hannah, I’m gonna end by asking you the question that I ask all my guests, which is, what is your best financial advice for an early career PhD? A grad student, a postdoc, someone recently out of their PhD training? Um, and that can be something that we’ve touched on already that’s related to tax, or it could be something completely aside from what we’ve discussed.

Hannah (37:19): Sure. Um, I’ll say this, it’s a bit of my personal religion, but, um, if you have never played with a compound interest calculator and seeing what the power of your money is when it is invested, um, please do yourself that favor, <laugh>. Um, and I would say do not just write yourself off. Say, I am broke right now. I will wait to put money in an IRA I really highly encourage you, if you do nothing else, maintaining an annual habit of maxing out your IRA will put you in a better position. Um, it, it will, you know, you invest the money inside the IRA so it will grow with compound interest and tax sheltered. So it’s really a wonderful thing that works when you start young <laugh>. You don’t wanna miss five years of compounding because you’re in grad school. Um, if you can, you know, just make it your religion to do it every single year without skipping, I think that is my best piece of advice. And believe you as a 45-year-old woman, woman, <laugh> talking to you, I, I wish for everyone here that we could all have started at the age that you are now. Um, and the age you are now is only it, you know, the best time to start this investments your investments was 20 years ago, but the second best time is now.

Emily (38:41): Love that advice. You touched on my two favorite topics today, taxes and investing. So it’s amazing. <laugh>. I will also just say, I mean, I love the goal of maxing out an IRA, but that’s not gonna be possible for many people. So even if it’s just, um, $50 a month, a hundred, 200, whatever you can do, be in the habit of it. And do as much as you can. And then absolutely, once you get that higher income from your lovely post-PhD job, then you can really ramp it up and use your 401k and use everything else. But having that habit of doing it from earlier and having sort of developing the identity of I am an investor and understanding things like compound interest that is gonna serve you so well later on, um, not just the dollars and the numbers, but all that psychology that comes along with it.

Hannah (39:24): Absolutely. Yeah. They, they show that even very, very poor people who have a savings account save more because just having it there helps you do it. So if you haven’t opened an IRA yet, I encourage you to do it this year. Even if it, even if you put 10 bucks in <laugh>, like open it. The fact that it’s there is setting up the infrastructure to make it easier to do that, you know, thing. And really saving, savings and investing is a muscle. So think of it as like a muscle that you have to get in some reps to get good at.

Emily (39:55): I love it. Hannah, thank you so much for joining me today. It’s been a wonderful episode and thanks again.

Hannah (40:02): Thanks so much, Emily. I really loved joining you today.

Outtro

Emily (40:15): Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! Nothing you hear on this podcast should be taken as financial, tax, or legal advice for any individual. The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Dr. Lourdes Bobbio and show notes creation by Dr. Jill Hoffman.

This Grad Student Puts Half Her Stipend Paycheck into High-Yield Savings

September 9, 2024 by Jill Hoffman

In this episode, Emily interviews Maggie Canady, a rising second-year grad student at the University of California at Irvine, on her budget breakdown. Maggie gives us a peek into her life via her top five expenses each month, which are rent, car insurance, groceries, utilities, and travel. Despite taking a pay cut when she started grad school, Maggie maintains close to a 50% savings rate on her stipend. Maggie and Emily end their conversation by discussing how Maggie can get started with passive investing.

Links mentioned in the Episode

This Grad Student Puts Half Her Stipend Paycheck into High-Yield Savings

Teaser

Maggie (00:00): I live in a, uh, beautiful, like two story craftsman house here in LA and I have three other roommates. One of them is my boyfriend. Our house is, uh, $4,500 like total, and there’s four roommates total, and we split it four ways evenly. So we each pay, um, 1100. My boyfriend and I share, um, the like master bedroom, the larger bedroom. Yeah, I’ve lived in this house for two years now. It’s been great. I love my place and that’s also why I’m kind of doing the commute from LA to Irvine because I really love the community I’ve built out here.

Introduction

Emily (00:44): Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

Emily (01:13): This is Season 19, Episode 2, and today my guest is Maggie Canady, a rising second-year grad student at the University of California, Irvine, and we break down her budget. Maggie gives us a peek into her life via her top five expenses each month, which are rent, car insurance, groceries, utilities, and travel. Despite taking a pay cut when she started grad school, Maggie maintains close to a 50% savings rate on her stipend. Maggie and I end our conversation by discussing how Maggie can get started with passive investing.

Emily (01:47): Let’s talk fellowship taxes for a minute here. These action items are for you if you recently switched or will soon switch onto non-W-2 fellowship income as a grad student, postdoc, or postbac; you are a US citizen, resident, or resident for tax purposes; and you are not having income tax withheld from your stipend or salary. Action item #1: Fill out the Estimated Tax Worksheet on page 8 of IRS Form 1040-ES. This worksheet will estimate how much income tax you will owe in 2024 and tell you whether you are required to make manual tax payments on a quarterly basis. The next quarterly estimated tax due date is September 16, 2024. Action item #2: Whether you are required to make estimated tax payments or pay a lump sum at time tax, open a separate, named savings account for your future tax payments. Calculate the fraction of each paycheck that will ultimately go toward tax and set up an automated recurring transfer from your checking account to your tax savings account to prepare for that bill. This is what I call a system of self-withholding, and I suggest putting it in place starting with your very first fellowship paycheck so that you don’t get into a financial bind when the payment deadline arrives.

Emily (03:07): If you need some help with the Estimated Tax Worksheet or want to ask me a question, please consider joining my workshop, Quarterly Estimated Tax for Fellowship Recipients. It explains every line of the worksheet and answers the common questions that PhD trainees have about estimated tax. The workshop includes 1.75 hours of video content, a spreadsheet, and invitations to at least one live Q&A call each quarter this tax year. The next Q&A call is this coming Friday, September 13, 2024. If you want to purchase this workshop as an individual, go to PF fsor PhDs dot com slash Q E tax. You can find the show notes for this episode at PFforPhDs.com/s19e2/. Without further ado, here’s my interview with Maggie Canady.

Will You Please Introduce Yourself Further?

Emily (04:14): I am delighted to have joining me on the podcast today, Maggie Canady. She is a current graduate student at UC Irvine, and today we’re doing a budget breakdown and we haven’t done one of those in a really long time, so I’m very excited about it. So Maggie, would you please introduce yourself to the audience a little bit further?

Maggie (04:30): Yes. Hi, everyone and Hi, Dr. Emily Roberts. That’s so, I’m so happy to be here. Um, my name is Maggie Canady. I am a rising second year clinical psych PhD student at UC Irvine. I’m originally from Dallas, Texas. I received my bachelor’s degree from Harvard in 2020 where I majored in psychology and minored in dance. Um, really broadly, my research interests, interests include understanding the risk and resilience factors around trauma exposure, as well as, um, learning about culturally responsive trauma interventions.

Emily (05:07): Okay, fascinating. And actually now that I know that you had a little bit of a gap between finishing undergrad and starting graduate school, let us know what you were doing during that period.

Maggie (05:17): Yeah, so my first year after I graduated and obviously graduated during the pandemic, I received a traveling fellowship from Harvard and I was supposed to be in Southeast Asia for a year. Um, that obviously couldn’t happen, so they said, okay, we’ll still give you the money, um, but you have to choose and create a project that stays in one state. So for my first year I was interviewing and photographing mixed race individuals and doing a, um, kind of like ethnographic project, um, about mixed race identity. And then after that I worked full time as a research assistant at the University of Southern California.

Emily (05:54): Okay. And I’m trying to sort of place some numbers on those kinds of jobs, like did you take a pay decrease when you started graduate school from that assistantship position?

Maggie (06:04): Yes, I did. So, um, at USC I was making about, I think I was making about $48,000 a year, $49,000 a year, and then went to a graduate student, uh, stipend <laugh> after that.

Current Stipend, Additional Income, and Household Size

Emily (06:17): Yeah, go ahead. Tell us what is your stipend right now?

Maggie (06:20): So this past year as a first year, I made a total of $29,125. Um, and that was for nine months of working as a part-time teaching assistant, which is defined as about 20 hours of work a week. Um, I also received a diversity recruitment fellowship of about $5,000 when I first started, and then I also received a merit award to help with summer costs, um, which I received at the beginning of the summer for $3,000. Um, this upcoming year I’ll make about $35,000, and this is due to the 2022 strike, um, that happened all across UC campuses. So starting, um, this, this year, the lowest paid workers will make $34,000. And then based on your level of experience, you make a little bit more incrementally. So this upcoming year I’ll make 35,000, which is great.

Emily (07:14): And that’s again for teaching assistantship, is that right?

Maggie (07:16): Yes, uhhuh.

Emily (07:17): Wow, I’m so glad to hear that. I’m so glad to hear that was the, the effect and also that you had some bridge funding for last year to kind of bring you closer up to that a number that you know, we will get to in this upcoming year. That’s really, really good to hear. Do you have any sources of income outside of your stipend?

Maggie (07:35): I occasionally tutor and babysit, but it’s very like one off and kind of just if my schedule allows, I’m also a dancer and I’ll get paid for gigs occasionally, um, like music video gigs or performance gigs. Um, but that’s more for like my own interest and like personhood as opposed to depending on that as, as like a source of income.

Emily (07:59): I see. Okay. And is there anyone other than you in your household, any living beings?

Maggie (08:05): Living beings? Yes. So I live in a, uh, beautiful, like two story craftsman house here in LA and I have three other roommates. One of them is my boyfriend, um, my boyfriend and I split a lot of the house grocery expenses, but when I pay my taxes at the end of the year, it’s just me.

Emily (08:24): Gotcha. Um, so no dependents, but you do have people, your boyfriend and other roommates that you’re sharing expenses with.

Maggie (08:30): Exactly.

Current Financial Goals and 50% Savings Rate

Emily (08:32): Alright. Are you currently working towards any financial goals?

Maggie (08:36): So I would eventually love to buy a house that feels a little bit, um, kind of like of a, a dream in the far distance right now, just with my stipend and how crazy California is with, um, like yeah. Houses. Um, but it’s definitely in the back of my mind, mind and when I put money into savings, that’s kind of what I’m thinking. I also love to travel, so I feel like I’m always kind of planning a trip or thinking about a trip and having money tucked away for a trip. I feel like when I think about my budget budgeting categories, that’s definitely one of them that I’m always, um, saving money for.

Emily (09:15): Okay. So you are, you do have some kind of savings rate for this like eventual house goal, um, and that could be several years away. Are you keeping that money in, in cash right now in like a savings account or are you investing it in some way?

Maggie (09:29): So I have, uh, Robin Hood and I am investing it, but I also have a high yield savings account. Um, and so I, this is like kind of one of my like tips or things that I learned this year, but, um, my 50% of my direct deposit goes directly to a high yield savings account and that, uh, a, that high-yield savings account is not connected to any of my credit cards or any of the ways that I spend money. So I feel like it’s just like this pot of money that, um, is really growing, which is really awesome. Um, and then I will also invest, um, invest like kind of every other month or so depending on like my schedule.

Emily (10:06): Wow, okay. A 50% savings rate. So once the money goes into the high yield savings account, does it come back out for spending in the present, like for travel, for example, like you just mentioned?

Maggie (10:16): I try not to, I try to really use like my 50% and, and go from there, but I definitely can pull from it and like have in the past, but I really try not to, I try to not touch it.

Emily (10:28): Okay. Wow. So you’re, you’re close to a 50% savings rate then. Yeah. This is something I’ve never heard of from <laugh>, a graduate students, so, okay. Now I’m very interested to hear how you’re managing your expenses to make that happen on the stipend numbers, um, that you mentioned. So that’s incredible. Let’s start talking about that. So we’re gonna go through your top five largest monthly expenses. And tell me first, are we hearing about these top five expenses based on like your average spending over the last year or like what you budget or like just last month or how did you come to this list?

Budget Breakdown: Housing and Car Insurance

Maggie (10:58): Yeah, so a couple of them are set in stone. Like my rent for instance is set in stone, that’s every month. My car insurance, I pay, um, every six months, so I just averaged it out for each month, but I pay it kind of in bulk. Um, and then my groceries, utilities, and, um, like flights that I pay for, um, that’s kind of an average. Um, so yeah, my rent is my biggest expense. Of course, it’s $1,100 a month. Um, so I’m, I immediately automatically budgeting for that.

Emily (11:30): Okay. So $1,100 per month for rent. Are you sharing? Okay. Just tell me more about the house. Like how many bedrooms are there? Yeah, how many people are there? Are you sharing a bedroom with your boyfriend and then you’re splitting it? Like, just tell me how you came to this number and what the house looks like.

Maggie (11:43): Yes, so fair. So, um, our house is, uh, $4,500, um, like total and there’s four roommates total and we split it four ways evenly. So we each pay, um, 1100. Well, we used to pay, we used to pay 1125 each. Um, but we have like a apartment. It’s kind of a long story, but now we each pay 1100, um, and we split it evenly. My boyfriend and I share, um, the like master bedroom, the larger bedroom. Um, and yeah, I’ve lived, uh, in this house for two years now. Um, we’ve lived together for coming up on four years. It’s about like three and a half right now. Um, and we’ve always split the rent evenly. Um, yeah, it’s been great. I love my place and that’s also why I’m kind of doing the commute from LA to Irvine because I really love the community I’ve built out here. Um, so yeah, 1100 and that’s what everyone in the house pays.

Emily (12:40): Gotcha, okay. Yes. ’cause I didn’t realize that you weren’t close to the university. So how long was your commute?

Maggie (12:46): My commute is anywhere <laugh> from 40 minutes to an hour and a half. Um, but I usually take the train and the train is like a clean an hour, 20 door to door, and I’m doing work on the train, et cetera. But if I drive, it varies depending on the traffic.

Emily (13:05): And do you commute every day? Every weekday?

Maggie (13:08): I, so during the school year, I commuted every day for the first two quarters, so about two thirds of the year. And then the last quarter I commuted for, I think it was, I think it was three days a week. Um, it really just depends on the quarter. It, and like these first two years are the most class intensive obviously. Um, so I will be commuting every day. And then the expectation is that as classes lessen more of my research becomes kind of independent. I won’t have to commute as much. And so it was like this real back and forth that I went of like, okay, do I move down to Irvine and like, do I kind of lose this community that I have but I’m closer to school or do I invest in kind of like my personal happiness and then have this balance? Um, and obviously I cho chose to stay in Los Angeles, um, and it’s, it’s been great. Um, occasionally I’ll house sit down in Irvine, which I guess is also, I don’t make money from it, but it is like kind of a relief from the commute. So it is an investment in some sorts but I’ll house, sit, dog sit, uh, closer, closer to campus.

Emily (14:12): I’m curious, um, how you and your roommates found this house,

Maggie (14:17): Craigslist, <laugh>? Yeah, so we were living in, um, echo Park, um, which is different neighborhood in la and we were looking for a new place that was slightly bigger. So we looked for about a year, really, I think eight years, eight months to a year. Um, and then my boyfriend found this place on Craigslist before it was on Zillow in the other, um, rental websites. So we were the first to apply. Um, we had three interviews with the landlords because they wanted to, um, rent to a family. Um, yeah, so they wanted to rent to a family. Um, but we convinced them that, you know, we all have incomes and steady incomes and that we’re reliable. So it’s been great. They’ve been great landlords.

Emily (15:05): Oh, that’s really interesting. I’m glad I asked about that. <laugh>. Um, yeah, ’cause I don’t talk with too many graduate students who live in houses with multiple roommates, but I think it can be a very cost effective, um, situation. So anyway, I’m, I’m just glad to hear all those details about yours.

Maggie (15:19): Oh my gosh. Yeah. I feel like it’s just like such a great perk of Los Angeles, that there’s so many beautiful, like artisanal houses and we have a front in the backyard and laundry and, you know, AC and uh, a fireplace. Like there’s so many, like, I don’t know, homey perks of it. And it is cost effective, which is sick.

Emily (15:37): All right. Number two, expense

Maggie (15:40): Car insurance. Um, so I pay $300 a month for a car insurance, which is definitely on the higher end. Um, I recently got an electric vehicle and it was a more expensive premium because of that. Um, yeah, my car insurance expires in September, so I’m definitely gonna be shopping around for a cheaper premium. So if you have any recommendations, I’ll definitely take them. Um, yeah, so it’s 300 a month.

Emily (16:10): I actually don’t have recommendations because I just found out that our car insurance company is pulling out of California.

Maggie (16:16): Wait, mine too.

Emily (16:16): I was using E-surance.

Maggie (16:18): Yes, same.

Emily (16:19): Okay. So we will both be shopping around.

Maggie (16:21): Okay.

Emily (16:21): For insurance on our electric vehicles. ’cause I also recently got an electric vehicle. Um, tell me, yeah, you too. How did you acquire this car? Because I’m not seeing a car payment on your list of expenses.

Maggie (16:33): Yeah, so I had a little electric car, um, before this one. It was like a little 2015 Nissan. Um, and I bought it on Facebook marketplace. Um, and it just didn’t go the distance. Like I had to charge it constantly, um, and all of that. So I was selling this car, I I put it on Facebook marketplace and then after about three to four months on Facebook marketplace, someone, um, purchased it. So I had, um, like that immediate check. Um, and I had, I’d say about like, so the car was 30, $37,000. I had this like about $10,000, $11,000 check from the car I sold. So then it was $26,000. I had about half of that money that I could, you know, I had allotted to like buy a new car. And then my parents helped me with the last like $12,000. So that’s how I bought the car full out. And then when I got my tax return in April, I got $7,500 back from that that I was able to give back to my parents. Um, so, so I’m, I know that math is kind of hard to like, speak out loud without seeing it. Uh, my parents probably gave about $5,000 to help me just like pay it out in full. And I had the rest in savings, the rest with selling my last car and then the, uh, tax stipend.

Emily (18:02): Yeah. Amazing. Um, I guess you probably had a pretty high savings rate during your last position as well, right? Making more money living in this same place. It sounds like same people.

Maggie (18:13): Mm-Hmm. <affirmative>.

Emily (18:13): So similar rent.

Maggie (18:15): Mm-Hmm. <affirmative>.

Emily (18:15): Um, yeah, so I, I see how that savings account was, was healthy enough to help you with that purchase, so that’s amazing not to have a car payment during graduate school, but, uh, yeah, hopefully we can get that insurance, uh, monthly cost down a little bit. I mean, you and I were probably both with insurance because it was a pretty good bargain <laugh> the last time we looked around, but hopefully there will be another bargain that we can both find. Um,

Maggie (18:36): I hope so. Yeah. <laugh>.

Emily (18:37): Yeah. Anything else you wanna say about that? Car insurance?

Maggie (18:40): Yeah, I guess this is more of like, um, kind of like a bigger thing, but, um, like my, my parents are like huge savers and I feel like I have like a very kind of like conservative background when it comes to money of like, okay, I’m going to like save my money and like, really just like, be aware of like, what’s coming in. And so I feel like I, I’m like always like, like nesting acorns or something, <laugh> with my money, which has been, has really paid off with like these bigger, um, payments. Um, so yeah, I, I think that that’s where it’s coming from of like, ’cause I know it’s like kind of insane to have like 50% of my income going to payments. Uh, sorry, 50% of my like, um, income’s going to savings. Um, but yeah, so I think that that’s where that’s coming from of this like very like, almost like must conserve my resources. Um, yeah.

Emily (19:35): Okay. Well let’s put a pin in that. We’ll come back to it at the end of the interview.

Commercial

Emily (19:41): Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, budgeting, investing, and goal-setting, each tailored specifically for graduate students and postdocs? I offer workshops on these topics and more in a variety of formats, and I’m now booking for the 2024-2025 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/financial-education/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutes enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Budget Breakdown: Groceries, Utilities, and Travel

Emily (20:56): Let’s continue with our list. What’s your third largest monthly expense?

Maggie (21:02): Um, my third largest is groceries. And so I split this with my boyfriend. Um, but even after splitting, it’s anywhere between like one 50 to two 50 a month. Um, I love to cook and we’re always kind of cooking meals, so that’s part of it and that’s more cost effective. But groceries are expensive. Like I can see the difference even from being here since 2020. Like it’s just, it’s just crazy.

Emily (21:30): Yeah. But that number actually seems pretty low to me. I mean, I also <laugh> grocery shopping, cook for a family of four, but it’s two little kids, so it’s not that much more than, you know, just two adults and, uh, we spend quite a bit more than that. So you must be doing something right. Tell us about a few of your go-to meals.

Maggie (21:47): So we have, um, a Costco membership. And so like, we’ll get like a rotisserie chicken, like $5 rotisserie chicken from Costco.

Emily (21:54): The loss leader.

Maggie (21:56): Um, Yes, love, um, big fried rice, stir fry kind of people. I just made like a shrimp fried rice, so frozen shrimp and then whatever veggies I have. And, um, we buy like a 20 pound thing of rice, which is awesome. Um, soups, I, not really right now ’cause it’s summer, but I’m a big soup girl <laugh>, and that’ll last, like, that’ll be made in bulk on like a Sunday, and then I’ll use that as like meal prep for the week. Um, and then I eat like, pretty light breakfasts, like I’ll buy like a pack of like a big thing of yogurt and like granola. Um, yeah. Yeah.

Emily (22:36): So eating out does not appear in your top five expenses, but let us know where that falls in the list. Like, are you eating out, how often do you do? So,

Maggie (22:45): Uh, it really depends on my social battery <laugh>, which I feel is like this pendulum swing. And, um, like, so I was in Europe, um, this, um, at the first two weeks of this month, and like my shopping was like through the roof, like my eating out obviously because, you know, we were on vacation and so like when I came back I like shut my doors, like grabbed my groceries and like, have been cooking, like eating in just because like I can’t, like eat out for the whole month. Um, and then when I’m back in LA like it’ll kind of depend on like, oh, okay. I’ll feel like, oh, I have a little bit more free time in my schedule, so I’ll see more of my friends and then we’ll like go like, grab a drink or we’ll go out to eat. Um, and then I’ll like feel like, oh no, I’m way too stressed. I have to like, just can’t see anyone have to stay in and then I’ll just do that. Um, yeah, so it really kind of varies. Um, but when I, I do go out, I try to just like go for coffee or like, um, frozen yogurt or something, like, something that it’s like still I’m, I’m still paying for something, but I’m not paying like 30 bucks for a meal, you know?

Emily (23:56): Mm-Hmm. <affirmative> especially if your purpose is to see people, then it doesn’t really matter how much money you’re spending on the food or whatever, it’s more having this setting to to be together with other people.

Maggie (24:06): Yes, exactly.

Emily (24:07): And how about, um, takeout or, you know, DoorDash, GrubHub? Do you do any of that?

Maggie (24:13): So, no, my mom owns a restaurant. She’s had a restaurant for like 30 years and I worked for her growing up. Um, and then even throughout college whenever I was back. Um, and GrubHub and DoorDash just like are so awful to small business owners. Um, and so kind of seeing like behind the scenes, I was just like, I, I cannot endorse this. So it’s like more of a personal value. Um, but I, I don’t, I don’t, DoorDash, yes, <laugh>. Um, I’d say utilities, they average about $75 a month. Um, it’s $25 for, um, wifi and then like somewhere between like, like 10 to $20 for gas. And then depending on the month, the rest of it is, um, uh, electricity. So anywhere, honestly, probably like closer to 75 to a hundred dollars a month. Like it really just depend, like we’ve had the ac blasting this, you know, this past month, so it’s going, it’s gonna be a lot higher than usual, but then kind of in the fall and spring it’s, it’s very, very little, very minimal.

Emily (25:26): Yeah. And this is one of those areas where having the multiple roommates really, really helps because yes, your utilities go up a little bit more with the higher square footage, but things like internet, like that’s just gonna scale down. Right, exactly.

Maggie (25:38): Yeah. Yeah, yeah. That’s exactly right.

Emily (25:40): Sounds great. And your last expense? The fifth one,

Maggie (25:43): My last one, it’s, uh, most recently been flights. Um, I’ve been trying to buy like my holiday flights early and then, like I said, I was in Europe, so I bought those flights. Um, the most recent flight I bought was for my parents actually to come visit me. Uh, my dad had a coupon and then for my mom’s, uh, ticket was $400 round trip. And so like kind of going back to that, like travel as like a bucket for my budgeting, like it’s, it’s one of those things that I’m like, I will be traveling home for the holidays or like, I want my family to come see me or I wanna go on vacation. So it’s one of those things that I just, I’m like, okay, this is where money is gonna go, you know?

Emily (26:24): Yeah. And with a 50% savings rate, nobody can argue with spending a little bit on travel as well. Um, tell us about your, um, strategies around buying flights, if there are any. Like, are you loyal to any airlines? Do you use any certain credit cards? Like how do you work this?

Travel Credit Cards

Maggie (26:40): So I have a Southwest credit card, which honestly has not been as great as I expected. Um, but I’m from Dallas and uh, Southwest, um, has like love, uh, love Field Airport, which is 10 minutes from my house. So it’s, um, it’s nice to have the Southwest credit card because I am building points on that and I try to use those when I can, but the flights are usually quite expensive still. I also have a, um, I have to look at the exact one, but it’s a Chase, like traveling credit card and that’s been great.

Emily (27:14): The Sapphire Preferred, I’m assuming?

Maggie (27:16): Yes.

Emily (27:16): Okay.

Maggie (27:16): Yes, the Sapphire Preferred. I love that card. I try to do like all of my expenses on that card and that card actually paid for my flight to Europe this past time, like after, like, just spending for the entire year. And I love that. So those are my two. I also have a Amex Blue Preferred, which gives 6% back on groceries. Um, and so I’ll just give that back as like a, um, kind of like cash, like return. Um, so yeah, those are my, my top three.

Emily (27:51): Uh, what airline did you use for your trip to Europe?

Maggie (27:53): Oh, great question. I used, um, I think it was, I’m, I will probably get the name wrong. France Air or like Air France. Mm-Hmm. <affirmative>. Okay. Yeah. Um, because they’re a partner with Chase and so I was able to transfer my points from Chase to Air France.

Emily (28:10): Yeah, I’m, I’m quite familiar with the Chase system because I also was trying to be loyal to Southwest for a little while. Um, it’s a little bit easier actually with the family because we can do the Southwest Companion Pass, which is a really great like, value. Are you familiar with it?

Maggie (28:26): Yes. That’s amazing.

Emily (28:27): Yeah, so like you can always take one for the listeners once you earn the companion pass. You can always take one when, when the primary person books a flight, they can always take a companion with them on any flight, unlike some other airlines where it’s like once per year. Nope, it’s every flight as long as there’s a seat available, um, for free, which is amazing. Uh, but anyway, the Chase points Trav, uh, transfer to Southwest as you probably know. So I was working that system for a little while. And smart. Yeah. Seeing where else the Chase points could go. ’cause we also have the, um, the Sapphire preferred card, but I haven’t gotten into any of the other systems yet. Like I’m not an Amex, you know, so it’s something to explore and see what those partners are. ’cause yeah, I mean, using credit card rewards for travel seems to be the kind of the biggest bang for your buck.

Maggie (29:07): Yes, I totally agree. And I feel like I’m like so sold on Chase as like my credit card because of how many flights and like how many points I get that I can then transfer. I’ve heard that for American Express, like it’ll start paying off once you have like the platinum or whatever, like the highest kind of credit cards are, and I’m just not, I’m just not ready to spend like $600 a year on a credit card. So I haven’t yet, but <laugh> maybe one day.

Emily (29:34): Um, yeah. Well this is really exciting. So you’re spending quite a bit on travel, but you’re also trying to optimize as what, as much as you can with points and so forth. Mm-Hmm. <affirmative>. Um, and it seems like you’re sort of using that, uh, save the high yield savings account that you split your paycheck into as, um, what I would call a, a targeted savings account, at least to a degree. Mm-Hmm. <affirmative> because you can pull from that account when you have these like large flights or whatever coming up, right?

Maggie (29:57): Exactly. Yeah, you’ve got it exactly on the head.

Saving Vs. Investing

Emily (30:01): Okay. Um, so the question I kind of wanted to come back to is why are you saving and not investing given that you have quite a high savings rate and you could be doing some of both?

Maggie (30:12): Yeah, that’s a great question. I honestly feel like it’s from a, like lack of knowledge around investing. Like I know that investing kind of consistently and monthly and like diversifying your assets is the way to go, but I feel like there’s still a bit of fear for me there. And kind of going back to this idea of like where my parents came from of like saving, like my, my mom and I just got into investing in 2020, so it’s kind of this new endeavor for both of us and she’s really gotten into investing, um, in the past few years. Um, and for me, like, it’s just, I haven’t put that like energy into like really knowing what I’m doing. Um, but I feel like that’s potentially like a financial goal I can work on, um, alongside like saving for a house, um, just because there is like so many benefits, um, to it. So if you have any advice for me, I would definitely take it.

Emily (31:14): Yeah, I mean, I, I said a second ago that you weren’t investing, but that’s not quite true, right? Because you are using Robinhood Mm-Hmm. <affirmative> you said sort of inconsistently. Mm-Hmm. <affirmative>. What kind of investing are you doing with Robinhood? Like what are you investing in?

Maggie (31:26): Um, like I’ll invest, you know, I have to honestly go back and like, look, it’s kind of all over the map. Like, like I, it would be like Apple <laugh>,

Emily (31:37): But single stocks is what we’re talking about.

Maggie (31:39): Yes. Yeah, Exactly.

Emily (31:39): Not Like, um, ETFs or something

Maggie (31:41): Like that. No, not ETFs. Yeah. Okay. And see, like I, I feel like I can feel myself like not even really know, like exactly like feel, not feeling super confident in like having a conversation about it because I, it’s just, it’s like a place where there’s a big gap in my financial knowledge. Um, so yeah, I think that that’s definitely like kind of a next step for me. Um, yeah.

Emily (32:04): Yeah. Well I have, I have content recommendations for you, please. Are you more of a reader or more of a podcast listener? Um,

Maggie (32:13): Podcasts, I think for, especially with my drives,

Emily (32:16): So there’s a very, uh, well known person in the, uh, the fire space, the financial independence and early retirement space. His name is JL Collins. Mm-Hmm. <affirmative>. And he has a book, if you are a reader, I would recommend his book. Okay. But since you’re a listener, I would say find his interviews, which he goes on a lot of different podcasts, but he’s been on, for example, the Choose Fi podcast several times. So I, I would go find like the earliest one or two interviews where they’re probably going over the basics of, uh, his book is titled The Simple Path to Wealth. So it’s all about this strategy, which is passive investing, which is investing in, um, index funds and ETFs that are based on indices. And so it’s a very like set it and forget it kind of investing strategy, which I really like. And it’s the kind of strategy that I teach also because it’s the most effective Mm-Hmm. <affirmative>

Emily (33:02): In terms of the money that you’ll have at the end of the decades, like in your pocket because you’re paying very little in fees and you’re not letting your, um, psychology and your human emotions, you know, get in the, in the way, in the way of like your investing strategy. So I would go find some interviews with him, definitely on Choose fi. You can probably just search like your podcast player for Col j Collins and hopefully some interviews will come up. But choose FI for sure, has him. Um, I might also suggest Afford Anything that’s another podcast name. I bet he’s been on that podcast too, although I haven’t listened through all the archives extensively. So yeah, just find, find a few interviews with him and see if you sort of like his argument, his philosophy.

Maggie (33:42): This is so helpful. Thank you so much. And I will definitely check out The Simple Path to Wealth. Um, I have like two free audio book credits for some reason right now, so that’ll be one of ’em. <laugh>.

Emily (33:54): Yeah, I don’t know if it’s an audio book. I certainly heard Hope it is Okay, because it is very popular, so hopefully they have turned it into an audio book. But I’m curious, um, whether he the author is the one who’s reading it or whether they hired someone else. He has a very like deep like gravelly like old man voice, which actually think would be great for an audio book. So, um, yeah, I’m curious if if he’s the one who’s who, uh, read it or not. Um, but yeah, start, start there, I would say.

Maggie (34:19): Okay. I definitely will. And if, like, I’ll definitely take a book recommendation too, especially with the summer. I have like ex like exponentially more free time. Mm-Hmm. So

Emily (34:27): The one After The Simple Path to Wealth that’s also great on investing is Ramit Sethi’s book, I Will Teach You To Be Rich. Mm-Hmm. And that’s on more broad personal finance topics, but he’s, he does have a couple chapters devoted to investing, passive investing. So that would be another good one to read.

Maggie (34:42): Thank you. That’s so helpful.

Emily (34:44): Oh, sure. I mean, you are already, honestly most of the way to winning the game by just having like a very high savings rate on obviously a limited income and really dialing in your expenses. Obviously you’ve thought a lot about what you value, um, in the travel and so forth. So like you’re already doing a ton of stuff really well, and if you decide you want to, you know, devote some of that very high savings rate toward investing, you’ll really be able to grow your money, um, over the next few years. And even, um, this is not like advice, but depending on how far out that potential house purchase is, um, you know, a savings account might not be the most appropriate place for it. Some conservative invest investments might be an appropriate place, but it kinda depends on what your timeline is on, on that front. So it’s just something to think about. Like you could do a split, right? You can do a certain percentage into just straight savings, a certain percentage into investing. Maybe some of it’s for long term, some is for medium term. Mm-Hmm. <affirmative>, um, again with high savings rate you kind of can’t go wrong. Um, yeah. With choosing where you wanna put that money.

Maggie (35:42): Yeah, that’s a great point. Yeah. Okay. This is a great summer project. I am excited to Yeah. Kinda go down this route.

Emily (35:50): Yeah. Um, I hope the listeners enjoyed this because this is a really, you know, unique example of like living in a very high cost of living area. But as we were talking about kind of setting those highest, you know, the, the expenses that are, have the potential be the biggest in the budget, the rent, the transportation, getting those set at the, the best level that you can and sort of letting everything else fall where it may, and, and doing that, um, strategy of paying yourself first by splitting your paycheck. These are really great examples. So I wanna say to the listeners, if anybody else wants to come on and do a budget breakdown, I love doing these kinds of episodes. I wanna hear from people all over the country with all different kinds of stipends, and it’ll be every one single one is gonna be a very different story. Right.

Best Financial Advice for Another Early-Career PhD

Emily (36:29): Um, so Maggie, thank you so much for coming on the podcast. I’d love to ask you the final question that I end all my interviews with, which is, what is your best financial advice for another early career PhD? And it could be something that we’ve touched on already in the interview, or it could be something completely new.

Maggie (36:44): Ooh, okay. Yes. Well, a couple things We’ve already touched on. High-yield savings account. Definitely recommend that. Um, I use SoFi because I had a great offer. Um, so kind of look at whatever has, you know, a great, uh, high interest rate. Um, like I said, the, you know, trying to like immediately put my direct deposit into savings and into that high yield savings account, so I don’t even have to think about it, um, was like kind of a great, like passive like, or, you know, intentional act that now has become like routine. So that was really helpful. Um, I listened to, um, financial Feminists by Tori, uh, Dunlap this, uh, at the beginning of this year. And I feel like it was a really like great, um, like supportive start into thinking about finances, um, because she really breaks things down and you don’t feel like overwhelmed or Yeah, she, it just feels like it comes from like a context in a place in a positionality that I also, uh, subscribe to.

Emily (37:48): And that was the audiobook version, right? Yes. She has a podcast as well. I don’t think it’s called Financial Feminist though.

Maggie (37:53): No, it was the audiobook. Yes. Great distinction. Um, and that’s where I learned about, um, kind of like values and having like when you’re thinking about budgeting, kind of breaking up the budgeting into buckets and like three buckets that you care about. Um, and that was a really helpful framework. And then this is kind of like a small piece of advice. Sorry, I feel like I, I just have my list, so I was like, oh, lemme just say it. Go for it. Um, but institutions have money and like applying for stuff, my first year was really fruitful. Like I was a mentor and received a stipend, you know, like I was a volunteer for a conference and I received a stipend. Um, yeah, just like reading the emails weekly, weekly emails you might get from your institution and just like checking those for additional pockets of money.

Emily (38:42): Great. Great advice. Um, you won’t be needing it as much, right? With a massive pay increase that you’re gonna enjoy this year, but should still be available to you should you want to access those opportunities and amazing. Well, Maggie, thank you so much again for volunteering to come on the podcast and sharing your life with us for the last half hour.

Maggie (38:59): Of course. And thank you so much for having this podcast. It’s so helpful for people like me. So yeah, I really appreciate you.

Emily (39:06): You’re absolutely welcome.

Outtro

Emily (39:16): Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! Nothing you hear on this podcast should be taken as financial, tax, or legal advice for any individual. The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Dr. Lourdes Bobbio and show notes creation by Dr. Jill Hoffman.

Financial Goals Workshop Advance Preparation

August 29, 2024 by Emily 3 Comments

Thank you for registering for How to Set and Achieve Financial Goals as a Graduate Student or Postdoc! Please complete the action items below prior to the date of the workshop so that you can receive the full benefits of the workshop.

Bring your balance sheet. A balance sheet is a record of all of your current financial assets and liabilities. If you don’t have a balance sheet, please take some time to create one. You can download a template spreadsheet as well as some instructions via this link. Feel free to use a different template if you prefer. If you use budgeting or net worth tracking software and have all your accounts linked, the software probably has all the information, so no need to replicate it elsewhere. You will work with your balance sheet during the workshop.
Review your budget or cash flow with these questions in mind: Am I currently saving money for my short- or long-term future? If yes, what percentage of my gross income am I saving? If no, would it be possible in my current circumstances for me to save a certain dollar amount or percentage on a regular basis?
Enter your question(s) via this form so I can be sure to answer the most popular.

During the workshop, we’ll be working with spreadsheets and PDFs. If the workshop is in person, please bring your laptop or tablet. If the workshop is remote, please set your workspace up so that you can best juggle Zoom alongside the other programs.

I look forward to speaking with you during the workshop!

Budgeting Workshop Advance Preparation

August 29, 2024 by Emily Leave a Comment

Thank you for registering for Expert-Level Budgeting for Graduate Students and Postdocs! Please complete the action item below prior to the date of the workshop so that you can receive the full benefits of the workshop.

Please bring all of your current/recent spending data that you have access to. If you track your spending, bring your spreadsheet or plan to access your software. If you don’t track your spending, look up your fixed expenses in advance (e.g., rent, minimum debt payments, utilities, subscriptions) as well as what you’ve spent recently on variable expenses (e.g., food, transportation, entertainment). If you would like, you can use this spreadsheet to organize this data for the recent months (edit according to your spending categories).

During the workshop, we’ll be working with spreadsheets and documents. If the workshop is in person, please bring your laptop or tablet. If the workshop is remote, please set your workspace up so that you can best juggle Zoom alongside the other programs.

I look forward to speaking with you during the workshop!

Dr. Emily Roberts, Personal Finance for PhDs

Estimated Tax Workshop Advance Preparation

August 28, 2024 by Emily Leave a Comment

Thank you for registering for How to Prevent a Large, Unexpected Tax Bill on Your Fellowship Income! Please complete the action items below prior to the date of the workshop so that you can receive the full benefits of the workshop.

Bring your 2025 income- and tax-related records to the workshop. Bring your spouse’s records as well if you file a joint tax return. These records include any or all of:
- Your fellowship offer letter,
- Your recent fellowship paycheck amount(s) and date(s),
- Your student account transactions,
- Your final pay stub from a prior W-2 job, and
- Your most recent pay stub for an ongoing W-2 job.

Bring your 2024 federal income tax return, if you filed one, to the workshop.

Watch this video (7 minutes) for background information so that we can jump right into the exercises during the workshop.

During the workshop, we’ll be working with spreadsheets and PDFs. If the workshop is in person, please bring your laptop or tablet. If the workshop is remote, please set your workspace up so that you can best juggle Zoom alongside the other programs.

I look forward to speaking with you during the workshop!

Dr. Emily Roberts, Personal Finance for PhDs

Investing 101 for Your Post-PhD Job

August 26, 2024 by Jill Hoffman 2 Comments

In this episode, Emily interviews Dr. Scott Grissom, a full professor of computer science at Grand Valley State University and Certified Financial Planner with Socrates Financial Planning. Scott and Emily talk through the health insurance and retirement benefits options that may be available to PhDs in their first post-PhD jobs. Scott explains the tax benefits of investing via an HSA and/or a 401(k) or 403(b) and the factors that affect the choice of a Roth or traditional option. He also helps the listener overcome potential analysis paralysis by detailing the benefits of a target date retirement account.

Links mentioned in the Episode

Teaser

Scott (00:00): From day one. Let’s get that match and figure everything else around that. ‘Cause otherwise, as we know, we’re gonna be, have some inertia put in place and we say, I’ll do it later. I’ll do it next year. You probably won’t. So day one, do whatever you can to get that match would be what I recommend.

Introduction

Emily (00:27): Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

Emily (00:57): This is Season 19, Episode 1, and today my guest is Dr. Scott Grissom, a full professor of computer science at Grand Valley State University and Certified Financial Planner with Socrates Financial Planning. Scott and I talk through the health insurance and retirement benefits options that may be available to PhDs in their first post-PhD jobs. Scott explains the tax benefits of investing via an HSA and/or a 401(k) or 403(b) and the factors that affect the choice of a Roth or traditional option. He will also help you overcome potential analysis paralysis by detailing the benefits of a target date retirement account.

Emily (01:37): My colleague, Dr. Toyin Alli, recently launched a new community called GRADBOSS. Toyin is an expert teacher of grad school productivity and time management through The Academic Society in addition to being a lecturer at an R1 university, so she knows of which she speaks! I’m honored that Toyin has invited me to facilitate a workshop within the community this month! Join the GRADBOSS community to attend my workshop Your Financial Orientation to Graduate School on Tuesday, August 27, 2024 at 4 PM PT as well as access all the other incredible resources! Go to theacademicsociety.com/gradboss/ to learn more and join the community. I hope to see you tomorrow at the workshop! You can find the show notes for this episode at PFforPhDs.com/s19e1/. Without further ado, here’s my interview with Dr. Scott Grissom of Socrates Financial Planning.

Will You Please Introduce Yourself Further?

Emily (02:48): I am delighted have joining me on the podcast today, Dr. Scott Grissom, who is at a really interesting point in his career where he has two jobs right now. He’s a full professor at Grand Valley State University and also a CFP with Socrates Financial Planning, his financial planning firm. So we’re gonna talk all things investing today, which is really exciting. So Scott, thank you so much for volunteering to come on the podcast, and would you please introduce yourself a little bit further?

Scott (03:11): Sure. Excited to be here. Um, so Scott Grissom, a little academic background for the PhD folks, if that’s okay. So, for my whole life, I wanted to be an architect. So I went to college at Texas a and m University, all set to be an architect and be the next Frank Lloyd Wright. And by the junior year or so, I had, uh, discovered two things. One is that I didn’t like architecture as much as I thought I did, and two is I discovered these new things at the time called computers. So I got enamored with computers and one of the professors that I admired a lot, I had taken several courses from him. I still remember where I was standing at the time. He says, Scott, have you ever considered graduate school? I’ve seen the way that you work with your fellow students and you tutor them and you help them, I think you’d be really good as a professor. Well, I had not considered that at all until that moment, but the light switch went off, changed my career path, went to graduate school for computer science with the sole purpose of getting a job as a professor. And 32 years later, I am still a professor. So it, it’s been a great choice. Highly recommend being a professor for the rest of your life, if, if that’s an option for you.

Emily (04:25): And yet you’ve decided to embark on an, an encore career. And so can you tell us how personal finance, how money became a passion for you alongside of your career as a, as a professor in computer science?

Scott (04:41): Yeah, so as long as I can remember, I’ve been interested in my own personal finances, whether it be investing and reading books. When I was in college myself, uh, I used to get this thing called a magazine in the mail each month on this physical piece of Paper magazine, uh, called Kiplinger’s. And I would read the, I would be so excited every month waiting to see what information they would have about saving and investing and all sorts of stuff. And one, one week there was this article about this designation called the Certified Financial Planner Planner, CFP. Ooh, that would be fun, at least for my own self education. I would like to take those two years of courses and see where that leads. So that was around 2005. And after taking classes for two years and then passing a pretty exhaustive exam, uh, I earned the CFP designation mainly as a hobby. Didn’t really, really know where that would go, but then I started helping friends and family with their financial questions and then started to work occasionally with some small financial planning firms. But, and that passion sort of peaked and valleyed through my, my 25 year career as a professor. And now I’m to the point where I’m ready to move on. I’ve enjoyed being a professor, but for the next x years of my life, I’m ready to transition to probably just part-time, uh, helping, educating others much like you do in terms of, of their finances and especially as they get close to retirement, uh, what changes do they need to make? What adjustments, what questions do they have? So I’ve got another year as a professor, and then I’ll be transitioning to this firm that I just created about, uh, six months ago called Socrates Financial Planning, Socrates building on the way that I like to teach in the classroom using the Socratic method. So I thought that was a fun, playful, uh, name for me.

Finance Related Employee Benefits

Emily (06:31): Yes, very eye-catching as well. I love it. Um, so we have a real, um, treat today, which is to employ your teaching skills in the subject of investing. And even though you just said that, you know, your typical financial planning client would be closer to retirement, you know, when we were prepping for this episode, we talked about how, um, the typical listener for this podcast is gonna be very early on in their career, maybe currently in graduate school, currently a postdoc, uh, maybe in in their first job post PhD. And so we were thinking it would be really great for them to have some insight into how to set up those initial investments with their new employer when they finally get that 401k or the 4 0 3 B or similar type of retirement account, um, access. So let’s go into it. So very good for that newly hired employee. Looking at the benefits package for the first time, it can be overwhelming. What are they probably looking at in terms of potential benefits related to their finances?

Scott (07:26): Yeah, so probably the, the biggest benefit most people have to struggle with initially is the health insurance. Now that applies to us because if they have an option for what’s called a high deductible plan, which mostly they do nowadays, uh, that will have an important financial option available for you called a health savings account. So maybe we’ll come back to that a moment. And then the second one is what kind of retirement account do you have? And in the private workplace, that’s generally called a 401k, uh, in the public space, whether it’s hospitals or my case a, a university, they’re called 4 0 3 Bs, pretty interchangeable. Uh, and then just personally you might have a thing called an IRA. So all three of these retirement accounts are virtually the same. They’re a place for you to invest for the future, and there are generally some tax advantages to each of those, depending on what choices you’re trying to make.

High Deductible Health Insurance Plans

Emily (08:19): Okay, let’s dive into that a little bit more. Let’s start with the health insurance component of it. Who is a good candidate for choosing a high deductible health plan versus like a PPO is probably gonna be their other option, I would imagine. Um, and, and for also using that HSA if it can come with that H-H-D-H-P

Scott (08:38): <laugh>. Yeah. So hard to de- describe o- over, over this broadcast on, on what makes the best choice. Uh, just recognize with a high deductible plan, depending on whether you’re single or a part of a family, you’re agreeing to pay the first $2,000 of your medical care, maybe the first 4,000 thousand that’s called the deductible. So you need to have, uh, an emergency fund I guess, or enough, uh, fees also depends on your, um, your health. So if you’re somebody that’s pretty healthy and don’t anticipate seeing the doctor much, therefore you don’t need to worry about paying that deductible, that might be a good rationale, justification for getting the high deductible plan. Uh, and then it also just depends on locally and you, if you’re moving to a new city, you may not know, but picking what, uh, doctor option doctor networks that you have sometimes make a difference. So there, I would say talk with your, uh, human resources department or a colleague that you’re about to work with or a supervisor to see what choices they’ve made and why.

Emily (09:38): Yeah. So the trade off there for those who don’t know is gonna be a, a premium difference. So the monthly premium that you pay for like a PPO plan, for example, is gonna be higher or at least let’s say the overall portion. We don’t know, uh, how much the employer is paying versus the employee in, in, you know, general. But that overall premium is gonna be higher for like a PPO. It’s gonna be lower for that high deductible health plan. But like you said, you have to be prepared to pay out of pocket for a higher deductible, $2,000, $4,000 versus maybe the PPO is 500 or a thousand, something lower than that. Um, and so you have to have some savings available to, uh, to do that in your own finances, should you need to access medical care. And that’s kind of where the idea of the HSA comes in. It, it sort of, um, nudges you in the direction of, oh, you have that high deductible health plan, well you better be saving in this HSA. But tell us more about how the HSA works.

Scott (10:26): Yeah, so it’s, it’s one of, it’s a very unique, um, savings plan in terms of what the federal government allows for you. So it allows you to save money going into the account, uh, tax free going in, but it’s also tax free coming out, which is highly unusual. So that doesn’t apply to the 4 0 1 Ks and the IRAs or even the Roths. So I really like the HSAs, the potential advantage, advantage that you have to save on your taxes from day one in your career. And so what that means is for every dollar that you put into this account, and it’s earmarked to be used for medical, so for healthcare to be spent this year or next year or 10 years from now, but all of that money is tax deductible off of your current income. And as we know, every dollar that you can shave off of your current income is gonna reduce your taxes. So that’s great for now, which is the way a lot of the retirement accounts work. But then later on, when you start to pull money out to pay for those qualified medical expenses, it’s not taxed there either. And that’s what’s different about the HSA. So HSA saves you now, it saves you later. It’s just a, a win win win when it comes to taxes at least. And as you said, there is this sort of incentive to put that money into this account because you know you’re going to have to spend it at some point this year, next year, five years from now on those deductible expenses. And so that’s why the federal government requires you to tie together. You first have to have this high deductible plan and then that allows you, it’s optional, but I would strongly encourage it to create this health savings account.

Emily (12:02): I’ve not had the, uh, reasonable option of signing up for a high deductible health plan with an HSA ever. So I’m, I’m sort of excited about this in a theoretical way. But, uh, my understanding is that if this comes through your employer, um, you actually save, not only on income tax going in, but also your, your FICA taxes, your payroll taxes, which is like, there’s like almost no other way you can reduce your payroll taxes. So that’s like really exciting as well. Um, in terms of more money in your pocket, more money in that account.

Scott (12:29): Yep. Once again. And you’re saving now and never taxed again on it, assuming you pull it out for medical expenses and it rolls over each year. So there, there’s another kind of a medical account called a flexible savings or flexible spending account that you might have options for. They’re probably a little antiquated now, but the potential concern with them used to be you had to spend it or lose it at the end of the year. So back in, in December then people started getting dental care and eye care and so forth to try to, to spend that money. But the HSA, you can literally, it let it run for 30 years. And so that’s why some financial advisors think of this as sort of a third retirement plan. ’cause we’re always going to have healthcare expenses. And so the longer you can invest it and let that build tax free, the more money in your pocket.

Emily (13:20): Yeah, I wanna kind of underline that point that you just made about the potential for the money inside the health savings account being invested for the long term, because that’s not something that I think people really did maybe 10 years ago with those flexible spending accounts that wasn’t an option. This is unique to the HSA, um, and so elaborate on that a little bit more, the power of of that option.

Scott (13:40): Yeah, and it’s something that I suspect a lot of people don’t take advantage of. So generally by default, you’re gonna put this into an HSA and it’s gonna be treated like a savings account or a checking account and probably not pay you much at all if, if even 1% and for money that you’re gonna spend three months from now, that makes perfect sense. You wouldn’t want to invest it because with investing, and let’s just generally talk about investing in stocks, there’s the concern that that money’s gonna go down in the short term. So, but if you are investing for the longer term, 4, 5, 8 years down the road, you’re convinced that you don’t really need that money out of the HSA that you can pay for these, these medical expenses out of pocket, then the longer horizon that you have, the more options it gives you. And then you can now invest in stocks and mutual funds in your HSA, just like you would in these other accounts such as the 4 0 3 B and 401k.

Emily (14:40): Yeah, it’s really like, I think you mentioned this earlier, like a supercharged form of an IRA, like an even better form of an IRA. But you have to be prepared to pay for those medical expenses and save it to the HSA on top of that. So it’s really a personal finance and budgeting kind of challenge, but a very, very powerful tool if you can harness it,

Scott (15:00): Right? So at the very least you would want to contribute enough for your deductible each year. So even if you don’t wanna invest in the future and your little leery of building a large account of 15, 20, $30,000 in this HSA, if nothing else, remember that very first dollar that you save is saving you permanently on taxes. So if you’ve got a, a deductible of $2,000 and you’re pretty predictable that you’re probably gonna spend about $2,000 this year on healthcare, then at least put that much into your HSA and if it hovers above and around close to zero because you’re putting money in it and taking money out, you’re still getting a great tax advantage from that.

Traditional Retirement Savings Vehicles: 401Ks and 403Bs

Emily (15:41): Yeah, I love it. Well let’s talk about those more traditional retirement savings vehicles, the 401k, the 4 0 3 B. Can you tell us generally like what’s the advantage of investing for your retirement through your employer? And then we’ll talk a little more about traditional versus Roth.

Scott (15:57): Okay. Uh, so as I said, 4 0 1 Ks are just the names generally for private companies and 4 0 3 Bs for public companies slash universities and healthcare. Uh, historically they’ve been what we call pre-tax. So I put money in and I get to remove that from my salary this year, which is gonna save on taxes this particular year. So let’s suppose I’m in the 20% tax bracket and I put in a thousand dollars. Well that’s gonna save me $200 this year on taxes, but eventually I’m gonna take that money out presumably during retirement and then it will be taxed then. So that’s one of the, the advantages is the tax advantage is that we’re going to have a tax advantage this year. It’s gonna build tax deferred and then eventually we pay our taxes. But one of the new features that these companies now are allowed to provide somewhat new is a Roth component to this 401k. And now we have the option of do we pay taxes now and put that into what’s called a Roth account or a 401k Roth, but it’s never taxed again, much like the HSA, so you can let that ride for the next 30 years and hopefully make lots and lots of money off of your investments and then they come out tax free. So that’s one of the choices you’re just gonna have to make is if I have a Roth option for my 401k, do I put my money in there now or do I use the more traditional approach? The second key I think, um, question is, is your employer providing a match or not? And they often do, uh, and it’s often tied to how much you put in. So they might say, we’re gonna match the first 2%. If you put in 2%, we’ll put in 2% or we’ll put in 50% of how much ever you put in of the first 6,000. So either way, whether you’re gonna put 2000 in on your behalf or 3000 or 8,000, you really wanna take advantage of that ’cause that’s in the business we call that free money. And then you’re going to invest that going forward. You’re not paying taxes on it now. Um, the employer’s putting the money in so it’s not coming outta your paycheck. So if your employer does provide a match, be aware of, put as much money as you can in that affects that match.

Emily (18:17): I have also noticed sometimes with these employer provided plans that have a match or maybe not even a match, but a baseline amount that they’ll put in for you. Sometimes universities do that sort of thing. Um, they’ll have like a vesting schedule. Can you explain how people should understand the vesting schedule?

Scott (18:33): Yeah, so normally what that means and, and it’s case of as you said, it’s the employer putting money in on your behalf less so of the money that you put in. And they’re going to as a way to try to keep you employed there as long as possible. Say we’re gonna put $10,000 in each year for you, but you can’t pull all that money out if you were to leave employment. So over the next four or five, six years, uh, on a sort of degrading uh, feature, we’re gonna decide how much of that money do you get. So you’ll have employers say, this year I’m vested. Well that means that this year if I were to leave or get fired or whatnot, then I would at least get all the money that’s in my account. Up until that point it might look like I’ve got $50,000, but 20,000 of that might not leave with me if I choose to leave. And general, as you said, it’s generally the what, the money that the employer puts in any money that you put in is generally what we would say 100% vested immediately.

Should You Ever Pass Up On The Employer Match?

Emily (19:34): Okay. And so I’m thinking about a person who is just starting out and they’re looking at this benefits package and they see that they have a match available to them, so exciting. Um, but maybe their personal finances are not totally in great shape yet. When should they pass up that free money and work on other areas of their finances? Is there ever a situation where that, where you would advise that?

Scott (19:57): I wouldn’t think so. I mean, so let’s suppose you’ve gotta put in 4% of your brand new paycheck that you’re excited to get and that’s going to entitle you to matching and you’re leery to say, but could I use that 4% for something else paying off student loans or paying off credit card debt? Well that might be an appropriate use of it, but I would be more inclined from the psychological perspective is let’s just commit to that 4% and then learn how to carve out additional savings from our new paycheck to pay for that other debt. I mean, debt would be the only reason. I could see why you wouldn’t want to get that initial match. And even then I would really encourage you to, from day one, let’s get that match and figure everything else around that. ’cause otherwise, as we know we’re gonna be have some inertia put in place and we say, I’ll do it later, I’ll do it next year, you probably won’t. So day one, do whatever you can to get that match would be what I recommend.

Emily (20:52): Yeah, I really like that advice. A great point about the inertia, like when are you really going to make that change if you don’t make it right from day one? Um, and if you are really excited about getting that match and you’re really hating, let’s say the credit card debt that you’re in, maybe because of your move to your new job or whatever the case is, um, just use all those, uh, well, they’re probably negative feelings, but use them to energize you <laugh> to get that debt paid off while you’re still contributing to that retirement account and getting the match. And hey, then once the debt is paid off, you can increase that retirement contribution rate above the match level, let’s say

Scott (21:26): After celebrating and going out to dinner or, or something that you paid off your debt. So

Roth Vs. Traditional Retirement Accounts

Emily (21:31): Yeah, that’s awesome. Okay, still thinking about that new post PhD employee, um, let’s say they have a Roth option and a traditional option within their retirement accounts, what are the factors that go into making that decision? Which way to go?

Scott (21:46): So it generally comes down to taxes. And so as we said that traditional, um, contributions to 401k are tax, um, deducted this year. So you save on taxes this year, let’s suppose 20%, whereas the Roth contribution, you don’t save on taxes this year, but it goes in and you never pay taxes again. So the question becomes do I wanna save on taxes this year, maybe saving 20% depending on where my income is or at the, when I start to retire and I pull money out, do I want to pay taxes then do I have any insight 30 years from now that I’m gonna be paying less or more tax rates than I am now? And we don’t have a crystal ball, so we don’t know that for sure. But the general understanding is that the lower your tax rate is now probably a pretty good chances 30 years from now when you start pulling money out, your tax rate’s gonna be higher. So that puts you in favor of using a Roth. Now, uh, it’s less like, it’s less helpful to you to save 15% on taxes now, which is the Roth scenario, rather than to wait 30 years from now and pay 2020 5% coming out, which is the 401k option or the traditional 401k option. So I would say, what’s the general recommendation when you’re starting off, that’s generally the best time to do a Roth because you’re generally making less income than you will in the future. And it also give you a much longer runway the next 30, 40 years to invest that money and have it accrue, uh, tax free, which is a, a really great option.

Commercial

Emily (23:24): Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, budgeting, investing, and goal-setting, each tailored specifically for graduate students and postdocs? I offer workshops on these topics and more in a variety of formats, and I’m now booking for the 2024-2025 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/financial-education/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutes enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Roth Vs. Traditional Retirement Accounts

Emily (24:42): Let’s project forward a few years, maybe 10 years. So this person is no longer a fresh new PhD graduate in their first job, but they have increased their income somewhat over time. Is there a tipping point that you would say or is it just for every individual? Where do you see your income potential going?

Scott (24:58): Yeah, that’s a much trickier. Um, but let, let’s play that, that scenario. So some, some of my colleagues will say, um, if collectively, because we’re talking about, I’ve been saying federal tax rates, but it also applies to state income tax, if that’s indeed, um, it, it, uh, applies to your state. So in my state of Michigan I pay about 4% and if I’m in the 24% tax right rate for a federal plus the four is 28% combined. That’s where I’m wondering am I gonna pay more or less than that when I retire 20 years now or 30 years from now? And so I hear people talk about this magic, not magic number, but just sort of rule of thumb about 30%, anything less than 30% taxes. Now it’s probably a pretty good bet that when you’re pulling money out later, you’re gonna end up paying more than that. So somewhere in that range, 25 to 30% is, is sort of this borderline category. Anything more than 30%. So if you’re very high income earner right now, you probably want to take advantage of saving taxes now because you might be in the, the 34% tax bracket or even higher and you’ll likely be taxed less than that 30 years from now. But we don’t know for sure. So all these choices, it just sort of depends. You make the best decision you can at the time and then don’t look back, don’t worry, you made your decision, it’s over and what happens, happens.

Emily (26:22): Yeah, definitely don’t use the uncertainty around where will my tax rate be in retirement as a reason to not get started, right? Like just jump in with whatever option you think is best at the moment. That’s okay, keep going at that. And my philosophy around it is kind of to want to get to retirement with a mix of Roth and traditional so that I can do some tax optimization on the backend. So as long as I have big pools of money in both of those types of accounts, by that point I’ll be pretty happy. I’ll add in one other anecdote, um, sort of about how I made this decision earlier on in my career when I could see, um, where my tax rates were going. So I post PhD was living in the state of Washington, which has no state income tax, but I knew that I aspired to move to California, which has could be a high state income tax rate. And so I used that view into my own personal aspirations in my future to say, okay, when I’m living in Washington, that’s a great time to use the Roth. And when I move to California, that’s a great time to switch to traditional assuming no other changes in my, you know, overall income.

Scott (27:22): Very good, good idea. Now let’s talk about those, that bucket that you mentioned. So when people retire, it’s nice to have options and so there’s considered, there’s sometimes considered three buckets of Roth, which has already been taxed, 4 0 1 Ks which have not yet been taxed. And then there’s a third category that we haven’t talked about. We call that a taxable account. And that’s just where you’re doing extra savings. So out aside from these retirement accounts, and if you have sizable amounts in all three of these buckets, they’re probably not gonna be equal and nor should you necessarily aspire to that. But if, if you’ve got some money in each of those, as you start to pull money out during retirement, as you said, that gives you some flexibility, uh, to control your tax rates so you can start pulling some money out of a Roth because it’s not gonna be taxed at all, some money out of your 401k ’cause it is gonna be taxed and then have some money in your taxable. So how do you manage that? How do you end up with three buckets? Well, we’ve talked about early on maybe you start with a Roth for retirement and then throughout your career maybe you start to transition it, there’s gonna be perhaps some tipping point, maybe not, maybe you just wanna do Roth all in and that’s perfectly fine as well. But in that mid category, that 15 years that we were talking about, you could get to the point where you put half in Roth and half in a 401k, so there is no right or wrong or it’s not a binary decision. And that would allow you to con uh, to continue to build in all three of those buckets.

What Exactly Should I Invest In?

Emily (28:49): Perfect. Let’s talk about another decision that has to be made when you’re contributing to that 401k or 4 0 3 B, which is what should I actually be invested in <laugh>? Because the 401k or the 4 0 3 B is not synonymous with the investments that could be inside of it, there’s gonna be some choice about what exactly you wanna be invested in. So help that you know, fresh PhD with that first job, help them think through that choice of what exactly should they be invested in.

Scott (29:17): Uh, well still first and foremost when we come to talk about investing, uh, the golden rule is called, um, diversification. So we don’t wanna put all of our eggs in one basket. So although it’d be really tempting to, to buy as much apple stock as you possibly could or as much Nvidia stock as you possibly could, uh, because that’s currently what’s hot, you want the risk of losing a lot as well. So how do we do diversification is we mainly, or most of us buy things called mutual funds, which are collections hundreds if not thousands of individual stocks for different companies. So that provides you that diversification and that’s what you will generally be given as an option. So for your 401k, normally you’re given a limited collection of choices for yourself. Those are often gonna be what we call mutual funds. And so you still have to make choices. So maybe it’s a choice outta 10 or it’s a choice out of 50, that can be pretty overwhelming. Uh, so my approach is to pick mutual funds that buy a little bit of everything. So these are called index funds and I know Emily, you’re, you’re a fan of passive investing as well. And so look for, uh, titles of these mutual funds that perhaps include index in the name, probably don’t call it passive, but they might say index. Uh, one of the keys when you’re picking out mutual funds is the expenses that they cost. So most people don’t realize, but you invest money in a mutual fund and each and every year the uh, management company takes a little bit out of that. Maybe it’s 1%, which would be super high or maybe it’s 0.1%, which would be pretty low. Sounds like pretty sounds like the same thing to most of us. 0.1% and 1%. What’s the difference? Well, it turns out 30 years from now, those build on themselves a lot. So when we’re given a choice of mutual funds, back to the original question is I wanna look for something that is an index slash called passive investing. And those generally have lower fees, which might be 0.1% or even less, uh, which is more money in your pocket, less money in their pocket, more money in your pocket. And that’s the win-win. So first choice, pick mutual funds that are indexes and then you might have to choose between, uh, do you want to buy stocks or do you wanna buy fixed income, which is, which is often called bonds. That’s probably a whole nother podcast. But, but the quick answer is most of us now have an option called a target date fund. And a target fund. Target date fund is perfect for somebody just getting started ’cause they don’t need to worry about the ins and outs of picking what percentage of stocks and what percentage of bonds someone else is doing that for you generally at a low cost. So if you have an option for a target date fund, they’re gonna have names associated with the year that you plan to retire. Now there’s nothing magical about it and nothing significant about it, but if you’re just getting into your career now and you’ve got at least another 30 years to work, 35 years to work, so adding that to 2025. So 2060 would be the name of a target fund that you might look for. Vanguard has these fidelity, uh, Schwab has all of these and all that tells you is somebody has decided what percentage of stocks and bonds. So I just looked up Vanguard’s 2060 target date fund and 90% is in stocks and 10% is in bonds. The longer that you have to invest the, uh, more volatility or the more ups and downs you might be able to stomach mentally stomach. So if you recognize, yeah, the stock market went down this year, it’s gonna go down. I can guarantee you that. I don’t know if it’s this year, I don’t know if it’s next year, but at some point the stock market’s gonna go down again. And if you’re okay with that, if you’re mentally prepared to say, I knew that was gonna happen, I’m gonna keep letting it ride, then because you have the luxury of going for the next 30 years, then it’s okay to have 90% in stocks. But as you get closer, uh, and this is what those target date funds do for you, is they start to reduce the stocks and increase the fixed income so that as you get closer to closer it might be a 60 40 split. So long-winded answer, sorry my professor is coming out on me, but what are your choices as a new employee? If you’ve got a target date fund, generally pick that.

“Safe” Investing Options

Emily (33:40): So sometimes I get questions when I teach about investing where the questionnaire says I want to start investing and I wanna use something safe. If one of your clients said that to you, I I’m nervous about the stock market, I wanna pick something safe, how, how would you coach them?

Scott (34:01): So safe generally means, um, lower return. So whether you’re buying bonds or treasury bonds, so safe means less likely to lose money, which is something that none of us want to do, but also less likely that you’re going to make much money. So over the next 10, 15, 30 years. Question is, can you afford to be conservative? Maybe you can, but I think there’s a bigger risk, a long term risk that if you’re too conservative, you put all your money. I mean the extreme would be you put all your money in a savings account making 0.1% and that’s gonna make you feel very safe. But 20 years from now, you’re gonna regret that because your money has not even kept up with inflation. So if inflation’s rising, if 3% every year, so it’s really a mental game, I understand that the concern about potentially losing money, but hopefully you overcome that and recognize that over the next 15, 20, 30 years you’re likely not going to lose money and you’re going to stay ahead of the game by investing in more what we would call more aggressive, not completely aggressive, but more aggressive investments as as, um, you pointed out.

Different Fee Structures of Financial Advisors

Emily (35:14): So something that I learned in our prep for this interview, um, is in your financial planning practice, how your fee structure works, which I really appreciated, but I want you to explain it, um, and explain why you think it’s advantageous both for you and for your clients.

Scott (35:30): Okay, well let’s back up and recognize that there are hundreds of thousands of people that call themselves financial advisors in the us. Uh, that’s not a regulated term. And so almost anybody can call themselves a financial advisor and they generally make money from three ways. Now we all need to make money so there’s no harm in that. Uh, one of them is that they make commissions. So they sell you products whether they be what are called annuities or insurance or stock plans and they make a commission off of that, whether that be 2% or 3% or 10%, perfectly fine, assuming that they disclose that to you and they’re recognizing, you know, I’m gonna make 10% off of you buying this $100,000 investment, but I think it’s best for you and that very well may be best for you. Then there’s a category called called fee only advisors. So they wanna avoid commissions with the potential of there being a conflict or at least the perception that there might be a conflict. And they’re generally gonna charge you for ongoing what we call asset management. And so the going rate is generally 1%. Now these are people that already have established accounts, maybe a million dollars. And so they’re going to pay their, um, fee only advisor 1% of that each and every year to manage their money and give them good advice and, and keep them on the straight and narrow. And then there’s a relatively new category that we call flat fee planning where we’re not interested in managing the money for that client, but we want to just give them some objective solid education advice and then the person can go back on their own for the next 2, 3, 5 years and then maybe come back for a refresher and say, how am I doing? What advice do you have me now? So I’m in that category, it’s called flat fee. So for a particular fee I offer a financial plan to clients that says if they’re starting out and or getting close to retirement and says, let’s take a look at all your finances, not just your investments, but let’s take a look at your insurance and your estate planning documents and a variety of other aspects. Let’s take a look at your goals and just do an assessment and objective assessment to see if you’re on track or not. So, so flat fee advising or flat fee expenses is the way I model my business useful for people especially just getting into investing because they don’t have a lot of money yet. And so the fee only advisors that charge 1% probably aren’t going to see you anyways. So that would be an advantage.

Emily (38:06): Hmm, yeah, especially if, um, you may have zero in assets under management to offer if you only have your 401k plan, for example, if you don’t even have an IRA that, that an advisor could even work with. So I really appreciate that flat fee, um, model. It’s actually when I sought out financial advising a few years ago, that’s the model that I went with for the advisor that I chose. So, um, I’m a believer in it now. It’s a little harder to stomach maybe upfront because you have to come up with hundreds or a couple thousand dollars maybe, depending on the advisor and the type of, um, package that you’re getting versus going to someone who makes money off commissions. Well, it seems like it’s free, but it’s really not free. And so just to recognize as you said that everybody in this industry is getting paid in some way or another, as long as you’re upfront about it, fine, then the client can choose how they want to pay for the service that they’re getting and their advantages and disadvantages to each of those models. But I really appreciate the model that you’ve chosen, so it’s great.

Socrates Financial Planning

Emily (39:01): And if someone listening, um, really likes your style, likes how you’ve taught us through this episode, wants to work with you or maybe wants to recommend you to someone else, how would they get in contact with you?

Scott (39:12): Yeah, so the name of the company is Socrates Financial Planning. So Socrates, because that’s the way I always taught in the classroom using the Socratic method. So Socrates financial planning, socratesfp.com is the website address and from there you can get an email or schedule a call with me or, or find more information about me, but socratesfp.com is the place to go.

Best Financial Advice for Another Early-Career PhD

Emily (39:36): Well thank you so much Scott, and I wanna conclude by asking you the question that I ask of all of my guests, which is, what is your best financial advice for an early career PhD? And that could be something that we’ve touched on already in the interview or it could be something completely new.

Scott (39:50): Yeah, I would come back to that notion of day one, start contributing to whatever plan you have, whether it’s the Roth or or the, the traditional plan certainly to, um, achieve that employer match that we talked about. 10% might sound like a lot to start saving right away, but I would recommend you, you strive for that if not higher, set that up from day one so that you just learn to get by on 90% of your salary. And that’s gonna do such wonders for you. 30 years from now, you will be so glad looking back that that was the best decision you ever made.

Emily (40:26): Well, Thank you so much Scott for volunteering to come on the podcast. It’s been a pleasure speaking with you.

Scott (40:31): Very good. Thank you very much.

Outtro

Emily (40:41): Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! Nothing you hear on this podcast should be taken as financial, tax, or legal advice for any individual. The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Dr. Lourdes Bobbio and show notes creation by Dr. Jill Hoffman.

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Teaser

Introduction

Will You Please Introduce Yourself Further?

Similarities Between Academics and Creatives

How Do You Know When You’ve Actually Started a Business?

Commercial

Best Financial Practices for Early Career Academics With Businesses

Preparing for Tax Season as a Business Owner

Side Hustles and Estimated Tax

Sunlight Tax and the Sunlight Podcast

Best Financial Advice for Another Early-Career PhD

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Will You Please Introduce Yourself Further?

Current Stipend, Additional Income, and Household Size

Current Financial Goals and 50% Savings Rate

Budget Breakdown: Housing and Car Insurance

Commercial

Budget Breakdown: Groceries, Utilities, and Travel

Travel Credit Cards

Saving Vs. Investing

Best Financial Advice for Another Early-Career PhD

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Teaser

Introduction

Will You Please Introduce Yourself Further?

Finance Related Employee Benefits

High Deductible Health Insurance Plans

Traditional Retirement Savings Vehicles: 401Ks and 403Bs

Should You Ever Pass Up On The Employer Match?

Roth Vs. Traditional Retirement Accounts

Commercial

Roth Vs. Traditional Retirement Accounts

What Exactly Should I Invest In?

“Safe” Investing Options

Different Fee Structures of Financial Advisors

Socrates Financial Planning

Best Financial Advice for Another Early-Career PhD

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