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This Grad Student Saved and Spent $60,000 for a Year-Long Seabbattical

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In this episode, Emily interviews Michael Spano, a fifth-year PhD student in chemistry at the University of California, Irvine. After seeing his stipend offer from UCI and securing university-subsidized housing, Michael resolved to save and invest as much money as he possibly could throughout grad school. Michael shares his financial philosophy of keeping recurring expenses low, splurging only on high-value experiences, and finding joy and fulfillment in inexpensive activities. Over the course of graduate school, Michael saved up approximately $60,000 in cash, which he has spent—listen through the end of the episode to find out on what. His post-graduation plans include a year-long sabbatical and pursuing financial independence.

Links Mentioned in the Episode

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Teaser

00:00 Michael: I talked about how I minimized all of my recurring costs so that I have a lot of ability to save, and that allows me to make these one-time purchases that I put a lot of value on. Things that I only have to buy once. For instance, you know, a wetsuit, it’s maybe a four or $500 investment, which, you know, if you don’t have savings, it’s a lot of money. But because I had this, you know, money saving up as I’m watching it grow, I’m like, Hmm, yeah, I’ll take a little bit off the top and I’m going to buy this equipment. And it gave me hours and hours and hours of joy.

Introduction

00:36 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. 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. This is Season 14, Episode 9, and today my guest is Michael Spano, who at the time of this interview was a fifth-year PhD student in chemistry at the University of California, Irvine. After seeing his stipend offer from UCI and securing university-subsidized housing, Michael resolved to save and invest as much money as he possibly could throughout grad school. Michael shares his financial philosophy of keeping recurring expenses low, splurging only on high-value experiences, and finding joy and fulfillment in inexpensive activities. Over the course of graduate school, Michael saved up approximately $60,000 in cash, which he has spent—listen through the end of the episode to find out on what. His post-graduation plans include a year-long sabbatical and pursuing financial independence.

01:59 Emily: I have a personal update for you all today. The last six months or so have been pretty hard for me and my family. Starting last fall, my husband and I had some extra caregiving duties for one of our parents pop up. And the conclusion of that journey a couple of months ago was the death of that parent. So, it’s been a very trying season of course managing all of our regular life plus these extra caregiving responsibilities. Plus it was tax season, which, you know, is like the busiest time of year for me. And then of course grieving and the funeral and all these associated things. So, it’s been a lot, and I just wanted to say thank you to you all. To everyone who has supported my business in any large or small ways through this period, I’m especially appreciative. I could not do any marketing for my tax return workshops outside of like this podcast and my own mailing list because I didn’t have the time and energy for it.

03:05 Emily: So, I super appreciate all of you who recommended that workshop, whether that was to an individual or to a potential sponsor at your university. It really helped me get through this season without a huge hit to the business revenue and so forth. And I also want to say, you know, thank you for your patience with me. Some of you may have emailed me during this time and I may not have gotten back to you or gotten back to you weeks or months later. And I’m really sorry about that. It had to happen. And one more, very special thank you needs to go to my team who works with me behind the scenes on the podcast and on other aspects of my business. Jill, Lourdes, and Meryem, I appreciate you so much. It is really, really all to their credit that things have been happening in the business. That your emails have been getting answered, that podcast episodes have been coming out, that transcripts are getting done, all of those sorts of things especially over the last few months. Literally, the business would have ground to a halt without you. So, thank you.

04:03 Emily: Now that we’re near the beginning of May, I have turned my thoughts to summer vacation. I am looking forward to a change of pace and hopefully some rest and recuperation over the summer. My kids are out of school from about early June to like mid-late August, and we have a couple of vacations planned. I’m going to a couple of conferences as Personal Finance for PhDs. My kids are enrolled in fun summer camps. I’m just really looking forward to a change of pace for the summer. One exciting thing about the podcast is that we’ll be doing something different with episodes over the summer and I really want you to contribute. So, please keep listening to this episode to find out how you can be part of the special set of episodes we’re doing over the summer.

04:50 Emily: What this experience has to do with finances, let’s see. I am really grateful to myself and my husband in the past for working very diligently on our finances and especially automating as much as we can. Because whenever you hit an emergency of any type, and we’ve been through a couple, having those finances automated is just a huge peace of mind that the bills are getting paid and you do not have to do anything to make that happen. I’m also really grateful that we, you know, have aggressively saved in the past because we did have some extra costs associated with the caregiving we were doing. And we didn’t have to worry about overdrawing the checking account. We had savings that we could rely on. And this experience of losing a parent and, you know, reflecting on the life that that person had and the relationship that we had with them, it makes you realize that <laugh> life is for living, you know?

05:38 Emily: And money should be in service of that. So, I do think that we are going to be adjusting our strategy going forward. We’re not going to be saving quite so aggressively for retirement. We’re really good on that front, and we’re going to be using our money a bit more in the here and now to upgrade our lifestyle and create, you know, lasting memories with our friends and family. So again, thank you so much for bearing with me through this time period. I’m really grateful to you. Thank you for listening. Thank you for sharing these episodes. If you’d like to join my mailing list to keep up with new episodes coming out and other announcements from Personal Finance for PhDs, you can do so at PFforPhDs.com/advice. And why don’t you give your loved ones a hug or a phone call today? You can find the show notes for this episode at PFforPhDs.com/S14E9. Without further ado, here’s my interview with Michael Spano.

Will You Please Introduce Yourself Further?

06:27 Emily: I am delighted to have joining me on the podcast today, Michael Spano. He’s a fifth-year PhD student at UC Irvine in chemistry, and he was actually recommended by past guest Sam McDonald from season eight, episode three. So, Michael, thank you so much for volunteering to come on the podcast, and will you please introduce yourself a little bit further to the audience?

07:05 Michael: Yeah, sure. Thank you for the warm welcome, Emily. I’m really happy to be here and talk about my story. Sam and I are domestic partners, so we share a lot of things in common. A little bit about my background. I’m actually a dual citizen with Brazil. I spent half of my life in Brazil. I had all of my primary education there, so middle school, high school, and college. And then I got lucky in college to have a Science without Borders fellowship. So I came to North Carolina and I got exposed to what like a science lab was in the United States, and I was hooked. So I knew I had to do my PhD here. So, ever since then I’ve been working to get back to the United States. And here I am doing my PhD at UC Irvine in chemistry, and I’m, yeah, stoked.

07:49 Emily: So, I understand that when you started your PhD, well, tell us what your stipend was. And tell us how that struck you. Having, you know, recently or let’s say for college, you were in Brazil and so obviously there’s currency and, and cost of living differences there. So like what were you thinking about that stipend when you first saw that offer letter?

08:05 Michael: Yeah, absolutely, right. So, the stipend was right around $30,000. And that was an enormous amount of money, like you said, having been coming straight from Brazil that was more money than any of my professors made at university in Brazil. So, it struck me as like an opportunity. Like if I play my cards right and I’m frugal about living, I could save a ton of money and be really well off. And mind you, if you go to a federal university in Brazil, it’s free. So, I didn’t have any debts from college. And I was going into a PhD where not only was I not accruing debt, they were paying me. So I could actually build net worth if I played my cards right. So, $30,000 a year was the largest amount of money I had ever seen at the time. And I think we can agree I kind of played my cards well and built something for myself.

Cost of Living Expenses

08:56 Emily: Yes, that will be revealed through the course of the episode. I know where the exciting conclusion is here, but the listeners don’t yet. But okay. I mean, you see the number $30,000 per year, I understand how that could strike you, but we also are talking about Southern California, which is incredibly expensive. So I don’t know if you had like the context for that at that time. Like when you lived in the U.S. before, was it also in a high cost of living area? Or like how did you, before you actually got on the ground in Irvine, did you have a concept of how much your basic living expenses would, you know, account for as part of that stipend?

09:27 Michael: That’s a fantastic question. Because no, I didn’t, I had no idea. You always hear like, you know, California’s super expensive. So, kind of to back up, I applied only to three grad schools because it costs money to apply. And, you know, at the time I didn’t have it. So, I applied to three schools, got into two of them, Chapel Hill and UCI. And UCI had this really cool deal where they guaranteed you student housing if you signed up for it in your first year. And it’s common in graduate programs, at least in chemistry, for them to fly you out to see the school and you get to meet the faculty and everything. So on that trip, you know, I took a quick look at all the facilities. I was like, great, yeah, everything checks out. It’s a top-notch school.

10:08 Michael: Let me go to Aldi and buy, you know, enough groceries for a week. Let me see what that costs. Let me go fill up the rental car that I have. Let me see what it costs to actually live here. And I talked a lot with the students about housing, and I saw that the rent varied a lot. The cheapest housing units at UCI were around $550 a month, which is like fantastic. And some of the more expensive ones were around $1,500. So, that’s a difference of a thousand dollars every month. That’s 12 grand a year. That’s a $60,000 difference over the course of your PhD. So, it was essential that I got one of those cheaper units. And because I got accepted into two programs, I was willing to walk away from UCI and go to Chapel Hill because the cost of living there is much cheaper if I didn’t get the housing assignment. Did that answer your question?

10:57 Emily: Yes, it did. So I think we’ve already, if there are any prospective graduate students listening to this, we’ve gotten some lessons there already from just what you said was going on during this admission season of you actually having the opportunity to be on the ground at the university. You were checking out what are the costs that you can observe, what are the costs that you can speak with other graduate students about? And like you said, housing is number one, the most key expense to identify and make sure that it’s going to be able to fit within your budget. So, this sounds like this was a point of negotiation with your program, that you said, I must have this guaranteed housing spot, or else I have to decline the admission. Is that correct?

11:33 Michael: Not quite. I didn’t quite have the power to enforce that requirement upon the school. But I did know the date in which they would tell me if I got the housing was still not too late, that I couldn’t turn down the offer and go and join the other school in North Carolina. So it was kind of like a plan B, if I didn’t get the cheap housing, I was willing to just say, okay, I’m out. I quit and I’m going to go to this other school that’s cheaper.

12:02 Emily: Yes. Okay. Maybe not for your situation, I don’t know, but for other prospective graduate students listening, don’t be afraid to try to use this as a point of negotiation. For you, it sounds like it was just a boundary. If I get this, I’ll go here, the numbers are going to work out. If I don’t, I’m going to go with my next top choice. And that’s totally fine to have that boundary for yourself. But other people could maybe go the next proactive step and just inform the program that that’s what you’re thinking and that is going to be a boundary that you’re setting for yourself. Okay. So, you have your $30,000 per year statement. You have your guaranteed lowest cost housing. You mentioned $550 per month. Is that what this has been during your graduate career, or has that changed?

12:45 Michael: Yeah, it’s been that and it’s gone up 15 bucks every year. So, I’m still in the range of like $600 something per month. Yeah.

Money Mindset in Grad School

12:53 Emily: Okay. Amazing. So, you know, you spoke earlier about, you know, being impressed by the amount of money and that you were interested in saving as much as you could of that stipend. Can you say anything more about what motivated you to think in that direction? Because it’s definitely not a typical goal for a graduate student.

13:14 Michael: Yeah, I think I just realized at some point, you know, like this money is freedom down the road, right? Like we exchange our life for money to do things we want. And if you’re not born into wealth, all you have to work with is your salary, right? If you’re not, if you don’t get an inheritance of, you know, $500,000, a million dollars, all you’ve got to work with is, either you come up with a really good idea, you start a business, you get rich, or you work with what you have. So, that was basically me realizing like, hey, this is a really good opportunity. I’m going to work with what I have. I did the math and you know, as we’re going to get into shortly, making some really severe like austerity measures, you can save a lot of money during grad school. It’s guaranteed income for five years, and if you play your cards right, you can save it. So, I think that’s where my head was at. You know, I realized, yeah, I wasn’t born into like a lot of wealth or anything. And this was what I had to work with. So, this was my shot I was going to take it and work with it.

14:19 Emily: So interesting again, and so unusual. I think I did something similar when I was in graduate school, though not to the same extreme as you in terms of the mindset that you had. My mindset was more like, I am an adult and I need to do adulty things with my money, even though I am also a graduate student. And so that involved like saving 10%. So I’m not thinking like, oh, I want to save every single dollar I possibly could, but like having a savings rate of some kind is something that, you know, I wanted to do. And so we had a similar thought process, but you’ve taken it a little bit further than I did at that time.

Minimizing Recurring Costs

14:53 Emily: So, let’s talk about the budget that you’ve had during graduate school, and later on we’ll discuss what you’ve, you know, decided to put those savings towards. But in terms of living expenses, what have those been aside from the rent, which we’ve discussed?

15:06 Michael: Yeah, so my philosophy on living expenses was to really take a hard look at everything that I was spending money on and asking, is this absolutely necessary? Do I really need this recurring cost? And I’ll be clear, I’m trying to minimize all of my recurring costs, like rent, like insurances, like cell phone bills, all these things that you have no choice. They get billed to you every month and you have to pay them, right? If you minimize those and you can save a lot of money, then you can choose to buy things when you want them, right? Like one-time payments for an object that will bring you lots of joy in my mind was better than subscribing to things over and over. And then, you know, wasting my salary because that, like I said, that was my only leverage is building up that savings.

15:53 Michael: So, my rent, I’m going to give you some numbers here annually, but my rent equates to about $7,200 annually. So for 12 months, I decided that, you know, in California you absolutely need a car. So I had a hand-me-down little car but it needs insurance, and that’s a recurring cost. So, even if my car is parked, it still costs me insurance. That was around $348 per year. And that’s another thing, a lot of people pay way too much for car insurance. Call the competitors and haggle. Say, Hey, I’ll switch to your company if you beat this price by 50 bucks. And when they do, call up the other competitors, like six companies. Just keep doing that until you drive the cost down.

16:34 Emily: I do have to say I’m very impressed by that number. Because I hear other people talk about their expenses for car insurance but I’m assuming you have a car that doesn’t have much value, right? And that mostly you have liability insurance is mostly what it’s there for.

16:48 Michael: Exactly. It’s just liability. A car is a tool. It shouldn’t, I’m sorry, this is my opinion, it should not be your pride and joy. That’s silly. It’s a trap. It’s a financial trap. If you’ve got a new car, sell it. Go buy a junker. Anyone giving financial advice would tell you that. Buy a junker, drive it until it explodes, fix it, and keep driving it. So here we are, rent $7,200 car insurance, $348 a year. My cell phone bill, I prepaid a whole year with Mint Mobile. They were doing this promotional. $109 for the whole year. And that’s for a four gigabyte plan, unlimited talk and text. The car needs a smog check in California, it’s $36 every year. Can’t get around that. It also needs to be registered, $128 a year. So right there, those are like my basics. Living and transportation. Mind you, I don’t have to put fuel in my car.

Retirement Saving and Discretionary Spending

17:36 Michael: So that’s not non-discretionary, that’s definitely discretionary. And then one thing that I put in my budget that I was not going to skip on was maximizing my Roth IRA. Now that’s a retirement account, it’s tax leverage. So you put money in that account that you’ve already paid taxes on and it grows tax-free and you can withdraw it under certain circumstances. But typically when you’re about to retire. So I max that out, it was $5,500 and it’s grown to $6,500 now. They might even change it this year or next year to compensate for inflation. So, when you add all those up, my non-discretionary spending, things I have no choice to pay. It’s $14,321 per year as you know, the criteria there. So my gross income is $30,000. You subtract those two and I now have a discretionary spending of $15,679.

18:31 Michael: So now, what do I choose to spend my money on? How am I going to live my life, live a fulfilled life, travel, see the world, be happy on $15,679? Well one, I buy California state park pass. So, that’s $200 a year and that gives me free parking to any of the state parks. So, I live six miles from a beach and that’s my go-to place. That’s my happy spot. I also bought some, well I’ll talk about that later, but groceries is a big one. I’ve got this supermarket called wholesome choice. I mostly eat vegetables, really healthy food. It’s $35 a week. So, that equates to $1,680 a year. I choose to have beer. I like my beer money. So, you know, having two or three beers a week, that’s, you know, at the grocery store. So, it’s six bucks a week. That equates to $288 a year.

19:25 Michael: Gasoline, let’s say $60 a month to go travel, see things that really opens up your horizons. That’s $720 a year. And then finally the National Parks Pass, which is a hundred dollars a year. And that, you know, just opens your world, right? And then California, we have so many national parks. That was, you know, hands down worth it. A hundred dollars a year. So now, add up my discretionary spending, that’s $2,983. Subtract that from my discretionary spending, and I’m left with what is my saving ability. So, I’m able to save $12,696 every year if I stick to this or roughly these numbers. So, that’s about a thousand dollars a month. So, multiply that for 12 months over the course of a PhD, five years, that’s $63,480. That’s not accounting for, if this money is in a savings account or invested in the stock market growing with the market, it’s actually more than that. It turns out to be like 70, 75,000 over that five-year span. So, that was the math I did. You know, if I can be happy putting gas in my car, going, seeing national parks, doing natural things, I don’t have to spend money on movie tickets or these other things or buying clothes or whatever, right? Whatever brings people happiness. Mine was cheap quality, good happiness, and I’ve lived a very fulfilling life.

20:50 Emily: That does bring me back to kind of a note or a point or a question that I wanted to make regarding what you said earlier about, you know, like not getting trapped into like high rent or like high transportation costs in terms of what you’re calling your recurring expenses. The expenses that have to go out the door every single month. It sounds to me like you do not value those things. So, you are going to spend as little as you possibly can. And thankfully, you know, UCI has given you a good deal on housing and so forth. So, it’s not like you have to go to market rent and everything like that and compete in Irvine for that. But I just wanted to point out that other people can have a different opinion about this.

21:29 Emily: The listeners, for example, might not want to follow your example of spending the absolute minimum possible amount of money on things like housing or transportation. And that’s okay. It’s just that you have determined, what I think is really fantastic about this story is that you have been very clear about what is important to you and what is not. And minimizing the spending on what is not important to you. You know, you’ve been very intentional about that and I fully agree with, advocate for that strategy of decide what’s important, decide what’s not. Spend as little as you can on what’s not important so that, like you’re doing, you can free up money to spend on the things that are really adding value to your life. Like you mentioned the National Parks Pass and the state parks parking and all that sort of thing. The gas to get to these, you know, wonderful natural, beautiful places. You’ve decided that’s what you value. Now you’re, I don’t know if lucky’s the right word, but in your worldview it happens to be that those things are not that expensive, right? <Laugh> in the grand scheme of things. So adding a lot of value to your life for just a little bit more spending has really increased your quality of life dramatically.

22:33 Michael: Yeah, I think you nailed it. That’s a great summary of my perspective on this.

Commercial

22:39 Emily: Emily here for a brief interlude! We’re doing something special for Season 15 of this podcast, and as a loyal listener, I know you’re going to want to be involved. Season 15 will be a chance to share your financial experiences, even if you don’t want to give a full-episode interview or want to remain anonymous. We’re going to publish compilation episodes around certain themes, and each episode will feature at least a half-dozen different contributors. The contributions can be audio clips or written text that I will read aloud for the episode. If you are interested in contributing, check out PFforPhDs.com/season15/. That’s the digits 1 5. On that page, you’ll find a list of the proposed themes and how many volunteers I’ve identified for each episode. Your next step is to email me at emily@PFforPhDs.com to let me know which episode you’d like to contribute to or if you have another idea for the list. Once I’m confident that we have enough contributions for an episode to be created, I’ll give the volunteers specific prompts and directions to create their submissions. I hope you will choose to participate in this unique season! I can’t do it without you, so please get in touch! Now back to the interview.

Spearfishing

24:02 Emily: You brought up something else in our prep for this episode that I thought was really illustrative of your kind of philosophy around spending, which was spearfishing <laugh>. So, please tell me how spearfishing fits into your financial philosophy?

24:18 Michael: Okay, so I talked about how I minimized all of my recurring costs so that I have a lot of ability to save, and that allows me to make these one-time purchases that I put a lot of value on. Things that I only have to buy once. For instance, you know, a wetsuit. I still bought a pretty cheap wetsuit, so don’t think like spearfishing, super expensive, but you know, a spear gun, a wetsuit, gloves, it adds up. It’s maybe a four or $500 investment, which, you know, if you don’t have savings, it’s a lot of money. But because I had this, you know, money saving up as I’m watching it grow, I’m like, Hmm, yeah, I’ll take a little bit off the top and I’m going to buy this equipment. And it gave me hours and hours and hours of joy. I’ve just fallen in love with the ocean and I’m so fortunate that I got to go to school here.

25:04 Michael: I’ve never been an ocean person, but by going to the ocean, I fell in love. One day when this lady, she took her goggles and put it on a kid, her daughter shoved her head underwater and she’s giggling and screaming. And I went over, I was like, can I see what’s underwater? She put the goggles on me and I was hooked, instantly hooked. I wanted everything to do with underwater. So, spearfishing actually allows me to catch quality fish, be sustainable, and save a lot of money on groceries. Like I only buy fruits and veggies at the supermarket. Most of my protein comes from the ocean. And quality protein. Lobster season just opened up. It’s legal to catch lobsters here with your bare hands. So, I’ve had fantastic lobster dinners, lots of sea bass. I make ceviche, I jerky my fish. I mean, I have a really good quality of life from spearfishing. So, it brings me joy and it reduces my costs even further by providing me quality protein that I don’t have to spend money on, or at least the cost is very little.

26:03 Emily: Yeah, what a virtuous like cycle there that you have set up. Like something that you enjoy doing with your free time, brings you some, you know value to your mental health and so forth. And oh, what do you know? It also happens to help you reduce your expenses at the same time in terms of the grocery spending and, you know, the healthful diet and all that lovely stuff. So, I think the, maybe the broader lesson to take from that for the listeners is, maybe you won’t be able to find such a hobby that will actually help you reduce your expenses after, you know, an initial investment. But finding an inexpensive hobby that really brings a lot of value to your life is wonderful during grad school. Obviously, when you don’t have, have tons and tons of money to be having a very, very expensive hobby, it’s great to find things that are just low cost. Like I know for me during graduate school I went to Duke, so I got like really into Duke basketball and like, it’s free essentially to like watch a game with your friends, right? Like, and to have that be like your social activity. So yeah, I just love that point of finding these low cost activities that you just really, really enjoy.

Self-Sufficiency and Knowing What Makes You Happy

27:05 Emily: Is there anything else that you’d like to add regarding your expenses or how you find joy and happiness at this like, lower spending level?

27:16 Michael: There are two things I might want to talk about. So one is unexpected things happen, right? We own things that might break, like our cars or laptops, whatever. I’ve gotten very good out of necessity at fixing those things myself. So, if you think about, you know, the hourly cost to bring your car into the mechanics, it’s outrageous. If you have to do that very often, because you’re driving a junker like me, it actually defeats the purpose. So I’ve gotten phenomenally good at fixing my own car. And I’ll often try to purchase equipment that will allow me to fix the car multiple times. So that thing could break, like for example, I bought a welder from Harbor Freight for a hundred dollars because I had a hole in the exhaust of my old Subaru that rusted all the pieces. So when I got a quote from a welder, it was $150 to fix it.

28:09 Michael: And I thought, well I could buy this welder for a hundred and fix it two or three more times because another hole’s going to show up. So, it’s that kind of mentality of like, I’m going to do it myself. I’m going to fix these things, I’m going to drive the cost as low as possible. And you know, for some people it might just seem like work, but you end up learning so much in the process. Like, I can fix anything now and it’s great. I mean, even like in my next steps in life, it comes in really handy to achieve those dreams because I know how to fix things and I’m good at it. So, and another thing that I would like to drive home is like when you’re trying to find these cheap hobbies, it can be hard because we live in such an environment where we’re being advertised to all the time or we compare ourselves with other people. Try and declutter everything and, and ask yourself what really makes me happy? For me it’s nature. I love nature. And the beauty is nature’s free, right? You can just walk outside, go to a park, and yeah, when you get in tune with the things that really, really make you happy and you pull back away everything that’s clouding that, not only does it make for a much more fulfilling life, but you can save a lot of money too.

29:19 Emily: Do you think that you would have gone on that same kind of journey of understanding yourself and what makes you happy had you not had the financial constraints of the stipend slash wanting to save as much as possible? Like if you had gone a different route and not gone to graduate school, had a different kind of job, do you think you would’ve ended up in the same place?

29:41 Michael: Probably not. I think another beauty of grad school is it gives you a five-year span where you can think about things, right? It’s kind of our job is to, well the Ph in the PhD is philosophical, right? So, we have this time to think. I think, I can’t quite say if things would’ve panned out the same way if for instance, I had declined UCI and gone to Chapel Hill. My life would’ve been totally different. I probably wouldn’t have discovered the ocean. I might not have had a reason to save so aggressively my stipend, who knows, right? But all I can say is that, the way it happened, I wouldn’t change it. I wouldn’t have it any other way. It’s been a fantastic experience.

Sailboat and Seabattical

30:24 Emily: I think the listeners don’t yet fully appreciate how fantastically you are setting yourself up. Because we talked about, you even talked about Roth IRA contributions as like a recurring thing that you have to do, but you’re saving on top of that around $12,000 per year. You have that opportunity to save around $12,000 per year. So, the big reveal, what are you doing with that money <laugh>?

30:50 Michael: Right. So, to everyone that pulled out their calculators and was adding up all my expenses you know, five years of saving a grand a month, that adds up to, you know, over $60,000. I’ve purchased a sailboat here in Southern California. And more importantly, sailboats actually are kind of cheap. I bought the parking space for the sailboat that was twice as much as the boat. So, it’s called a mooring system. It’s lead weights at the bottom of the harbor, and you get to park your boat on it, and it’s kind of like a lease. So, when you buy that, you buy the rights to use that indefinitely, so long as you pay a small tax. So, that’s what I’ve done with my stipend. I’ve saved up all this money. I’ve bought the mooring and the sailboat. And my view for it in the future is, you know, it’s a little place that I can call home.

31:40 Michael: I’ll always have a place to come back to in California, wherever my life might take me. And you can actually live on them for very cheap. Now, some people have all the amenities of a house on a boat and then you completely skip rent. So, in a future where perhaps I get a job somewhere here in southern California, I have a place where I could live virtually for free and that will allow me to save, repeat this process and save even more, earning six figures. And then, you know, together with Sam, we both are like-minded. We can do whatever we want. We’ll be financially free. We can take whatever job we want because we don’t have to have a job. We’ve saved up enough money and we could do this in a relatively short time-scale.

32:22 Emily: You are the first person I’ve interviewed who has purchased a boat during graduate school. And as you said, not even just the boat, but the place to house the boat even more important. Incredible.

32:33 Michael: Thank you.

32:34 Emily: Why are you living in your campus arrangement right now? Is the boat that you have right now not suitable for living in full-time?

32:41 Michael: Yeah, it’s not suitable right now. I need to do some work on the plumbing for the sewage. Now, trying to juggle a PhD and working on a boat that’s floating in the middle of the harbor is kind of difficult. So, I’ve prioritized my education right now. But also, if you look at the house around me, this is a really nice deal. It’s beautiful. I call this place home and it’s lovely. I wouldn’t want to get rid of it. So, the rent, even though I could cut that and live on the boat cheaper, the joy that this apartment brings Samantha and I for the cost is worth it. So, we’re going to stick with this until I can no longer live here when I graduate.

33:21 Emily: And so, I see how now, you know, the skills that you mentioned developing from working on your car, I’m assuming some of those are at least the same learning mindset is translating to being able to fix up the boat and maintain the boat and and so forth. So like you found a new way to apply the skills that you were trying out and practicing on maybe a lower stakes endeavor with the car?

33:42 Michael: Yeah, absolutely. Anyone that knows someone that owns a boat, they are financial nightmares unless you do the work yourself, in which case they’re a time commitment. But it’s kind of what I’m going for here. I want to have the ability to slow down and take life at a slower pace. And that means that I do the work myself on the boat, even if it takes me a little bit longer. And I’m planning as soon as I graduate to spend a whole year on the boat traveling around the world with Sam before we go into our next endeavor. You could call it a “seabbatical”. And in that time, you know, I really want to slow down, kind of refind myself again before I just jump into the next opportunity and, you know, spend the rest of my life in a career. I really want to make sure that I get that time for myself. And slowing down learning how to fix things yourself on a boat, it’s a good way to make that dream happen on a budget.

34:36 Emily: I am so amazed by this, this idea of doing the seabbatical after you finish. Now, you’re a fifth-year, so this is in the relatively near future, right? Can you tell me what the plans are for finishing up your PhD, for doing the seabbatical, for, you know, what you’ll do after that for your next job?

34:53 Michael: Yeah, absolutely. So, I’m quite, I’m right in between opportunities here. I’m trying to finish up my thesis work and get that published and submit my thesis and defend. I’m trying to do that in the next, let’s see, we’re in November. I’m trying to do that in the next three months, and then be graduated sometime in January. And I’ve already written a grant that will fund my postdoc at a National Laboratory. So, that money is already, you know, in my hands at the National Lab. So, I’ve got a guaranteed postdoc after the seabbatical. So the idea is graduate, take the boat down to Baja, explore Baja, California, cross the Pacific either to Hawaii or straight to French Polynesia. And it’s my lifelong dream. I want to see the Pacific atolls. There are these beautiful rings of coral in the middle of the Pacific Ocean. That’s my dream. If I see that in this upcoming seabbatical you know, I’ve made it, you know. Anything else can come and I’ll happily go and join a national lab and do work there and produce science.

35:57 Emily: I love the strategy of securing the funding before, like knowing really what that next step is going to be. Because it’s a little bit of a risk, and especially I think with academia type stuff. People say, oh, you know, you take a break, you get out, you can never come back and so forth. But I really like this that you have the money, which is kind of the most important part. Having that established so that you know, you have a place to land when you’re done with this lovely break. And I’m so excited for that. And I definitely want you and or Sam, both of you to come back on the podcast after you’ve taken this year break and tell me, you know, all the shifted, you know, perspectives that you have. Maybe your life won’t even be going in the same direction that you thought at that point. That would be wonderful.

National Laboratory Postdoc Funding

36:37 Emily: But I want a little bit more detail now, if you don’t mind. I understand you’re already working with this National Lab that you had then, you know, applied for the grant for and so forth where you’ll do your postdoc. So, can you talk about that like relationship between, you know, yourself and your current advisor, your current program, and that National Lab?

36:55 Michael: Yeah, absolutely. So, you know, when you join grad school, they tell you that you’re guaranteed a stipend, right? $30,000 in my case. What they don’t tell you is what you have to do to earn that $30,000. Most people find out kind of the rather harsh way that they need to be a teaching assistant their entire PhD. Or some people write NSF grants and they get a fellowship which funds them. My case was neither. My case was, you know, a fellowship that came from Los Alamos National Laboratory. They were looking for a person that had my skillset. And my advisor at Los Alamos, my current advisor now at Los Alamos, reached out to my advisor at UCI looking for this type of individual that I kind of fit the bill. And that was that they already had built up a relationship in the past.

37:38 Michael: And, you know, that’s kind of how the world works. You call up, do you know anyone that’s good at this? And yeah, I do, here. So, that’s how I got selected for this. But that didn’t quite solve my financial problems once that connection was made. Just because I was the person for the project didn’t mean the money was there yet. So, we went through multiple rounds of applying for grants to fund me in this new endeavor, this partnership collaboration between UCI and Los Alamos. And it took us three years to actually get the funding. And then finally it came through internally from Los Alamos. My advisor at Los Alamos kind of pulled through and got that funding. And it was meant to be more of like a summer internship funding. But the way that we’ve structured it is we’ve kind of spread that money out over the whole year.

38:22 Michael: And then we, it’s not enough to fund me for the whole year. So then we have to supplement it with additional funding that my advisor from Los Alamos is able to get internally there at Los Alamos. And it’s kind of the first of its kind, but there are going to be many more of these types of fellowships. So kind of like a plug to anyone that’s in the southern UC school systems. It might not be known, but the UC system is actually a third owner or administrator of the National Laboratory. So, they’re trying to build a pipeline of students from the southern UC, you know, UCLA, UC San Diego, UC Riverside, UC Irvine to go to Los Alamos because all of the Northern UC system schools already have that pathway to the National Labs in Berkeley. So Lawrence Livermore, Lawrence Berkeley, Sandia, they already have that pathway. So, their students kind of go there. And so they’re looking to build that. So, there are actually going to be more opportunities like the one I have for students in the Southern UC school system.

39:20 Emily: Yeah. And so the way that I understand this is structured is you are an employee of the National Lab, but since you’re still a student, your education expenses are still outstanding. And your department, your program has agreed to pay those on your behalf, even though you’re not, you know, a teaching assistant or you don’t have a fellowship that’s being administered by the university, they’re still covering that part of things.

39:43 Michael: Yeah, that’s correct. It’s kind of messy, right? Because once you get external funding, the school doesn’t get its cut and then it requires you to pay for tuition. But in the way that this is, because there is this unique kind of like part-ownership of the UC systems with the National Labs, they’re trying to make this work, right? They’re trying to get students from the UC systems into the National Labs. And so, you know, some kind of conversation had to occur between Los Alamos National Lab and my department where my department agreed to pick up my tuition costs.

Financial Independence, Retire Early (FIRE)

40:19 Emily: I’m so glad we got that into the interview because it’s a structure that I had not heard before. So, it’s really just interesting and good to hear that there are creative solutions to how graduate students can be funded in various ways. And thanks for letting the other, you know, UC students know about this upcoming pipeline. Surprise second-to-last question, Michael. There are some ways that you’ve been answering questions in this interview that indicate to me that you might be part of the financial independence movement. Is that the case?

40:51 Michael: I mean that’s the dream. Yeah. FIRE, right? Financial independence, retire early. And I think it’s funny because a lot of people have a negative connotation with the word retire, but it’s focused more on the financial independence, right? If you have saved enough money, built enough wealth, created passive income streams to the point where you don’t have to take a job, it means you can work on whatever you dream, whatever you wish. And because we’re humans, we’re always evolving. What we picked to do in school might not be the thing we want to do for the rest of our lives. So, having that ability to say no to that job, say no to maybe perhaps corporate America or something and say yes to entrepreneurship or whatever floats your boat, right? That’s the beauty. So that’s what Samantha and I are both trying to achieve together is that financial independence so that we can dedicate our lives to whatever we want, whatever we think has value, not necessarily the big corporate, you know, pharma company or this or that, whatever pays the bills.

41:46 Emily: Do you see this pursuit of financial independence as enabling you to continue to do science in the way that you want to? Or are you thinking of it as a way of stepping away from that vocation entirely when it might, you know, please you to do so?

42:01 Michael: Hmm. Both <laugh>. Yeah. To do science, it’s a very costly endeavor, and it’s really funny the way that we structure, you know, professorships. You get paid to teach, you don’t really get paid to do the science. You need to get that grant money kind of independently from your position as a professor. So it’s kind of like, they hire you for one thing but expect you to do the other. If you have the financial independence, you can do whatever you want. You can do research, maybe you go and pursue opportunities in science that you wouldn’t have thought of otherwise. Like perhaps joining an antarctic exploration boat or something like that, right? It means you have the flexibility to pursue what you want. That might be continuing science, that might be doing something entrepreneurial, but it’s nice to have the flexibility and the financial security, or at least striving towards the financial security, to do whatever I might please in the future.

42:59 Emily: I’m so glad we got to this point of understanding this even bigger picture. Because we’ve been talking about, you know, the expenses during grad school, the savings, saving up for the seabbatical and everything, which is not full early retirement, but it’s certainly a mini-retirement as it’s called within the FIRE community. I’m glad to see that this is a vision that you see playing out over your entire lifetime. Not something you’re doing, you know, temporarily just during grad school, just for whatever reasons. You’re going to be sort of fluidly moving in and out of different employment opportunities and maybe some other sabbaticals or mini-retirements and maybe other, you know, unusual work arrangements and so forth because you’ve already started to build up this financial capital. Even though you’re not fully FI at this point, you have enough financial wherewithal to have a lot of control over how you spend your time and everything.

Best Financial Advice for Another Early-Career PhD

43:51 Emily: And so, I’m just so pleased that we can see how, you know, that started with the seed of an idea at the beginning of graduate school and how it’s going to be blossoming over the coming years and over the coming decades. So, so glad that we got to this point in this interview that we could understand that. The question that I ask all of my guests at the end of interviews is, what is your best financial advice for another early-career PhD? That could be something that we’ve touched upon already or it could be something completely new.

44:18 Michael: Hmm, that’s good. I’m going to try and answer this as best I can. Because as we’ve established, I’m kind of an exception to this, right? So my advice might be a little bit extreme for others, but I would advise to those whoever may resonate with my story, minimize your recurring costs, advocate for yourself, whether that’s, like you pointed out, the necessity for a certain accommodation at the university. You can also advocate for a higher stipend for yourself at the university. Most people don’t know that. So, minimize recurring costs. Advocate for yourself. Those are my two big ones.

45:00 Emily: I love that. That’s sort of how I see my, you know, even business going forward of like advocacy and also doing really well with what you have, such as by minimizing those not important to you, recurring expenses. And Michael, where can people find you if they want to reach out?

45:17 Michael: Yeah, so if you want to follow me, my sailing adventures are all published on YouTube under my channel Sailing Ambrosia. So if you want to, you know, unplug and unwind, you can follow me there on YouTube.

45:30 Emily: Michael, this has been such a fascinating interview. I’m so glad that Sam recommended you. And thank you so much for taking the time to give it!

45:37 Michael: It’s been my pleasure. I really hope that someone out there resonates with this story and perhaps I’ve enlightened someone to follow in my footsteps.

Outtro

45:49 Emily: 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! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

Insights from a Financial Planner Who Works with Academics

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In this episode, Emily interviews Andy Baxley, a Certified Financial Planner who specializes in working with academics and PhDs. Andy pursued graduate school in psychology immediately after undergrad, but quickly realized the career path wasn’t right for him and the financial pressures were too great. He eventually started practicing financial planning, realizing that it is psychology ‘out in the wild’, and decided to serve the academic community he so closely identified with. Andy shares his insights from working with PhD clients nearing retirement about what they are glad they did when they were younger and what they wish they did. At the end of the interview, Andy explains how his career plans have brought him back to graduate school again. Andy brings deep insights to the interview from his years of study and practice in this space—ones you won’t want to miss!

Links Mentioned in this Episode

Teaser

00:00 Andy: It was sort of that long-term existential financial dread mixed in with just the day to day, “I don’t have enough money for anything.” I was living in a big, fairly expensive city and just was very, very much living like the proverbial graduate student. I didn’t mind that, but it was that in tandem with feeling like everyone else was just taking like leaps and bounds beyond where I was in their financial journeys, that confluence of things added a lot of anxiety.

Introduction

00:34 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season eight, episode 17 and today my guest is Andy Baxley, a certified financial planner who specializes in working with academics and PhDs. Andy pursued graduate school in psychology immediately after undergrad, but quickly realized the career path wasn’t right for him, and the financial pressures were too great. He eventually started practicing financial planning, realizing that it is psychology out in the wild and decided to serve the academic community he so closely identified with. Andy shares his insights from working with PhD clients nearing retirement, about what they are glad they did when they were young and what they wish they had done. At the end of the interview and explains how his career plans have brought him back to graduate school. Again, don’t miss Andy’s deep insights from his years of study and practice in this space.

01:36 Emily: I have my own insights that I will provide to you next week, specifically regarding the home buying process. My husband and I closed on our very first home a week ago. My podcast episode next week is going to be all about our journey to home-ownership. Like many other PhDs and millennials generally, we put off buying our first home for quite a while. I’ve been open on the podcast about my regret that we did not buy our first home back when we were in grad school and I’m pretty bullish on grad students and PhDs buying homes if it’s financially feasible.

02:10 Emily: To that end, I’m publishing the episode next week on our personal home-ownership journey, which I hope you’ll listen to. I’ve also scheduled a special event with my brother, Sam Hogan, who is a mortgage originator specializing in grad students and PhDs. You’ve heard Sam on the podcast previously in season eight, episode four; season five, episode 17; and season two, episode five. We are going to do an AMA style live call over zoom on Thursday, May 6th, 2021 at 5:00 PM PDT 8:00 PM EDT. We will do our best to answer any question you have about buying a home, especially as a grad student or PhD. You can register for the event and my mailing list at pfforphds.com/mortgage. I hope you will join us.

Book Giveaway

02:56 Emily: Now it’s time for the book giveaway contest. In April, 2021, I’m giving away one copy of Walden on Wheels by Ken Ilgunas, which is the Personal Finance for PhDs Community book club selection for June, 2021. Everyone who enters the contest during April will have a chance to win a copy of this book. Walden on Wheels made a splash when it was published, because the author wrote about how while he was a graduate student at Duke, he lived in a van on campus instead of renting a home so that he could avoid taking out student loans. This was an even more counter-cultural move than it appears to be now because it was before the rise of hashtag van life. I’m looking forward to learning more about the author’s motivation to make such an extreme choice and discussing it with the members of the Personal Finance for PhDs community. If you would like to enter the giveaway contest, please rate and review this podcast on Apple podcasts, take a screenshot of your review and email it to me@emilyatpfforphds.com. I’ll choose a winner at the end of April from all the entries. You can find full instructions at pfforphds.com/podcast. Without further ado, here’s my interview with Andy Baxley.

First Go at Grad School

05:12 Emily: Yeah. And we’re going to get ton of that insight later on. I’m so excited for it. But first we want to go back in your own history back to when you were pursuing your own PhD the first time, so could you please tell us about the graduate program that you entered and what you were studying?

05:30 Andy: Yeah, absolutely. It’s funny, when I look back on my own personal history, I would have been really surprised 10 years ago, if I could have gotten in a time machine and seen where I am today, I don’t think I ever would have guessed that I ended up exactly where I am, but I also wouldn’t have guessed that I’d be as professionally fulfilled as I am either. It turned out well, but definitely a number of unexpected turns along the way. To go way back, I think the best place to start this story is probably in high school. I was a really sort of uninspired student in high schoo,l to say the least, and my parents always said, you have to get a 3.0 at minimum, so I always got like exactly a 3.0, I just didn’t really have much direction or passion.

06:15 Andy: All that kind of changed when I got about halfway through college and I just got very inspired by a couple of professors and started doing research assistantships and teaching assistantships in my undergraduate work and ultimately decided to pursue becoming a professor myself in psychology. The second half of my academic career, I think I was an excellent student and that was the first time I’d ever been excellent at anything. I really was just very excited to be good at something. I started thinking about life after undergraduate work and ultimately went to a master’s program, that was well-known for being a feeder into really good PhD programs, and so I thought that was the path. It didn’t end up working out that way, and I can tell you more about that story certainly.

What Drove the Decision to Leave Grad School

07:07 Emily: Yes, please do. I mean, I think we all know the beginning of this path, but where your story gets interesting is when you start to deviate from it. So why did you end up leaving that master’s program?

07:17 Andy: It was a mix of things, it was definitely a confluence of things. First and foremost, I think I got there and I realized that while I was fully funded in the program and I had a stipend, I sort of looked around and I realized that I didn’t have the same sense of purpose or direction that a lot of the other students in the program did. At first it didn’t seem like that big of a deal, but the more I thought about it, the more I realized that the further on I got in that journey, the competition was only going to get fiercer and fiercer. I sort of had this mindset that as long as I can do the next thing, that’s where I’ll find happiness. If I can just get into this master’s program, then my path is paved and I’ll find happiness and all will be well.

08:05 Andy: Then I was like, well, that’s obviously not true and I was thinking, okay, well maybe if I get into a great PhD program, once I do that, all will be well and my life will be pretty much set at that point. And I kept talking to people who were either one step or two steps or three steps along in the journey and realizing that some of them are happy, but a lot of them were under a tremendous amount of pressure financially. They just had a lot of stress in their lives that I wouldn’t have expected, and that wasn’t just true. One or two steps beyond. The more people I talked to, I realized that even all the way up to tenured faculty, those folks were under a lot of pressure as well. Some folks were extremely happy with their lives, but not all of them were and I just realized that I wasn’t on a path to sure happiness or professional fulfillment.

08:52 Andy: Also, I was going up against people who were really super passionate about the research topics that they were focused on and I just didn’t have that. All I had was that I was really excited to be good at something and excited to be a good student, but I just didn’t have that passion and didn’t have that drive. Those were sort of the personal reasons. And then there were certain financial ones as well, which I’m certainly happy to go into.

09:15 Emily: Let’s do that in a moment. I am really impressed with you as a, whatever you were 22, 23 year old person, really being able to kind of take a step back from the day-to-day rush and rigor of the program and evaluate “is this really where I want to go” and to do that, looking ahead to your older people ahead of you in the program and older mentors and so forth and asking yourself if you really want that out of your life. And to do that so early on, right within the first, it sounds like about a year of that program doing that evaluation. I really encourage the listeners to periodically step back and reevaluate and see if the path that you’re on is really the one you went to beyond because bailing out like you did earlier is much, much less sunk cost, than getting to the end of the PhD and realizing that you don’t want the career that’s on the other side of that PhD, the one that you thought you wanted. I really commend you for that. Can you talk a little bit more please about the financial pressures that you were experiencing and observing?

10:13 Andy: Absolutely. And one thing I’ll add to what you just said as well, is that that was the hardest decision I’ve ever made to leave that program. It felt like it felt like my world was crumbling down. So much of my identity was wrapped up in that path that I had chosen for myself. At the time it was truly like crushing at a personal level to make that decision, but looking back, it truly is the best decision that I’ve ever made. That’s not to say of course, that everyone should leave their PhD programs or that everyone should leave graduate school, but it is to say that if you have that hunch, that maybe that’s something worth considering. It may feel like the end of the world in that moment, but it will get better later on as you find your path, it just doesn’t seem like it in the moment.

10:57 Andy: To circle back around to the financial side of things, I think I had this experience that a lot of folks probably do, which is that I was seeing a lot of my peers from college who hadn’t chosen the same path, start to experience some degree of financial success. I always had assumed like, “Oh, financial success isn’t for me like that that’s for other people, that’s, that’s not really a thing for me”. But then I had this weird experience where I started to see other people get jobs and decently paying jobs and I felt a little bit of jealousy there. Also I just felt, my stipend was generous, but it wasn’t quite enough to live on, so I was accumulating more student loan debt on top of what I already had for my undergraduate work.

11:42 Andy: I was by no means into personal finance yet at that point, but I was just doing some very simple math and thinking about when am I actually going to make enough money to start to dig out of this hole? I started playing around with compound interest calculators and realizing how delayed I was going to be, not only in paying off my debt, but also in starting to accumulate assets long-term. It was that long-term existential financial dread mixed in with just the day-to-day “I don’t have enough money for anything”. I was living in a big, fairly expensive city and just was very much living like the proverbial graduate student. I didn’t mind that, but it was that in tandem with feeling like everyone else was just taking like leaps and bounds beyond where I was in their financial journeys, that confluence of things added a lot of anxiety, I think.

12:32 Emily: Yeah. I think what you’re expressing is, again, common enough if people take the moment to think about it. And certainly when you’re actively taking out student loan debt it’s really in your face that this it’s not a long-term sustainable thing to be doing. I think it’s a little harder when you have the stipend and it’s enough to live on, but you don’t quite realize, like when you were playing around the compound interest calculators, you don’t quite realize the long-term effects of not being able to save, not being able to invest, so you can make it day to day, but it’s easier to not think about the long-term. You had the pressure of both the day-to-day and the long-term bearing down on you. I really appreciate those observations.

Life after Leaving Grad School

13:12 Emily: Can you tell us what you did next — after you left your program, after you world crumbled around you? And on that path, how you fell in love with personal finance?

13:22 Andy: Yeah, absolutely. After the program, I spent a couple of months just sort of wallowing in uncertainty and not knowing what I would do. Ultimately what I landed on — I love to travel, so I moved to South Korea and taught English as a second language. I intended to do that for one year, just to sort of get my financial house in order and also have a really neat, unique experience. I actually ended up staying for four just because I really loved it. And I knew that I didn’t want to be — I was teaching anywhere from kindergarten to middle school, depending on which year I was there. I knew I didn’t want to do that forever and I also knew I didn’t want to be a teacher forever necessarily, but I just found the experience kept getting more and more interesting and so it kept me there longer than I thought.

14:07 Andy: Somewhere about halfway through that journey, I picked up a book called Millionaire Teacher by a guy named Andrew Hallam. And first of all, the term “millionaire teacher” seemed like an oxymoron to me, which I think is kind of the point of the title. And again, like I said earlier, building wealth, and certainly becoming a millionaire, never felt like something that was for me. It just always felt like that’s that’s for rich people and I just don’t know anything about that. I sort of always buried my head in the sand and was never a great saver, never even thought about investing. I don’t remember why exactly I read this book, but I started to read this book and realized that actually, if you start early enough and you save even just a bit, and as your earnings increase, if you can save a bit more, there’s a pretty clear path to wealth for a lot of folks. I don’t want to make it seem like it’s, it’s available to everyone because I think we have systemic structural issues that do make it really hard to build wealth. But I think it’s, it’s available to a lot more people than most people think. If you can be prudent, especially in your younger years, that there is a path to wealth and, and that wealth isn’t, we can talk more about this certainly, but wealth isn’t just about, how big your accounts are getting, but it’s also about what does that allow you to do. What sorts of freedom does that allow you to pursue? Once I realized number one, that wealth isn’t just for rich people, you know, building wealth isn’t just for people with trust funds, I think I just started reading every book I could possibly find on personal finance and just became sort of obsessed. So that’s how the interest was born in personal finance and then the career part came later.

15:41 Emily: That’s a fantastic entry point into the subject matter. Finding that perfect book that you could see yourself in — The Millionaire Teacher. And I love that you said it’s a provocative title, it’s an oxymoron. I also have a program called the Wealthy PhD, which is similarly designed to be provocative and “What a PhD can be wealthy? How could that possibly be?” Of course, we’ll talk about that in a moment.

Transitioning into a Career as a Financial Planner

16:05 Emily: You’re falling love the subject of personal finance. How did you make it into your career?

16:10 Andy: The first part was the realization that building wealth isn’t just for rich people, but the most important thing was the second realization, which was that personal finances is not just about finance. It’s not just about the numbers. There’s kind of a corny saying that I’ve heard, but I actually like. It’s that personal finance is more personal than it is finance. I started to make this connection. I was also really deeply immersed in the positive psychology movement at that time. I was reading a lot of work by Marty Seligman and other folks who were really just making the statement that it’s not just about fixing our deficiencies, it’s about how do we get from our baseline and transcend beyond that and live a life that is maybe even better than we ever could have expected.

Andy: I started to make this connection that like, “Oh my God, if building wealth is available to everyone, maybe that can also be a tool for helping people, to use another cliche, live their best life.” How can wealth become a tool to live in accordance with our values and live a life filled with joy and fulfillment? And once I made that connection, that personal finance is the best applied psychology there is, it just clicked for me. I was like, Oh my God, I can do this thing professionally that I’ve become really interested in and sort of honor my love of psychology and that original career trajectory I had set for myself. It was like psychology out in the wild. And that was really exciting for me. I didn’t have to just become, I shouldn’t say just, I didn’t have to become a professor. There were other ways to do that. That was really exciting for me. I was hooked at that point and I haven’t really looked back even a single day since then.

17:49 Emily: That’s such a beautiful expression. I’m completely on board with you, but I hope the audience is hearing this as well, the insights that you just gave, because I think it can maybe explain a lot to them about why they haven’t been successful with personal finance in the past. Even if they’re obviously super smart if they’re PhDs or whatever. But like you said, it’s psychology. It’s personal.

Insights into Personal Finance for PhDs

18:09 Emily: So, you get into this as your career, and I know you’ve had a couple of jobs, but what I want to focus on now is what you have learned from and observed in the academic clients you’ve been working with since you did switch to having a focus on that population in your practice. What does the future look like for someone who is maybe currently in graduate school or otherwise early on in their PhD career? What happens a few decades from now, if they are intentional now with their money?

18:40 Andy: Yeah. That’s such a good question because the answers are very different about when you think about the person who’s intentional versus the person who isn’t. To talk about the people who are intentional, there’s this quote I really love by a guy named Morgan Housel, he just came out with a book called the psychology of money and he says “the ability to do what you want when you want with who you want for as long as you want is priceless. It’s the highest dividend money pays.” And so what comes later down the road for folks who are really intentional and diligent about their personal finances early on is freedom. I guess that’s just the best way to put it. And that can be intellectual freedom, it can be creative freedom, it can be — the one thing I would add to Morgan’s quote is the ability to be wherever you want to.

19:25 Andy: I think when people are investing and saving, it can feel abstract, but the way I think about it is they’re just saving little units of freedom and flexibility and how they end up using those units of freedom and flexibility later on, we don’t necessarily know that on the front end, but when they get there, they’re so happy to have them. I’ve had clients who spend half of the year abroad in South America. I’ve had clients who retired and started a little boutique motel. I’ve had clients who were able to afford to do sort of part-time work very early on, like in their fifties and do a half retirement, half working thing for a period of time. So truly the limits are non-existent. The possibilities are as big as your creativity. What comes later on, I can’t say specifically what comes for each individual person without knowing them, but I can say that everyone I’ve ever talked to who did a good job saving early on was really glad they did. I’ve never once heard somebody say that they regret it.

20:24 Emily: I really love the way you phrased that of, saving up units of freedom and flexibility for the future. I’ve expressed that before as money gives you options. Whatever you want to do, having money is going to make it easier to accomplish that. But I really like the way you phrase it, because I know that for me earlier on when I was in graduate school and so forth, and I still don’t to a degree, didn’t have a clear picture of what my retirement or my long-term future would really look like. I wasn’t really sure what kind of career I would have. I wasn’t really sure where I’d want to live or. I have children now, but when I didn’t, I didn’t know how big my family would be. There was a lot of uncertainty and I think that’s really common for PhDs because if you stay on that track, like you may end up moving many times, it’s very difficult to tell what your life is going to look like many decades from now. That can make it a little more difficult to save for and get motivated about because if you think about the vision board technique, for example, you are supposed to have like a really crystal clear vision of like what you’re going for. When you’re facing reality about what your career might look like as a PhD, it might be difficult to have that clear vision, but I love the way you phrase that of just whatever it ends up looking like, saving up for your freedom and flexibility now we’ll give you your options later on for living wherever, doing whatever with whoever, everything you just listed from Morgan Housel. I really love the way you phrased that.

Commercial

21:51 Emily: Emily here for a brief interlude. Taxes are weirdly, unexpectedly difficult for funded grad students and fellowship recipients at any level of PhD training. Your university might send you strange tax forms or no tax forms at all. They might not withhold your income tax from your paychecks, even though you owe it. It’s a mess. I’ve created a ton of free resources to assist you with understanding and preparing your 2020 tax return, which are available pfforphds.com/tax. I hope you’ll check them out to ease much of the stress of tax season. If you want to go deeper with the, or have a question for me. Please join one of my tax workshops, which you can find links to from pfforphds.com/tax. It would be my pleasure to help you save time and potentially money this tax season. So don’t hesitate to reach out. Now back to our interview.

Pitfalls to Avoid as an Early-Career PhD, According to a Financial Planner

22:57 Emily: Do you want to talk about the converse side about mistakes that you’ve seen your clients make or pitfalls that younger people earlier on in their career should avoid?

23:08 Andy: Yeah, absolutely. The number one mistake is a pretty obvious one and it’s just not saving. It doesn’t have to be, Oh, I didn’t have a super high savings rate, it’s people who just decided, I’m going to wait until much later to start saving. And the thing about investing and saving is that time is your best friend. A lot of people think Warren Buffet’s secret is that he’s this fantastic investor, but the truth is Warren Buffet’s secret is that he’s a fantastic investor and he’s been investing now for like 80 years or something like that, so he’s had that time for, for compound interest to take effect. I think starting really late is one thing that a lot of folks end up regretting. When I meet clients who are 60 and maybe they didn’t start saving until they were 45 seriously and they’re a bit behind or a lot behind, I think what really rings true for me is that it makes it very clear in meeting with these folks is that money doesn’t buy happiness, certainly, but it does pave the way for you to build happiness and joy and fulfillment over the time.

24:13 Andy: Conversely, a lack of money can make it really hard to achieve those things. When you’re 60 starting to think about retirement, but knowing you don’t have enough money to fund a decent lifestyle in retirement that you can enjoy, that’s a really tough place to be. And that stress really weighs on people, in my experience. I think a piece of advice I would give to younger people sort of like cautionary advice is just we’ve all probably experienced some version of resource scarcity at some point in our life, especially folks who’ve gone through graduate programs where you just feel like it’s really hard to make ends meet. And we know how stressful that is. I guess the pieces of advice I would give to a lot of folks is that that stress is amplified by 50 to a hundred times, if you’re at the end of your career, because you no longer have three or four decades of earning potential in front of you. It can be really scary for folks. That’s one of the things I’m most passionate about when I work with younger clients is these small changes we can make on the front end, end up making these tremendous differences on the back-end.

25:15 Emily: Compound interest truly amplifies your actions from early on, given that timeline that you were talking about. I’m thinking about someone in the audience who — you mentioned earlier, systemic barriers to building wealth that many people experience. Of course, we have a student loan crisis now that did not exist for the people who you’re working with who are nearing their retirement years. I’m thinking about someone in the audience who is really struggling, or maybe they were really struggling until recently and only in their thirties or forties, they’ve finally gotten to a point where they feel like they have a career and they have the paycheck and they can start saving. What can someone who is struggling or has been struggling do to — I know that time is your best friend, but like what can we do to make up if the time has already passed?

26:04 Andy: What I often tell clients who come to me with that question, because I do get clients who are like, honestly, it’s too late for me. What I tell them is certainly the best time to start building wealth is the first paycheck you get. That’s the best time to start doing it. Knowing that the vast majority of people don’t start then, the second best time is just today. Just start today, wherever you are, whether you’re 30, 35, 45, 55. And I think the best advice I can give people is just start really small. If you don’t have a lot to save, if you don’t have huge amounts that you can put towards paying off your debt, start very small and build up from there. Even if say you’re almost done paying your student loans off and you’re starting to think about saving for retirement, even if you can start saving 1% of your pay and then commit to moving it up by a percentage point, say every three or four months, programs like that eventually will get you on track.

26:58 Andy: And I think taking those baby steps is important because the idea of saving for retirement, it’s one of the biggest financial burdens we’ll ever have to face and it can be really overwhelming. I think for a lot of people, when they hear numbers like, Oh, you need to save 15 or 20% of your income, they think of it in this very binary way. They’re like, well, can’t do that, so I guess I just won’t do it at all. I think what I would really emphasize is just start small and just build up incrementally and you will get there and no matter how much you’re ultimately able to save, you’ll be really glad you did it.

27:32 Emily: Yeah, I completely agree, especially about people being turned off by the big numbers of savings percentages. I remember when I was in graduate school and reading the advice of like have a three to six month emergency fund, I was just like, no way, there’s no way I can save up whatever that would have been at the time, $6,000 or something like that. I saw that as totally out of reach and so I really just didn’t even try. I fell prey to the same kind of psychology that you just said there. But like you said, just saving as much as you can or putting as much as you can towards debt — could be $5, could be $10 — I think one of the most transformational things about that is not necessarily the amount of money that you’re putting towards savings, but just the fact that you have changed your identity to “I am a saver, I am repaying my debt and I am a person who invests” and that alone can be super powerful and is a great building block on this path towards wealth, even if the numbers are not that big yet.

28:31 Andy: Absolutely. I couldn’t agree more. I think that identity piece is as important or more important than those initial dollars that you’re able to save. I hope people take heart and realize that when you’re just starting on the journey, it’s a little bit like when you watch a rocket ship take off, like watching a space X launch or something. It starts super slow at first. It’s really hard. There’s a gravitational pull that you have to get past, but the momentum builds over time. And once you start to build that momentum, it gets easier and easier. The hardest dollar to save is that very first dollar and every dollar will just get a little easier beyond that. Then eventually once you’ve started to invest as well when you’re at that stage, those dollars will be making more dollars for you while you sleep. That’s the idea of compound interest. Just know that it will never be harder than it is right now and that it does get easier progressively over time.

29:26 Emily: Yeah. Thank you so much for adding that insight. I totally agree. You hear it in the personal finance community: the first hundred thousand is the hardest to get to in terms of your investments and then getting to the $200,000, $300,000 is so much easier, it takes so much less time. But if we’re talking to grad students, let’s lower that scale — the first $10,000, the first $1,000, the first $100 — every order of magnitude that you go down, it is the hardest at that stage. Once you get that compound interest working in your favor, it happens while you sleep, as you said. I know I’ve experienced this in my own life from grad student years, scrimping to save even $5 more per month was like a big accomplishment and now things look very different 10, 15 years later, in terms of the compound interests working in my favor. I can kind of personally attest that yeah, that first hundred thousand, which I’ve well-documented in the first podcast episode that I published actually, was definitely the hardest. It’s been a lot easier since then.

Going Back to Grad School After a Career Shift

30:25 Emily: Andy, I want to get back to your own story because that’s taken another twist. You’re a CFP, you’re working with clients, but you’ve also recently decided to go back to graduate school. Tell us about that decision

30:40 Andy: There’s still that part of me that identifies as a great student and a person who loves school and I’m actually really grateful to have held onto that identity and so a couple of years ago, I started thinking about going back to school and I ended up signing on for the Masters in Financial Planning Program at Kansas State. I did a dual concentration. Half of the degree was really focused on advanced financial planning, so kind of the numbers side of things — taxes, estate planning, that kind of stuff. The other half was focused on financial therapy, so really taking a very deep dive into the psychology of money.

31:18 Andy: I’m finishing that degree actually in March, so I’ll be done in March and my next juncture is to decide if I want to do the PhD, which it’s so funny to me to think that I might yet again, be considering a PhD, but I think I’m doing so with a different head on my shoulders than before. If I decide to do the PhD program, which I think I will at this point, it’ll really be to further what’s been done with regards to academic research around the field of financial planning because not a ton has been done. It’s a very under-researched field.

31:52 Andy: I wouldn’t want to stop being a financial planner. The way a lot of folks do it in the industry is they get the PhD and then they sort of spend 70% of their time in practice and then the other 30% of their time doing research and publishing and doing some teaching. That for me seems like a pretty good balance, kind of having my foot in one door and the other as well, right now. We’ll see! Hopefully we can check in again in a couple of years and I’ll tell you what I decided.

32:17 Emily: Yeah, that would be excellent!

Best Advice for an Early Career PhD

32:18 Emily: Andy, I wrap up all my interviews by asking my guest, what is your best financial advice for an early career PhD? We’ve obviously already said a lot of advice throughout the course of the interview, but did you have something that you wanted to underline for us or maybe something new that you wanted to throw in?

32:34 Andy: Absolutely. I don’t know if it’s new, but I would definitely say that if it isn’t new deserves to be reemphasized and that is to me, the best investment you can make at any age, if you haven’t already made the investment is in your own financial education. Before you even start thinking about index funds and long-term savings and 401ks and things like that, just investing in your own knowledge and establishing a baseline understanding of personal finance, I think is the best possible thing anyone can do.

33:05 Andy: One critique I have the financial services industry is that I think a lot of the messaging has been set up to tell people this is too complicated or too time consuming or whatever “too this” or “too that”. It’s not for you to do, it’s for you to hire us to do. I think in some cases that’s true. When things do get complicated, it is really helpful to have a professional. I believe that obviously as a financial planner. But the basics are not complicated. It’s not to say it’s easy to master them because you know, saving money is never easy, but the principles are not complicated. I always just recommend folks, if you can take 10 or 12 hours, you will basically have mastered the fundamentals of personal finance.

33:49 Andy: A couple of books that I always recommend to people — one is The Index Card by Helaine Olen and Harold Pollack, which is rooted in this idea that basically everything you need to know about personal finance can fit on one five by seven index card. I love that idea and I tend to agree. A second one I’ve already mentioned is The Psychology of Money by Morgan Housel. If The Index Card tells you how to do it, The Psychology of Money is like a user’s guide to your money brain, which is a pretty interesting part of your brain as it turns out. And then the third is The Millionaire Next Door by Thomas Stanley. That’s probably my all time favorite because it really shows that the type of people who become millionaires actually aren’t the ones who you would think become millionaires. It’s not the people driving Mercedes and BMWs and living in fancy neighborhoods. It’s the people who have high savings rates. You don’t see their wealth because it’s all stowed away in investment accounts. I find that book just to be very empowering. Invest in your education, that would be my advice.

34:51 Emily: Yeah. I completely, completely agree. And also starting with books, I really love that idea. It’s kind of old school, but it’s how I started my journey into personal finance as well was reading some well curated material. Actually since you mentioned books, inside the Personal Finance Community, we are currently as of December, 2020 reading The Millionaire Next Door in our book club. Morgan Housel’s book is on the slate for January, 2021. And then The Index Card is one I have not read before, but it’s actually been on my list as another book to consider for that. I’m not sure when this will be published, but when it is, if you’re interested in reading these kinds of books along with some of your other peers, check out the Personal Finance for PhDs community, pfforphds.community, you can see what the current book is we’re reading, the next one on page. If that’s your thing, please come and join us and have some discussions around these books because I love taking these sort of general personal finance texts and bringing it into, okay, well, how does this apply to graduate students and post-docs and early career PhDs? What is this really saying to our population with our particular psychology and career path and so forth. I totally agree with your advice about investing in your education. That’s one way people can do it if they want to do it with me and with others in our community.

36:03 Emily: Andy, last, last question here is where can people find you if they have really connected with you during this interview? Or maybe they want to recommend you to someone in their life?

36:13 Andy: Yeah, absolutely. ThePlanningCenter.com, you can find me there. You can find my email there as well, which is andy@theplanningcenter.com. I’m on LinkedIn, very active on LinkedIn for a time. Tried to get active on Twitter so you can find me on Twitter, but I will say I’ve neglected my Twitter page and find the whole thing to be a bit overwhelming. So probably email or website or LinkedIn would be the best.

36:36 Emily: Thank you so much for joining me today and for giving us your insight

Listener Q&A: Are Fellowships Taxable

Question

36:47 Emily: Now on to listener question and answer segment. Today’s question was asked in advance of one of the live Q and A calls I host as part of my workshop, “How to complete your grad student tax return and understand it too.” Here is the question. “Is the NSF GRFP fellowship taxable? It’s not listed on the 1098-T form. I have no tax documents relating to it.”

Answer

37:12 Emily: Yes, the NSF GRFP is, generally speaking, taxable income, even if it’s not reported on any tax forms, I’ll quote from publication 970, page five: “A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.” Fellowships can be tax-free under certain conditions, which implies that they are not tax-free if they don’t meet those conditions. Publication 970 page five further states: “A scholarship or fellowship grant is tax-free only to the extent it doesn’t exceed your qualified education expenses.”

37:52 Emily: There are two additional points that further limit the conditions under which fellowships are tax-free but just going off of that first one, if your fellowship exceed your qualified education expenses, it is not tax-free. The NSF GRFP is composed of two parts, a $34,000 stipend and $12,000 for a cost of education allowance. If the $12,000 to the institution goes entirely to qualified education expenses, for example, tuition and required fees, that portion would be tax-free. To whatever extent the $34,000 stipend goes toward qualified education expenses, it would also be tax-free, but I suspect that little to none of it does, perhaps just some required course related expenses at most. You probably use the stipend for your personal living expenses and savings and that means that it’s not tax-free. Strangely enough, the IRS does not require universities and funding agencies to report fellowship income in any way. Some universities do report the NSF GRFP award on the form 1098-T, but others do not. It’s completely up to their discretion.

39:03 Emily: If you would like to learn more about the taxability of fellowships, please listen to season two, bonus episode one. To go even deeper into how to calculate your taxable income and higher education tax benefits as a grad student, whether you have a fellowship or not, please join “How to complete your grad student tax return and understand it too” at pfforphds.com/taxworkshop. If you’d like to submit a question to be answered in a future episode, please go to pfforphds.com/podcast and follow the instructions you find there. I love answering questions, so please submit yours.

Outtro

39:41 Emily: Listeners, thank you for joining me for this episode. PFforPhDs.com/podcast is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast and instructions for entering the book giveaway contest, and submitting a question for the Q&A segment. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcasts, Stitcher, or whatever platform you use. If you leave a review, be sure to send it to me. Two, share an episode you found particularly valuable on social media, with an email list serve, or as a link from your website. Three, recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt, repayment and taxes. Four, subscribe to my mailing list at pfforphds.com/subscribe through that list. You’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. Music is Stages of Awakening by Poddington Bear from the Free Music Archive and is shared under CC by NC podcast, editing and show notes creation by Lourdes Bobbio.

Financial Reasons to Work Before Starting Your PhD

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College students who aspire to earn PhDs often ask themselves if they should proceed directly from undergrad into a PhD program or take a year or more “off” to work. From a career perspective, there are some arguments on either side (and it’s probably field-dependent), though personally I think it’s better to not go straight from college to grad school. However, from a financial perspective, working for at least a year prior to starting grad school is a slam-dunk better choice – provided you handle your salary the right way in the meantime.

I’ll assume in this article that you’re earning more in your post-college job than you will as a grad student. I know that’s not always the case (my postbac fellowship paid a stipend comparable to that of a grad student), and if it’s not true for you, simply pick and choose the advice that works for you.

This article provides financial arguments for working prior to starting a PhD and gives you a strategy to combat the biggest potential downside to doing so. Working before starting a PhD program gives you the best shot at starting grad school (and the rest of your life) on the right financial foot.

Save Cash for Start-Up Expenses

Starting grad school, especially if you have to move to do so, is a cash-intensive endeavor. It can be done on the cheap depending on your city, but you are looking at paying for much or all of this before receiving your first grad student paycheck:

  • Moving expenses
  • First month’s rent (maybe last as well)
  • Security deposits, installation fees, and/or service fees for housing and utilities
  • All your normal living expenses like food, transportation and personal care for a month or more
  • Fees (and possibly tuition) if not covered by your program, e.g., parking or an insurance premium
  • Textbooks and other course-related expenses

Those expenses are similar to any that you would incur if you moved for a job, but in addition you have the educationally-related ones and you most likely will wait over one month for your first paycheck to arrive instead of the two weeks to one month typical for a job.

If you work prior to starting grad school, you have the opportunity to save for those start-up expenses. If you don’t have enough savings available when you matriculate, you’ll start grad school already feeling financially behind.

Build a Strong Financial Foundation

Working prior to starting grad school also means you can improve your overall financial health compared to where you were when you finished undergrad. You can work on one or more of these goals right away:

  • Saving cash for an emergency fund and short-term irregular expenses
  • Paying down debt (prioritize high interest rate debt such as credit cards and unsubsidized student loans)
  • Contributing to a tax-advantaged retirement account such as a 401(k) or IRA

Starting grad school doesn’t necessarily mean stalling financially, but it is easier to make progress with a salary intended to do more than pay basic living expenses.

Further reading:

Investing for Retirement

I already mentioned retirement saving above, but it’s worth emphasizing again. Saving for retirement during grad school is a challenge. This is due primarily to your limited cash flow, but in addition grad students are sometimes disallowed from contributing to any kind of tax-advantaged retirement account due to their income type. If you receive only fellowship income throughout an entire calendar year, you will not be able to contribute to an IRA. It is also exceedingly rare for a grad student to have access to a workplace-based retirement account like a 403(b).

Further reading: Taxable Compensation or Earned Income

Getting an early start on retirement investing will make an enormous difference in your account balances once you reach retirement. For example, if you work for one year until age 23 and contribute $1,000 per month to a retirement account, just that $12,000 contribution alone can grow to approximately $434,000 by the time you are 68 (assuming an 8% average annual rate of return.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

If you have to slow down or stop retirement investing during grad school, you can still feel good about the investments you already have in place that are working for you in the background.

If your employer provides a retirement match, please contribute enough to get the full match! It’s going to be a long time before that opportunity comes around again.

Applying Everywhere that Is a Fit

Grad school applications can easily cost over $1,000 between the direct application fees and indirect costs like taking the GRE. If you are working when you apply instead of doing it during college, you will have more money (and time) to apply and visit everywhere that is a good fit for you. It would be such a shame for a low budget for applications to constrain your career choices.

Further reading: The Full Cost of Applying to PhD Programs

Start a (Passive) Side Hustle

Side hustling during grad school is a great way to earn some extra income, maintain an identity and emotional outlet separate from your research, and potentially improve your post-PhD career prospects. But when you’re busy with research, classes, and/or teaching, it can be difficult to put in the time and energy needed to get your side hustle off the ground.

It’s much easier to maintain a side hustle you established prior to starting grad school (or you could continue some aspect of your job as a side hustle). An ideal side hustle for someone anticipating entering grad school is one that is location-independent and time-flexible.

The perfect side income for a grad student is not a “hustle” at all but passive income. Passive income comes in many forms, but requires an up-front investment of time or money to establish the income stream with little to no additional work required on an ongoing basis.

Minimize Your Tax Burden

In our current low tax environment, I don’t talk about tax planning, that is, changing your behavior due to the tax implications. I don’t like to let the “tail” of tax repercussions wag the “dog” of the rest of your life. However, in this case, I want you to at least be aware of the tax implications of starting a PhD program right away vs. waiting a year or two.

There are two big tax effects of having a “student” status (i.e., being a full time student in at least part of five months in the calendar year) and also being young (i.e., 23 or younger on 12/31 of the year in question).

Dependent

Normally, being considered a dependent of your parents expires at age 18, but students can be claimed as dependents up until the year they turn 24. Generally speaking, being claimed as a dependent is bad news for your tax return and good news for your parents’ tax return (or whoever is claiming you).

There are a few ways to avoid dependency status in the year you exit undergrad and/or the year you enter grad school, all of which can be more easily accomplished by working in between:

  • Live apart from your parents for at least six months of the year you finish undergrad (assuming you graduate in the spring) and continue to do so until the year you turn 24 (at least).
  • Wait to start grad school until at least the year in which you turn 24.
  • Provide at least half of your own “support.” Support is basically all your expenses, both living expenses and educational expenses. If you provide at least half of that support through your own income (taxable fellowships and loans count, but scholarships do not), you are independent. This is much easier to accomplish if you earn a higher income and minimize your educational expenses in any year that you are under age 24.

Kiddie Tax

The Kiddie Tax is bad news for the “kid” subject to it (that’s you, potentially) as it imposes a much higher tax rate on “unearned” income than what you would have on ordinary income. Weirdly and unfortunately, fellowship income is considered “unearned.” If you are a student, under age 24, and do not provide more than half of your own “support” with ”earned” income, your “unearned” income is subject to this higher tax rate. You do not have to be a dependent for the Kiddie Tax to apply to you.

How do you avoid the Kiddie Tax through tax planning? 1) You can wait to start grad school until the year you turn 24. 2) If you start grad school prior to the year you turn 24, make sure you have enough “earned” income in each year you are a student to cover at least half of your own “support.” Keep in mind that “support” includes educational expenses.

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How to Make the Most of Your Salary and Start Grad School on the Right Financial Foot

Have you ever heard the advice to “live like a college student” or “live like a resident?” Take that a step further and “live like a grad student” in your working years prior to starting grad school.

Further reading: Is “Live Like a College Student” Good Advice?

The advantages to living like a grad student when you have a job are three-fold:

  1. You will get a head start on the essential financial skills you’ll need during grad school, such as budgeting, frugality, and saving.
  2. You will rapidly increase your net worth through saving and/or debt repayment because you will be living far below your means.
  3. You will avoid experiencing the very painful process of decreasing your standard of living when you enter grad school.

Living like a grad student when you have a better-paying job is definitely a sacrifice, but it’s one that is well worth it. I often speak to grad students who worked prior to starting grad school, and their common refrain is “I wish I had saved more when I had the chance!”

An Emergency Fund Is Essential to Good Financial Health

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Having a dedicated emergency fund is a vital component of good financial health. An emergency fund is a sum of money set aside to use in case of an emergency. An emergency fund stands between: a) something bad happening in your life and b) something bad happening in your life and there being significant financial consequences. It’s inevitable that sooner or later something bad is going to happen in your life, and the best way to prepare is by saving an emergency fund. The subject of this article is how large that emergency fund should be, when to use it, where to keep it, and how to balance funding it against fulfilling other financial goals.

emergency fund

Motivation for Having an Emergency Fund

When an emergency occurs in your life, what is the best source of money to draw from to help resolve it? A credit card? A family member or friend? A withdrawal or loan from your investments? A payday loan?

The best place to turn in the case of an emergency is your own cash savings. (By cash savings, I mean cash equivalents, i.e., money in a checking, saving, or money market account, or actual cash.)
• A credit card or payday loan is going to cost you a pretty penny–or an arm and a leg–in interest.
• An investment loan or withdrawal unplugs your money from its potential to create a return and sometimes costs even more money in taxes, penalties, or lost contribution room.
• A loan or gift from a family member or friend is likely to strain your relationship and could possibly pass on the financial hardship.

If you want to contain your financial emergency to the primary event, you’ll save a dedicated emergency fund. Otherwise, the financial emergency could continue to ripple outward into other areas of your finances or relationships.

Employ These 10 Psychological Tricks to Supercharge Your Savings

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What Qualifies as an Emergency?

My definition of an emergency expense is one that is fully necessary but that you did not otherwise prepare for. This is a broad net, and qualifying emergencies differ from person to person depending on life circumstances.

For example, repairing a car that has become non-functional would be a qualifying expense if: 1) the car served a vital function, e.g., transportation to work when no long-term alternative was available, and 2) the money for the repair was not available from any other cash source.

If someone typically drove to work (or some other necessary destination) but other transportation options were available, such as public transportation, biking, carpooling, etc., the repair could be put off until the money could be found from somewhere other than the emergency fund.

Similarly, if car repairs were sufficiently saved for in a separate cash account, that expense is not an emergency even if it is a necessary expense. The emergency fund would only be tapped if the expense exceeded the amount of dedicated savings. It is a good idea to save for foreseeable (if not precisely predictable) expenses like car repairs as resources allow.

An emergency fund should never be tapped for a discretionary expense.

How Much Money Should I Have in My Emergency Fund?

While the existence of an emergency fund is vital for financial health, the exact target size depends on many factors in an individual’s life, such living expenses, competing financial goals, and personal disposition. There may also be a few distinct stages of emergency fund size as you build up to your target fully funded level.

Rules of Thumb

The common rule of thumb is that a fully funded emergency fund should contain between three and six months’ worth of living expenses. The rationale behind this figure is primarily for job loss. If you lost your primary income source, how long would it take you to replace it? The average is supposed to be between three and six months. However, you know your particular position and industry best.

If your skills are in high demand in your local area, perhaps it would take you very little time to find another position. It’s also easy to imagine that replacing your job could take a very long time if there is a low turnover rate in the position type you seek.

Being enrolled in a PhD program further complicates this estimation. Is your funding guaranteed? That doesn’t shrink your necessary emergency fund size to zero, but it may reduce it some. Is funding in your program patchy? That’s a great reason for a larger emergency fund or dedicated savings for underfunded terms.

However, if you have other financial goals you want to work on, you may not want to take the time to fully fund an emergency fund from the get-go. For example, in Dave Ramsey’s Baby Steps, you keep your emergency fund size at $1,000 while you pay off all non-mortgage debt. While I’m not necessary advocating this position exactly, it is a good reference point. If part of the objective of an emergency fund is to keep you out of credit card debt, after putting in place a small emergency fund you should work on eliminating any credit card (or similarly high-interest) debt that you have.

Further reading: Why Every Grad Student Should Have a $1,000 Emergency Fund

Living Expenses

It makes sense that your emergency fund size should scale with that of your financial footprint, i.e., your spending rate. If you spend very little money each month to keep your life running, you can get away with a smaller emergency fund.

For example, if your household is only your or only you and another working adult (no dependents), you don’t own your home, you don’t own a car, and you generally don’t have many necessary expenses, your emergency fund can be on the smaller size.

Conversely, if you own a home and one or more cars, have dependents, and spend a lot to keep your life running, you need a larger emergency fund.

In the case of job loss, your emergency fund of ideally several months of expenses would keep your household running until you can secure another position. However, other types of emergencies can arise, often relating to your possessions or the people in your household, e.g., illness, home or auto repairs, electronics replacement, etc. The more people and possessions involved, the more likely an emergency is to occur or even multiple emergencies at once.

Competing Financial Goals

Emergency fund building is not the only worthwhile financial goal you could pursue. There is also debt repayment, investing, and cash saving for other purposes.

After building a small emergency fund (e.g., $1,000 or a few thousand dollars), you should pay off any high interest rate debt before choosing your next financial goal. Cash saving, investing, and moderate-interest debt repayment all rank alongside finishing building your emergency fund, so it’s up to each individual to decide which is most important.

Realistically, in the case of a large emergency, any regular saving/investing/debt repayment rate could be redirected to the emergency need. Therefore, generating a high monthly savings rate itself is a worthy pursuit, and which goal exactly you fund with the savings rate is less material.

It’s a fine choice to split your efforts between continuing to build your emergency fund/cash savings and investing/repaying debt.

Disposition

Your personal disposition toward risk comes into play when deciding emergency fund size. This is an emotional or gut feeling issue rather than a logical or mathematical one. If you sleep better with a larger emergency fund, go that route! If you are not risk-averse regarding emergencies, keep a smaller (but non-zero) emergency fund.

Bottom Line

Your full emergency fund size is an incredibly individual decision based on your living expenses, competing financial goals, and disposition. You may also go through transitions in your emergency fund size: an initial smaller amount, gradual growth toward your full goal size, and fluctuations up and down as the fund is tapped and refilled.

Employ These 10 Psychological Tricks to Supercharge Your Savings

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Where Should I Keep My Emergency Fund?

Your emergency fund should be kept in cash-equivalents (or cash, partially). Cash-equivalents include checking, saving, and money market accounts.

The best solution for most people is to have a separate savings account dedicated as an emergency fund at the same bank where you hold your primary checking account. This allows for a clear distinction between regular and emergency funds while still keeping easy access in case the money is needed.

Some people may be able to keep their emergency fund in their primary checking account, but this method requires great discipline to keep from dipping into the fund for non-emergency purposes.

If you are inclined to inappropriately use your emergency savings, you could try keeping it at a separate bank from your primary checking (e.g., an online-only bank that pays higher interest rates). The delay in transfer time between the banks would discourage casual usage of the fund.

Can I Invest My Emergency Fund?

Some people desire to invest their emergency savings to try to make their money work for them and get a rate of return on it. For example, a popular place to stash emergency savings is in investments inside a Roth IRA because the contributions are able to be withdrawn at any time.

However, the true purpose of an emergency fund is not to earn money but rather to serve as a form of insurance. As Dave Ramsey says, “An emergency fund doesn’t make you money; it costs you money.” (The cost is the opportunity cost of not using the money for investing or debt repayment.)

The reason to not invest your emergency savings is that investing involves risk. There is a risk that your investments could drop in value and therefore the amount of money you have available for emergencies also decreases. According to Murphy’s law, your investment balance would drop at the same time your emergency occurs, forcing you to sell at a loss and have less money available to you than you expected. (These events are actually likely to be concurrent if your emergency is job loss tied to a weaker economy and market.)

If you are truly wealthy and have lots of cash and accessible investments, go ahead and invest your ‘emergency fund’, i.e., part of your savings. But if you’re just starting out, don’t risk your safety net for a few extra bucks.

How to Weigh an Emergency Fund Against Other Financial Goals

It’s not feasible to directly mathematically compare the goal of filling an emergency fund with other financial goals like investing or debt repayment. Investing and debt repayment ‘make’ you money, while an emergency fund ideally just sits there at the ready for you.

Anything you do to improve the asset side of your balance sheet is going to strengthen your financial position in the case of an emergency. (Debt repayment, while good for your balance sheet and eventually cash flow, does not strengthen your position in the case of an emergency unless you pay off one or more debts completely.) Cash savings are especially helpful, whether you call them emergency savings or something else. The more necessary expenses that you prepare for with cash savings, the narrower your definition of an emergency becomes, which makes it easier to keep a smaller emergency fund.

When you have low discretionary cash flow (total income minus necessary expenses), like during graduate school or your postdoc, it is more important to have a dedicated emergency fund. This is doubly true if you have a low amount of other available assets like cash and investments. Unfortunately, having low discretionary cash flow means that it is going to be difficult to build up significant cash savings in an emergency fund. In this case, you should move on to investing or debt repayment after working on the emergency fund for several months or a year.

If you ever do need to tap your emergency fund, refilling it should become your top financial priority.

Further reading: How to Prioritize Financial Goals When You Can’t Do It All

Example Emergency Savings Plan

While emergency funds are unique to each individual, you may use the following example as a model that you can tweak to your own purposes.

At his starting point, Andrew has no cash savings and some debt; he is living paycheck to paycheck. He works on increasing his income and/or decreasing his expenses so that he can start regularly saving.

His first goal is an emergency fund of $1,000. Once he achieves that, he turns his attention to repaying his high interest rate debt (> 10%). Then he returns to building his emergency fund to $3,000, which is approximately two months of expenses.

Now that his high interest rate debt is paid off, Andrew increases his savings rate even further. He would like to start investing alongside continuing to build up his cash savings, so he send half of his available savings rate into a Roth IRA and half goes into cash savings for irregular expenses. He considers the irregular expenses account full when he reaches $5,000.

Finally, Andrew switches his cash savings back to filling his emergency fund to what he considers a full size, 3 months of expenses. After that, he puts his full available savings rate toward his investments.