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Stretch that Stipend

Stack Frugal Strategies for Long-Term Savings

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Have you ever thought that only rich people can afford to be frugal? Many frugal strategies don’t help you spend less today; in fact, some instruct you to spend more today so that you can spend less long-term. But how do you go from being completely strapped for cash to being able to frugally plan your spending over the course of a year or longer? The answer is to stack frugal strategies.

stack frugal strategies

Stacking frugal strategies (a term that might be original to me!) means cutting your spending radically in the short term to free up money to put toward long-term frugal strategies. The short-term strategies may feel painful and sacrificial, but you won’t have to maintain them once you put in place at least one long-term strategy (unless you want to). The short-term strategies are cuts to your variable expenses, which take willpower and effort to maintain, but the long-term strategies are cuts to your fixed expenses, which take no willpower or effort to maintain.

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Frugal Strategies for Today

These frugal strategies form the base layer of your stack. Implementing them slows down or stops your spending in these areas immediately so you end the week/month with some money in your pocket. They aren’t usually sustainable for the long term, at least not in their most extreme form, but if you keep them up for a month or two can leave you with a healthy amount of cash that you normally would have spent. If you try out a lot of them, you might even find a few you’re willing to maintain as new habits.

  1. Eat down your pantry. Eat everything you have in your fridge/pantry before doing much grocery shopping. That might mean a few meals in a row of canned tuna or buttered pasta! Only allow yourself minimal shopping to enable you to eat what you already have.
  2. Don’t drive your car unless absolutely necessary. Walk or bike everywhere you can. Set up a carpool (but contribute gas money – don’t mooch!). If you have access to free public transit such as on your university’s campus or through a university-subsidized pass, use that to the greatest extent possible.
  3. Don’t go out with friends (except for free). Pass on restaurant, bar, and entertainment invitations from friends just for a short period of time. Search out free activities that you can suggest for outings.
  4. Substitute free coffee/alcohol. If buying coffee or alcohol is part of your routine, break it. Source free coffee and alcohol on campus, or make/drink it at home.
  5. Fast from shopping. No new clothes, no new household purchases, no new electronics. Delay every possible purchase.

Overall, the idea is to halt or at least seriously reconsider any spending that requires you to pull out your wallet (or click ‘Purchase’). Make do with what you have already to the greatest extent possible.

Frugal Strategies for Next Month

This set of frugal strategies forms the intermediate layer of your stack. Implementing them will pay off not immediately but in a month or two. However, they are more easily turned into habits for long-term maintenance.

  1. Use less electricity/gas. Turn down the temperature regulation in your home (use less heat/air conditioning). Use less hot water, including showering on campus instead of at home if possible (e.g., at the gym). Keep your lights turned off as much as possible. Track down sources of vampire power and unplug those appliances. Spend less time at home if you don’t mind.
  2. Switch utility providers when possible. For example, switch your internet or cell service, if you’re not under contract, to a less expensive provider, or downgrade the plan you have with your existing provider.
  3. Cancel subscriptions. Re-evaluate every subscription service you currently use (e.g., streaming video, streaming music, Amazon Prime, periodicals). If you don’t use it much, can get the same content elsewhere for less, or don’t mind a fast, cancel.
  4. Meal plan and shop strategically. Meal planning is the foundation of many frugal tips relating to food spending. Your meal plan enables you to buy in bulk, stock up on sale items, and batch cook, all of which save you time and money in the long run.

These frugal strategies usually take slightly more research and planning, but they are more sustainable than the shortest-term strategies.

Frugal Strategies for This Year

This set of frugal strategies forms the top layer of your stack. Implementing them requires an up-front investment of money, time, and/or research. Often, it takes months of concerted effort before you can implement the frugal strategy. However, once implemented, they have the biggest payoff potential for the least ongoing effort.

  1. Pay off debt. In the short-term, you have to accelerate your debt repayment amounts, but then the payment disappears!
  2. Reduce your spending on rent/mortgage. This is my #1 suggestion for a long-term way to reduce spending. It’s challenging to execute a move or adjust to having a roommate, but it’s worthwhile if you can reduce such a large expense by a significant fraction!
  3. Go car-free/downgrade your car. Cars are a huge money suck, and expensive/new/financed cars are the biggest money sucks. If you can live without a car, do so. If you can share a car with your spouse/partner/roommate, do so. If you can sell your expensive car and buy a cheap one, do so. Think of all the money you won’t have to spend on purchasing/paying for the car, insuring the car, fueling the car, maintaining/repairing the car, paying tax on the car, etc.
  4. Shop around for insurance. Re-evaluate both your insurance provider and level of coverage to see if you can get a better deal on all of your existing policies.
  5. Travel hack. When you plan your travel well in advance, you can research possible rewards systems that may defray some of the cost of the trip, such as credit cards that offer sign-up bonuses or rewards for ongoing spending. It may take several months or a year for a lower spender to accumulate the necessary points (if ever).

These are the frugal strategies worth keeping around for the long term – the ones that will help you reach your financial goals!

Always start your frugal stack with at least one long-term strategy in mind. You can go whole hog for one month with the short-term strategies; at the end you’ll have made deep cuts that radically changed your lifestyle over the short term, and you’ll have some extra money in your pocket. But you can’t do that month after month. You need to use that extra money to ladder up to mid- and long-term frugal strategies that pay off every single month in perpetuity.

An Illustration of a Frugal Stack

Rachel’s starting point is that she is essentially living paycheck-to-paycheck. In occasional months, she accumulates a bit more credit card debt, on which she pays a high interest rate. She lives alone in a 1BR place and is willing to live with a roommate in a 2BR place, but doesn’t have the money for the expenses associated with the move or the security deposit (her current place didn’t require one).

The ultimate goal of Rachel’s frugal stack is to save up enough money to move once her lease is up. She estimates that she’ll spend $250/month less on rent and utilities once she completes the move, but she needs $800 in cash for the moving expenses and fees.

Rachel goes scorched earth on her short-term spending over the course of one month. It’s not sustainable, but for one month she virtually never pulls out her wallet. She eats down her pantry, drinks the free drip coffee available on campus, declines invitations from friends that would require spending (and plans a couple free activities to see them at other times), walks everywhere possible, and doesn’t do any shopping that could reasonably be put off. It’s a crazy ascetic month, but she ends the month with a few hundred more dollars in her bank account than she usually has. She keeps part of the money around for frugal investment and puts part of it toward her credit card debt, knocking down the balance significantly.

In that first month as well, Rachel implements some of the strategies that will take a month or more to pay off. She turns the temperature control in her home way down, unplugs everything at home that she’s not actively using, and spends a lot more time on campus, even showering at the university gym instead of at home on the days she works out there. She goes through her fixed spending with a fine-toothed comb; she switches one of her utility services to a lower-cost option and finds a couple superfluous subscriptions to cancel.

In the second month, Rachel has to restock her depleted pantry, so her food spending jumps up, but since she’s able to buy some items in bulk and is committed to cooking instead of eating out for convenience, she ends the month with about the same amount of grocery spending as was typical before and less money spent on the go. Her ongoing food spending settles out to about $50/month less than it had been before, even including a few meals/drinks out with friends each month. Rachel also eases off the gas pedal in some other areas like entertainment and using her car, but her spending never returns to where it had been.

Meanwhile, the changes Rachel made to her fixed expenses start paying off, and in total she is spending about $50 less per month on those services, as well as a slightly lower electricity bill.

Her first priority is to pay off her credit card debt completely, which she does in a few months, eliminating the interest she had been paying on it. After that, she saves up for her move, and within about six months she has enough money available to move without accumulating any credit card debt.

Rachel’s new reduced rent pays for the moving expenses she incurred within about a month (as she’ll get the security deposit back when she moves out), and with the $250/month reduction in rent and utilities she feels comfortable increasing her variable spending approximately back to where it had been, though she keeps her new grocery shopping and cooking habits. She pays off her credit cards completely every month and is now able to save money regularly. It took one month of intense sacrifice and a half-dozen or so more months of moderate sacrifice, and now Rachel is able to live a comfortable lifestyle while still saving money every single month.

How to Financially Manage Your NSF Graduate Research Fellowship

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Congratulations on being awarded the National Science Foundation (NSF) Graduate Research Fellowship (GRF) (or a similar remunerative, competitive, national fellowship)! Whether you’re a prospective grad student or a current first- or second-year PhD student, this fellowship is a great boon to your research, your CV, and almost certainly your finances. However, you may not yet realize that your finances will become a bit tricky once you start receiving your fellowship. With the help of this article, you can avoid the pitfalls associated with fellowship income and fully capitalize on the benefits.

NSF GRFP stipend

The NSF GRFP’s Negotiation Power

I’m sure you didn’t miss this headline info about the NSF GRFP: The fellowship pays you a stipend of $34,000 plus $12,000 of educational expenses to your institution for three years. Awesome! At the majority of universities in the US, that stipend amount is well above what you would be paid if you didn’t receive the fellowship, so you’ve effectively achieved a raise for the next three years.

But the good news doesn’t stop there: Your university/department might confer even more benefits upon you for winning independent funding. If the administration isn’t forthcoming about these additional benefits, it is appropriate to inquire about them.

Independence

Your new outside funding may give you a degree of independence in your research that you wouldn’t otherwise enjoy. This is highly dependent on your field, department, and advisor, but the fellowship may enable you to take your doctoral research in a direction that you advisor couldn’t or wouldn’t have supported without it. Perhaps you could take a risk on a side project, establish a new collaboration, or take extra time to rotate through a lab to gain new skills.

Additional Funding

At many universities, there is a standard offer of additional funding for winning a multi-year, lucrative fellowship like the NSF. This offer could come in one or more forms, such as:

  • a guarantee of funding for additional years
  • a one-time bonus
  • a stipend supplement above $34,000 while you have the fellowship
  • a stipend supplement after the fellowship concludes (e.g., up to $34,000/year for your remaining time in graduate school)

Not all departments offer additional funding to NSF GRFP recipients, but it’s worth inquiring about with your advisor, the administration, and current NSF fellows at your university. Stipend supplements during the time that you receive the NSF GRF are more common in high cost-of-living cities where the departmental base stipend is near $34,000/year to begin with. For example, searching “NSF” in the PhD Stipends database reveals stipend supplements awarded during the NSF GRFP years to students at the University of California at Berkeley, Northwestern University, and Columbia University, while a student at the University of California at San Diego writes that he/she received no funding incentive for winning the NSF GRF.

For Prospective Graduate Students

You’ll never have more negotiation power than you do as a prospective graduate student with an outside fellowship in hand. Unfortunately, you don’t have a lot of time to negotiate as the NSF GRFP awards list comes out approximately two weeks before grad school decision day, April 15.

Further reading: Vote with Your Feet, Prospective Graduate Students

As quickly as possible, you need to clarify if the offers from the universities you are still considering are going to be sweetened at all now that you have your fellowship. If the financial package from your preferred university isn’t up to par with your other offers (after considering cost of living differences), you can tactfully ask if a bonus, stipend supplement, or guarantee of future funding is possible.

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Budgeting with Your Fellowship Income

There are two vital questions you need to ask of your department before you can begin creating a budget for your NSF GRF stipend.

  1. After the fellowship ends, what will my stipend be?
  2. How frequently is my fellowship disbursed?

Accelerate Progress on Financial Goals

In my ideal personal finance-oriented world, an NSF fellow would live on (less than) the base stipend from his department and put all the excess income received toward growing his wealth. There are a few advantages to that approach:

  • Your lifestyle roughly matches that of your peers in your department.
  • You can relatively quickly achieve financial goals such as saving or debt repayment.
  • If your income is set to drop once the fellowship ends, you avoid acclimation to the higher, temporary income and don’t have to make major lifestyle sacrifices once the three years are up.

Some financial goals you could work on during the time you receive the additional fellowship funds are:

  • Eliminating any troublesome debt (e.g., credit card balances, medical debt, car loan)
  • Saving up cash for short-term needs and expenses (e.g., emergency fund, targeted savings accounts)
  • Investing for long- and mid-term goals (e.g., retirement, house down payment)
  • Pay down student loans

Further reading:

This strategy is easiest to implement for graduate students who start the NSF GRF after one or more years in grad school. Just put all of your ‘raise’ toward financial goals and don’t change anything about your lifestyle! Prospective grad students will have to be more conscious about setting up their grad student lifestyle on a lower income than they will start out with.

Preparing for the Post-Fellowship Income Drop

If you choose to upgrade your lifestyle with your fellowship stipend, be careful to maintain any long-term financial contracts at a level that will be sustainable for you after your income drops (if it will). The two key areas to watch out for are housing and transportation expenses. While it is possible to reduce your spending in either of these areas during grad school, it is a painful process, so it is preferable to lock in your spending in those areas at a level that you can maintain long-term.

Budgeting with an Irregular Income

Sometimes, fellowships are disbursed to the recipient at a frequency other than monthly, e.g., once per term. This schedule can cause issues for budgeting, which is usually framed as turning over each month.

One of the advantages of an infrequent disbursement schedule is that you are paid at the beginning of the period rather than the end, so the money you need throughout the period is already available to you. However, you may not be able/inclined to use typical budgeting software functions and prefer to set up your own budgeting system.

One of the most useful budgeting concepts for people with irregular incomes is that of fixed vs. variable expenses. At the beginning of your budgeting period, project the fixed expenses that will be paid during the period, such as your rent/mortgage, debt payments, certain utilities, subscriptions, etc. Then allocate your remaining income to your variable expenses at a frequency that is convenient for you. For example, you can estimate the variable utility bills that you may pay monthly during the period, plan to spend no more than a certain amount of money each week on groceries, and give yourself a lump sum of money for entertainment for the entire period to be spent as opportunities arise. In this way, allocate your fellowship disbursement so that you are sure that your expenses won’t exceed your income (leaving some buffer for unexpected expenses).

Income Tax Implications of the NSF GRFP

Your NSF GRFP stipend is subject to federal income tax. (It is usually subject to state and local income tax as well, but there are some exceptions.)

Further reading:

However, the taxation of fellowship stipends is handled completely differently by universities than assistantship pay.

Tax Reporting

While assistantship pay is reported on a W-2, fellowship stipends are not required to be reported in any particular way.

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A large fraction of universities, possibly the majority, do not report outside fellowship stipends on any official tax form. At most, the fellow might receive a courtesy letter, which is an informal letter stating the amount of the fellowship stipend received during the calendar year.

Some universities report fellowship stipends on Form 1098-T in Box 5 (along with other scholarship and grant income).

A small minority of universities report fellowship stipends on Form 1099-MISC in Box 3.

Whatever reporting mechanism used or not used, the important information to bring to your tax return preparation process is the amount of fellowship stipend paid to you during the calendar year. From that point, the fellowship stipend income is treated the same as any other fellowship/scholarship/grant income, and (possibly after some adjustments) it will ultimately be taxed as ordinary income.

Further reading:

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Quarterly Estimated Tax

While you are required to pay federal and usually state income tax on your fellowship stipend, the vast majority of universities do not offer automatic income tax withholding on your fellowship stipend as they normally do for employee pay. (You should inquire whether automatic withholding is an option and use it if so, but the remainder of this section assumes it is not offered.)

This means that you will receive 100% of your gross fellowship stipend instead of your stipend net of income tax as you would assistantship pay. However, the IRS still expects to receive income tax payments throughout the year, so you will have to look into filing quarterly estimated tax.

Further reading: The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

As a default position, you should assume you are responsible for paying quarterly estimated tax. It’s possible that you won’t be required to in the year you switch on or off of the fellowship or if you’re married to someone with a high income and high withholding, but even in those cases it’s prudent to check.

The way you calculate your quarterly estimated tax due (and figure out if it’s required of you) is by filling out Form 1040-ES. That form will give you the amount of the payment you are supposed to make four times per year and an estimate of your total tax due for the year. You can make the payment online at IRS.gov/payments or through a host of other mechanisms.

Whether or not you are required to file quarterly estimated tax, it’s a great idea to set up a personal system that simulates automatic tax withholding. Open a separate savings account labeled “Income Tax” and transfer in the fraction of each paycheck you receive that you ultimately expect to pay in tax each time you are paid. Then, draw from that savings account when you make your quarterly or yearly tax payments.

This upcoming weekend I’m running an online workshop to help fellows file quarterly estimated tax. This is my first time giving the workshop, but if it goes well I plan to repeat it at least twice per year. If you would like to join my mailing list to be notified about future iterations of this workshop, please enter your information in the form immediately following this paragraph or at the end of the article.

Investing Implications of the NSF GRFP

The upside of receiving the NSF GRF is that your income is most likely higher than it would have been, which means you have an increased ability to achieve financial goals during graduate school such as debt repayment, saving, and/or investing.

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The downside of receiving the NSF GRF is that the stipend is not considered “taxable compensation” or “earned income.” It is taxable income, as discussed in the previous section, but it is not “compensation” or “earned.” If you receive only fellowship income in the course of a calendar year (and you’re not married to someone with taxable compensation/earned income), you become ineligible for certain tax benefits. The lost benefit that most commonly concerns graduate students is the ability to contribute to an Individual Retirement Arrangement (IRA).

Further reading:

An IRA is a tax-advantaged retirement savings vehicle. It’s a great idea to use an IRA (or other tax-advantaged retirement vehicle such as a 401(k) or 403(b)) for your retirement savings as it helps you maximize your long-term rate of return by protecting your investments from taxes. As a graduate student, you almost certainly don’t have access to the university 403(b), so the IRA is basically the only game in town for tax-advantaged retirement savings.

The catch is that you (or your spouse) must have taxable compensation during a calendar year for you to contribute to an IRA for the year. So if you go an entire calendar year with only fellowship income (you don’t have compensatory income from an assistantship or outside job and you’re not married to someone with taxable compensation), in that year you’re not eligible to make any IRA contributions.

It’s a catch-22: While you are likely more financially capable than ever of investing for the long term, you’re barred from doing so in a tax-advantaged retirement account.

I don’t think your inability to contribute to an IRA should stop you from working on your financial goals. It may be that you choose to prioritize another goal over retirement savings as a result of not being able to use an IRA, e.g., paying down student loans. But if saving for retirement is your top priority, you should pursue it; just use a taxable account instead of an IRA during any years of ineligibility.

Your tax burden can actually be quite low during grad school if you choose a long-term, low-turnover investing strategy. If you are single and your income in 2018 is below $38,600, your long-term capital gains and qualified dividends will be taxed at 0% at the federal level (you may still owe state and local tax). So it’s really not too bad to save in a taxable account as long as your income stays low. When you have access to an IRA or other tax-advantaged retirement account, you can probably shift your taxable assets into that account time to maximize the growth rate in the long term.

Further reading: Fellowship Recipients Can Save for Retirement Outside an IRA

What other questions do you have about financially managing your NSF GRF stipend?

Eliminate Debt Before You Start Graduate School

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Here’s the thing about debt: When you have a low income, you think that you have to use debt to purchase the things that you/need want. Buy now and spread your payments out over time! But here’s the thing about having a low income: you can’t afford to tie up your limited income with debt payments. If you are about to enter graduate school, which for most people is an unambiguous period of low income, you should do everything in your power to avoid taking on debt and eliminate the problematic debt you already have.

eliminate debt grad school

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The Trouble with Debt Payments during Graduate School

The stipend you receive in graduate school isn’t intended to be remunerative. I like to say that the universities expect us to research for free, so they pay us just enough to keep us from taking outside jobs. (That is, for the graduate students who even receive a living wage – many don’t.)

If you’re lucky, your stipend is commensurate with or slightly above the living wage for your county. That is, you hopefully will be able to pay rent, eat (in), and get around town, and perhaps you can afford another modest expenditure like visiting your family, saving a little, entertainment, or some shopping. Have you ever heard the old joke about college: “Sleep, study, socialize: Pick two.”? Well, apply that to your finances in graduate school. “Basic living expenses, a splurge here and there, and saving/debt repayment: Pick 1-2.”

I’m being slightly hyperbolic; there is obviously a range of financial situations in graduate school, but you will almost certainly be in one of these (assuming you aren’t being supported by someone else):

  • Your stipend isn’t enough to cover basic living expenses, let alone debt payments – you’re going further into debt or spending some time working an outside job.
  • Your stipend can give you an okay lifestyle as long as you don’t have debt payments.
  • You could afford debt payments on your stipend if pressed, but there are a lot of other things you’d rather do with it (e.g., lifestyle upgrades, saving).

Knock Out Your Debt Before You Matriculate

If you are planning to start graduate school next year or soon, take the next few months to eliminate your debt or at least reduce it as much as you can.

If you can’t eliminate all of your debt in that time frame, you have to triage! Sort your various debts by priority level and work on them from highest priority to lowest priority. (This method is a hybrid of the snowball and avalanche methods of debt repayment.) The objective is to minimize the debt payments you need to make during graduate school, which means eliminating certain kinds of debts entirely if possible.

With this method, you will pay the minimum balance on all of your debts and throw as much money as you can scratch up toward the top priority debt. Once you have eliminated that debt completely, you move to the next top priority debt and throw everything you can at it. Concentrating your efforts like this gives you the best chance of paying off a single debt completely, therefore eliminating its minimum monthly payment and lowering the total amount of money you are required to pay monthly toward your debt once you start graduate school.

Low-Balance Debt: Higher Priority

The easiest debts to eliminate completely are those with low balances. If you have any debt balances under $1,000 or a few thousand dollars, those should become a high priority because they are possible to eliminate completely in just a few months.

High-Interest Rate Debt: Higher Priority

Also a high priority is high-interest rate debt because that is the debt that is growing the fastest and costing you the most money overall. For example, if you have two debts both with balances of approximately $1,000, you should prioritize the one at the higher interest rate.

Deferrable Student Loans: Lower Priority

Check with your lender to be sure, but student loans should have the option to be deferred while you are in graduate school. Since there would be no minimum payment due on these loans once you matriculate, they are a lower priority to pay off before you start graduate school.

However, that does not mean that you should ignore them completely prior to or during deferment. Unsubsidized student loans accrue interest even in deferment, and it is common for student loans to have a moderate to high interest rate.

If you eliminate your higher-priority debt and can start paying your student loans down before graduate school, definitely do so, starting with the highest interest rate loan.

Mortgage: Zero Priority

If you’re near the start of your home ownership journey, I’m betting there’s no chance you can pay off your mortgage in just a few months. (If that assumption is wrong, go for it!) Mortgage debt will therefore be in your life during graduate school, so prioritize paying off basically any other debt before you start making higher-than-the-minimum mortgage payments. However, if you do own a home, you need to check that you will still be able to afford the payment once you switch to living on your stipend. Selling your home, renting out your home, and renting out bedrooms in your home are all good options if you can’t afford it on your stipend.

Dump Collateralized Debt that You Can’t Afford

You may discover, as you look at your stipend offer letter and add up your minimum monthly debt payments (taking into consideration what you can eliminate before you start graduate school), that you either can’t afford all of your remaining payments or that maintaining all of them would financially paralyze you during graduate school (no fun, no saving).

Your best option in this case is to eliminate your collateralized debt, which is your debt that is against a specific asset that you own, such as your home or car. A very accessible scenario is if you bought a car and took out a car loan based on your previous higher salary, and now that car payment is far too high for your lower stipend. A simple fix is to sell your car, pay off your car loan, and buy a less expensive car (ideally without debt). You may “lose money” by doing this because you owned the car over a period of steep depreciation, but that consequence doesn’t change your inability to afford the payment on your stipend.

“But I Don’t Have a High Income Now to Pay Off My Debt!”

The advice in this article applies to practically anyone who is about to start graduate school and not currently in graduate school, even college students.

Certainly, if you have a higher-than-a-stipend salary right now, start cutting back your lifestyle to what it will be during graduate school and use the cash flow you generate to pay off your debt. You have to do it pretty soon anyway, so you might as well make your transition to graduate school less of a shock by acclimating yourself to the necessary frugality and eliminating as many minimum payments as you can.

However, even if you have a low-to-non-existent income right now, e.g., you are in college, you still have time on your side. Yes, you need to keep your grades up until graduation. Yes, you should enjoy your last few months with your college friends. But you still almost certainly have more free time now (and especially over the summer!) than you will once you start graduate school. That time can be used to generate a side income that you can immediately apply to debt repayment. Bonus points if you can establish a side income that you can continue during graduate school (time permitting), such as online freelance work or passive income.

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Don’t Forget to Save

One caveat: Don’t become so focused on debt repayment that you forget to save up some cash. It’s very helpful to have a small amount of savings available to you during your transition to graduate school, particularly if you have to move. There are a lot of expenses involved with moving and establishing a new residence and possibly fees to be paid to your university, plus most graduate students have to wait rather a long time (over a month) before their first paycheck arrives. It does you no good to work so hard to eliminate your problematic debt only to turn to a credit card because you have no savings for the transition.

Further reading: Bring Savings to Grad School

How intense you need to be in your debt repayment relates to how much high-priority debt you have and your ability to repay debt during graduate school. The more debt you have that is possible to eliminate entirely and the lower your stipend relative to the local cost of living, the more essential this process is to complete prior to matriculation.

What to Do with Your Tax Refund

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You’ve just received your tax refund for the year and it’s burning a hole in your pocket! Whether your tax refund is a couple hundred or a few thousand dollars, there are many possibilities for the money that can further your financial goals and increase your life satisfaction.

Fund Your Upcoming Cash Needs

Before you consider investing or paying down debt with your tax refund, I want you to think about your upcoming year and ask yourself how much cash you should have on hand.

Is your emergency fund a bit anemic? Do you want to make any large purchases in the next year but are not sure yet how you will pay for them? Are you coming up on an employment transition, during which it is very helpful to have cash on hand? Are you facing an un/under-funded summer or term? A yes answer to any of these questions is an indication that you should use your tax refund to beef up your cash savings.

I particularly like the idea of using a tax refund to jump-start a system of targeted savings accounts. I think targeted savings accounts are an amazing solution to the problem of irregular expenses. The really difficult part about implementing them is that at the beginning you both have to cash flow your current large irregular expenses and save up for future ones. That can put a big strain on your budget. But if you use your tax refund as the start to your targeted savings accounts, you can make the process a bit easier.

Further Reading: Targeted Savings Accounts for Irregular Expenses

Grow Your Wealth

If you have sufficient cash flow and/or savings for all your desired purchases in the upcoming year, it’s time to consider using your tax refund to increase your net worth. With a sizeable lump sum, you can make a big leap forward with any of your current financial goals.

If you currently have any bothersome debt, throw your tax return at your top priority debt. Following the debt avalanche method, you would prioritize paying down your smallest debt first. How amazing would it be to eliminate one debt completely with your tax refund! Following the debt avalanche method, you would prioritize paying down your highest interest rate debt first. This is the debt that costs you the most on a daily basis.

Further Reading: Options for Paying Down Debt during Grad School

If you are currently saving for retirement or would like to start, you can make a lump sum contribution to an Individual Retirement Arrangement (IRA). (You can also increase your contribution to a workplace-based retirement account, but that involves more paperwork.) If you receive your tax refund before tax day, you can even contribute to last year’s IRA if you still have contribution room!

Further Reading: Why You Should Contribute to Last Year’s Roth IRA

There are other possible savings/investment goals that you can use your tax refund for, such as taxable investments, a down payment for a home, and a 529 account.

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Invest in Your Success

Another way to invest your tax refund is in your own personal or career development. I know this is an unfamiliar concept for many PhDs, so hear me out!

As far as personal development goes, you could put part of your tax refund toward receiving coaching. I offer financial coaching, and some of my colleagues in the Self-Employed PhD network offer other types. For example, Katy Peplin offers grad student wellness and productivity coaching and a membership community and Caitlin Faas offers productivity coaching. And these examples are only the tip of the iceberg when it comes to personal development!

I also am launching a video course on investing for early career PhDs next month. If you sign up during the pre-launch period, your receive a discount and a free Q&A call with me once the course.

Another great investment would be in your career. You can explore career options outside of academia through Beyond the Professoriate, a new membership site from Jen Polk and Maren Wood. Jen also offers career coaching. If you’re currently applying for jobs or gearing up for it, Heidi Giusto offers application consulting services. Attending a conference to expand your network and horizons is another perfect use for your tax refund.

Live a Little

You know what they say about all work and no play… If you don’t have any pressing financial goals, why not do something fun with your tax refund? Sometimes you look at a lump sum of discretionary money differently from a small amount each month.

Could you take a vacation (or staycation)? Have you been eyeing a certain purchase? Do you want to upgrade your wardrobe or home furnishings? How about making a donation?

Change Your W-4

This last idea is not about what to do with your tax refund but rather what to do about your tax refund.

Did you like receiving a refund or would you rather keep more cash from your paycheck each month? If 2018 looks similar to 2017 for you financially, you’re probably on track to receive another refund.

If you’d rather receive a smaller refund or maybe even owe a little at year end, you can file another W-4 with your employer. You can fill out the worksheet again that helps you estimate the number of allowances you should have and hope that it is more accurate this time around. Alternatively, if you want to dig into the numbers more, you can calculate the amount of money you would like to have withheld from each paycheck and then figure out the number of allowances to claim to get to that amount of withholding.

That way, next year you can have your preference: a nice refund at tax time or more money in your pocket throughout the year!

How My Husband and I Are Using Our Tax Refund

This year, my husband and I are using our tax “refund” (technically it’s the amount of money we oversaved for taxes in our own dedicated savings account) for an upcoming cash need.

I’m due with our second child in a few months. My husband’s employer offers parental leave at half pay, so we’re saving up to help pay for our expenses during his leave since we’ll have lower cash flow. We haven’t yet learned how much time he’ll be approved to take off, so we’re squirreling away as much cash as we can in case he’s permitted to take a longer leave. We don’t want money to be the limiting factor driving him back to work.

It’s a very happy purpose for this money, and I’m looking forward to having some special time as a newly expanded family!

What to Do with Your Higher Take-Home Pay

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Whatever you might think of the Republican tax bill from last fall, it has now been passed into law and has already started to affect your income taxes for 2018. In many cases, your tax burden as a graduate student or postdoc will decrease for this year compared to last year, which means you’ll have more money in your pocket starting with your January or February paycheck.

higher take home pay

Will Your Take-Home Pay Increase?

A few weeks ago, I calculated what the tax burden would be for single or married people with no dependents with the income ranges that are most common for graduate students and postdocs ($15,000/year to $110,000/year). I found that across those income ranges, the tax burden decreased by 20-35%. Families with children under the age of 17 would see an even further decrease due to the larger Child Tax Credit.

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To perform these calculations, I assumed that you will take the standard deduction on both your 2017 and 2018 taxes. If that assumption is true (and your income is in the above range), you should see a decrease in your tax burden.

The taxpayers who may see an increase in tax due under the new law are those who currently itemize their deductions, such as households who have in the past deducted more than $10,000 in property tax and state and local taxes together. Another group that may see a higher tax liability under the bill (depending on the rest of their situation) is parents of dependent children aged 17 and older; the exemptions they used to take have been eliminated, and the expanded child tax credit is only for children up to age 16.

Further Reading:

However, I think my assumptions are valid or at least reasonably accurate for the vast majority of graduate students and postdocs, who tend to be younger with lower incomes/expenditures. It’s safe to say that most graduate students and postdocs will see a higher take-home pay in spring 2018 than they did in fall 2017; effectively, you will see a ‘raise.’

What to Do with Your Income Increase

I have no shortage of ideas of actions you can take with your increased take-home pay, whether it’s $14.50/month (for a single person with no dependents earning $20,000/year) or $109/month (for a married couple with no dependents earning $70,000/year). Chances are, last month you didn’t have a lot of money lying around begging to be put to use, and starting pretty soon you will have some non-spoken-for money to work with.

Don’t let this money just disappear into the ether! Allocate it to something specific. If possible, I recommend you set up an automated transfer from your checking account to wherever the money needs to go so that you relieve your willpower/memory of the responsibility of making the transfer manually.

Financially Responsible Action Items

Add to Your Emergency Fund

If you don’t yet have a dedicated emergency fund with a balance of $1,000 (or a higher target, e.g., three months of expenses), use the extra money to beef up your emergency fund! When (not if!) life throws you a curveball, your emergency fund is what stands between you and serious financial consequences.

Further Reading:

Start Investing/Add to Your Investments

YES it is possible and worthwhile to start investing with just a few dollars per month and it’s also amazing to even incrementally increase your existing regular savings rate!

Using this compound interest calculator to estimate, adding just $25/month to your investments for one year, at an 8% rate of return in 50 years that $300 will become over $13,000! If you kept up that higher savings rate for all 50 years, it becomes over $172,000! Sure, that’s not all the saving/investing you will need to do for your retirement, but even a small regular savings rate helps a lot.

Further reading:

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Pay Down Debt

Similar to the investing example, a few extra dollars per month thrown at your existing debt can accelerate your progress to debt freedom.

If you currently had $500 in outstanding credit card debt and were making the minimum payment of $25/month, it would take you 23 months to pay off the card. But if you instead paid $50/month, you would knock out that debt in 11 months!

While you are not required to make payments on deferred student loans, if they are unsubsidized they are currently accruing interest. For example, if you had $10,000 of deferred unsubsidized loans at 6.8% interest and five years until graduation (and the end of the deferment), putting $25/month toward your loans would decrease the $14,036 you would have owed at the end of grad school to $12,255 (the $1,500 you paid decreased your debt by $1,781).

Further reading:

Invest in Your Career

Instead of using your money to increase your financial security or net worth directly, you could double down on your PhD training and invest in your career. Not many universities provide adequate career exploration and training for PhD students and postdocs, especially for “alternative careers.” You could use your increased cash flow to save up to attend a key conference in your field (if you’ve already used the funding available to you) or for a career path you’d like to get into. You could join a membership site like Beyond the Professoriate to help you transition out of grad school/your postdoc/your current job and into a fulfilling job. You could take a one-time seminar on negotiating a job offer; think of the ROI on that training!

Not-Financially-Focused-But-Still-Good Ideas

There are plenty of good ideas of what to do with money that will have a positive impact on your well-being rather than your bottom line specifically.

Treat Yo Self

Set aside a bit of time to consider what would give you the most ‘bang for your buck’ with this extra cash flow in terms of increasing your satisfaction in your life. You could use it on a monthly basis to take a fancy exercise class, have a special date night, enroll in a new subscription service, or care for a small pet. You could save up over the course of a few months or the year and take an extra flight to see loved ones, purchase new electronics (my husband is currently eyeing an ergonomic mechanical keyboard!), or update your wardrobe. What will mean the most to you is obviously quite personal, but whatever you choose, the key thing to do is to earmark the extra money for your choice so that it doesn’t get swept up in the rest of your expenses.

Give

At any point in 2017 or earlier, did you come across a non-profit or certain cause that you had the impulse to donate to, but you just didn’t have the available funds? This is your opportunity! You can now set up a recurring donation to a group whose work is meaningful to you. Non-profits really appreciate steady contributions that they can plan on. Alternatively, you could set aside a dedicated savings account with a monthly automatic savings rate that is earmarked for giving. My husband and I did this in graduate school for one-off donations that we would make a few times a year, and it was a wonderful feeling to be able to say “yes” when an opportunity presented itself without having to scramble or make hasty calculations.

Don’t let this opportunity to act intentionally with your increased cash flow pass you by! It might be quite a while before you get another increase in your take-home pay so make the most of it.

How to Put Your New Postdoc Salary in Context

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After a long, arduous journey through graduate school, you’ve successfully defended your PhD and are about to take the next step in your research career: a postdoc. One of the best perks of transitioning from being a graduate student to a postdoc is the pay increase. While postdocs aren’t exactly rolling in dough, they are usually paid significantly better than graduate students, and after 5+ years of zero to tiny raises, it’s gratifying to finally receive a higher salary.

However, before you buy that new car or put an offer on a house, take some time to put your new postdoc salary offer in context. There are a few subtle changes common to the grad student-postdoc transition that will decrease your take-home pay and/or discretionary income.

(This post is specific to the US.)

Employee or Fellow?

The very first question to clarify is what exactly your employment status will be with respect to your university/institute. Just like in graduate school, there are two broad ways you can be paid: compensatory or non-compensatory. In academic-speak: Are you an employee or a fellow?

If you see “fellow” in your title or offer letter, have heard “fellowship” from your advisor when discussing funding, or have won an outside individual fellowship, you are a fellow and not an employee of your university. As a fellow, you may receive no benefits from your university or only a few; you are almost certainly not going to receive all the benefits a full employee would. You should contact your university’s postdoc office or your departmental administrative assistant for a full explanation of your benefits.

If you aren’t labeled a “fellow” you are most likely an employee, but there may be multiple classes of employees at your university so it’s important to determine which one. (Postdocs may not be offered the same benefits as faculty, for example.) Once you know exactly your class of employee, you can read through material provided by Human Resources to determine your benefits, and direct any questions you have to Human Resources or the postdoc office.

When in doubt, ask if you will receive W-2 pay or not. W-2s are use for employee pay, while non-compensatory pay is not reported to the IRS or reported on a 1099-MISC.

Further viewing: Types of Grad Student Pay and Their Implications

Some of the common, though not universal, differences in benefits offered to employees though not fellows are: income tax withholding, 403(b) access, 403(b) match, subsidized health insurance premiums, health insurance premiums paid as a payroll deduction, Health Savings Account/Flexible Spending Account, group disability and/or life insurance access, and official paid time off.

Income and FICA Taxes

If you’re earning more as a postdoc, you’re also going to pay more in federal income tax (given no other changes in your personal life). Your effective tax rate will increase and possibly your marginal tax rate as well. So if your gross pay increases by $1,000 per month, for example, federal income tax may take a $120 or $220 (or somewhere in between) bite out of that increase.

The same broad story would be true for state taxes if you are not moving states, but many postdocs relocate states as well with their new positions. If you don’t want any surprises in your first paycheck, look up how your new state’s tax brackets and rates compare to your old state’s.

One of the biggest tax changes that occurs when going from a grad student to a postdoc is FICA tax (Social Security and Medicaid). As a graduate student, you did not pay FICA tax. Postdoc fellows will also not pay FICA tax (or self-employment tax) on their income as they do not technically receive “wages.” However, postdoc employees will begin to pay FICA tax. On the employee side, the Social Security tax is 6.2% and the Medicare tax is 1.45% on all of your income up to $128,400 (in 2018). If your new postdoc salary is $45,000 per year, for example, you will pay $3,442.50 in FICA tax. That can be a big shock for someone who wasn’t paying any tax in that category previously.

The best way to calculate your new take-home pay after all of these changes is to use a paycheck calculator, of which there are many. (However, due to the recency of the tax law changes, online paycheck calculators may not yet be updated for 2018. As of this writing, the IRS has not yet updated its withholding calculator.)

Further reading: Why Is My Take-Home Pay as a Postdoc Nearly the Same as When I Was a Grad Student?

Health Insurance

While your grad school and postdoc universities almost certainly offer you the option of buying group health insurance, who pays the premium and how might change.

As a graduate student, it is typical to have your health insurance premium paid partially or completely from funds that are not part of your stipend pay, so many graduate students don’t have to factor that cost into their take-home pay.

A postdoc employee will likely pay part or all of his insurance premium through a tax-free payroll deduction. A postdoc fellow’s insurance premium may be paid on her behalf, similar to a graduate student, or come completely from her salary.

This is an important benefit to check into prior to starting your postdoc position as you don’t want any lapse in coverage or to be surprised by the additional expense. The premium for a postdoc’s insurance may be much higher than a graduate student’s, depending on the risk pool each position is put in.

Student Loans

Another big change when you transition out of being a student is that your student loans, if you have any, are no longer eligible for in-school deferment. Beginning to pay off student loans can be a large monthly expense on a postdoc salary, depending on the total amount owed.

Contact your lender(s) to find the minimum payment due and the period over which you will repay your loans. Federal student loans have a standard repayment period of 10 years, but private student loans may take a shorter or longer period of time. Factor this minimum payment due into your planning for how to allocate your salary.

If you want to pay off your debt faster than the standard repayment period, which is an excellent idea for debt at a moderate or high interest rate, plan on paying more than the minimum amount due each month.

If you don’t think your postdoc salary can handle even the minimum payment on your student loans, you have two options to immediately consider.

1) With respect to your federal student loans, you may be eligible for one of the many repayment programs that lower your minimum payment due (even, potentially, to $0) by extending the repayment period and overall amount of money you will repay (income-based repayment, pay as you earn, etc.). Your eligibility for these programs depends on your household income. Carefully consider whether it is in your best interest to use one of these programs, even if you are eligible.

2) There are many lenders currently offering student loan refinancing at competitive interest rates. When you refinance, you are paying off your old loans and taking out new private loans, so make sure you would not be losing any benefits unique to student loans, such as the repayment programs for federal student loans. Be forewarned that these lenders only work with borrowers with excellent credit and low debt-to-income ratios. If you can significantly lower your interest rate, refinancing may be a positive step for your personal finances, both lowering your minimum payment due and reducing the total amount of money you will repay.

Cost of Living

With a change in university naturally comes a change in the local cost of living. As you well know, living expenses vary greatly from city to city. At the lower salary levels of a graduate student or postdoc, this can be a major concern.

There are two quick methods to estimate how the cost of living will change between your grad school city and your postdoc city.

CNN offers a cost of living comparison calculator. Plug in the two cities in question (or as close as you can get to them) and put in either your grad student salary or your postdoc salary. Your greater familiarity with the cost of living in your grad school city combined with this calculator will help you estimate how far your new salary will go in your new city.

MIT’s living wage database also provides insight. Look up the living wage for your grad school university’s county and your postdoc university’s county. The living wage will be closer to your grad student salary than your postdoc salary, but the difference between the two will also help you determine how much of an increase or decrease in cost of living you will experience.

A more involved but also more effective step if you have not yet moved to your new city is to sketch a budget. Using your best estimate of your take-home pay based on the above factors, research how much you are likely to spend on housing, food, transportation, etc. if you kept your perceived lifestyle the same from grad school into your postdoc. Ideally, this exercise will help you decide in which areas of your budget you are able and would like to upgrade your lifestyle, such as living without a roommate.

Personal Experience with the Transition to a Postdoc Position

My husband stayed in his PhD advisor’s lab for an extra year as a postdoc to finish up a few papers before applying for a “real” multi-year postdoc at another institution. My husband received one postdoc offer that he seriously considered before ultimately choosing a position in industry. We performed the calculations above regarding increased taxes and insurance costs to compare the take-home pay of his new postdoc offer directly to the take-home pay from his short-term postdoc and graduate student positions. The take-home pay from the postdoc offer was slightly less than that of his short-term postdoc position and much higher than his pay as a graduate student.

However, when we compared the cost of living in our grad school city, Durham, NC, to the cost of living in Boston, MA, where the new offer was from, we were shocked by the results. In terms of the effective purchasing power from my husband’s take-home pay, the pay for the postdoc position in Boston was “less” than even his grad student pay in Durham. We would not have expected to experience an effective pay decrease moving from a grad student position to a postdoc position, but that is how the numbers worked out. I’m very glad that we took the time to do those estimates before he made a final decision about the offer.

Further reading: An Agonizing Decision

While the gross pay from your new postdoc position may seem great in comparison with your grad student pay, don’t be fooled! You must account for several important changes in taxes, benefits, and cost of living to compare apples to apples.