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Travel and Savings Are This Frugal Grad Student’s Top Priorities

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This podcast episode is a budget breakdown with Latisha Franklin, a third-year graduate student in biochemistry and molecular biology at Penn State University. Latisha works to keep her housing and especially food spending low so that she can spend more on experiences, such as her yearly international vacation. She employs several powerful strategies in her frugality and budgeting to enable her saving, such as taking out cash for variable spending, prioritizing a “me” budget category, vegan meal prepping, and actually reading her email to find free food on campus. Emily and Latisha discuss how establishing a routine schedule lends itself well to developing frugal practices.

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0:00 Introduction

1:14 Q1: Please Introduce Yourself

Latisha Franklin is a third-year graduate student in the Biochemistry and Molecular Biology program at Penn State University. She moved to State College, Pennsylvania, for graduate school from her hometown Mobile, Alabama.

Her stipend is $1,996 per month after taxes.

2:27 Q2: What are your five largest expenses each month?

Latisha’s top expense categories are rent, car insurance, food, bills, and “me,” in other words, money she can spend freely on herself. She shares that she budgets much of her income for her Roth IRA and savings.

3:57 #1 Expense: Rent

Latisha lived in a one-bedroom apartment with her dog at the time of the interview. However, she had plans to move. Her rent was $820 per month and the rent in her new place is $710 per month. Originally, she wanted to move to a new place with a roommate. When those plans fell through, her realtor helped her find the new apartment.

Her new apartment is attached to a house. She has access to a backyard for her dog, which was appealing to her. Her new apartment is closer to Penn State, a 5 minute drive and 20 minute walk from campus. The neighborhood is family-oriented. This is in contrast to her former neighborhood that had a good mix of graduate students, young families, and late-career adults.

Latisha thinks Penn State graduate students living alone pay about $900 or more for rent. She thinks that $700 is the low end of the range for rents. In her estimates, she is not taking into account possible lower rents in shared housing with roommates.

8:29 #2 Expense: Car Insurance

Latisha has a 2016 Hyundai Tuscon. She bought the car new in winter 2015 and paid it off completely within two years. She used savings she had been building since middle school to buy the car new. Her monthly insurance payment is $159.

10:22 #3 Expense: Food

Latisha spends $150 per month on food. She spends $20 each week for food that she’ll eat during the week, and $50 each month to buy items she’ll use throughout the month. Her strategy to keep food expenses low is to meal prep and cook in bulk.

During her first year, she found herself cooking every other day. Cooking was too time-intensive, so she read articles about meal prepping. Now, she uses Sundays as her meal prep and cooking day. She makes enough to last the week and portions food into six or seven containers.

Latisha didn’t have any dietary restrictions or considerations during her first year in graduate school. She has now removed meat and dairy from her diet. She uses many kinds of beans, rice, nuts, and fruit in her meals. She buys fruit from the farmers markets and from her share of community supported agriculture (CSA).

Her meals include muffins, which she eats every week, salads, soups, and pastas. Additionally, Latisha eats free meals on campus as often as three times a week. She takes ten minutes each day to read her university emails to find events with free food that also match her interest. She rarely eats take-out or at restaurants, and this expense is from her “me” category.

18:54 #4 Expense: Bills

Latisha’s pays for electricity and wifi, because heat and water are included in her rent. Her parents pay for her cell phone bills. The electricity bill is $13 per month and wifi bill is $32 per month. To keep electricity costs down, Latisha makes the most of daylight for work. During the evening, she relaxes and minimizes her electricity use.

In her new apartment, she will have to pay for all utilities separately. She’ll have more bills, so she has planned to increase this budget category.

21:38 #5 Expense: “Me,” or Variable Spending

Latisha budgets about $20 a week, or strictly $100 a month, to spend as she wishes on herself. Typically, she uses this money to go to the movies, go out to dinner, or try something new. She bought herself a microscope because she enjoys using it to look at everyday items. Overall, she prefers “experiences, not stuff.”

Latisha’s strategy is to keep her “me” budget in cash. Using cash is strategy to keep variable spending in check. She mentions that credit cards didn’t suit her.

25:17 Q3: What are you currently doing to further your financial goals?

Latisha prioritizes savings. Since her teenage years, she kept savings for undetermined large purchases. For example, she bought her new car with her savings, even though she hadn’t intentionally planned the purchase.

She contributes $150 per month to a Roth IRA for retirement. She saves $50 per month in her savings account. This is about 10% of her net income. She is focused on building her Roth IRA

She started savings with a CD, about three years ago, without much knowledge of savings or investing. Her dad encouraged her to get a Roth IRA. Latisha read Emily’s emails and is now working on better managing her Roth IRA.

Latisha has set a goal to take one big trip a year. Here she discusses saving for her trip to Iceland. She has budgeted about $100 per month and has $1,200 saved at the time of the interview. She likes to travel and wants to get out and see the world while she has minimal responsibilities. Iceland is the first big trip that she has initiated on her own.

33:24 Q4: What don’t you spend money on that might surprise people?

Latisha spends very little on food. Many of her peers claim to not have the time to cook, so they get take out or eat out more often. She found the time on the weekends to prepare all her meals for the week, so she saves time during the week. Emily and Latisha agree that in reality, getting take out or going to eat can take just as much time as preparing your own meals. Prioritizing cooking your own meals is a great frugal strategy.

35:34 Q5: What are you happy with in your spending and what would you like to change?

Latisha is happy that most of her money goes to experiences, not things. She wants to add money to food, because she believes trying new kinds of foods is a good experience. Joining the CSA is one way she is trying new foods. She is interested in new fruits, like dragonfruit. Additionally, she is happy has “cushion money” so she is prepared for anything.

36:48 Q6: What is your best advice for someone new to your city who is budget-conscious?

Latisha recommends over estimating your budget so you have cushion money. This reduces stress and helps even out irregular expenses. One strategy that Latisha uses is to set up separate accounts for her money. For example, she moves her income out of her spending account into a reserve account. This restricts how much money is available for her to spend, but the money is still accessible if she really needs it.

Latisha also recommends personalizing your budget. She has had financial training that emphasizes certain income percentages for budget categories, but this advice doesn’t suit her lifestyle. She realized this when she went through the process of purchasing a home but ultimately could not get approval. During the process to buy a home, she found that financial advisors insisted that 50-60% of income is budgeted to living expenses. Though she was frustrated she couldn’t buy a home, she is glad she went through the process and would recommend the experience to other graduate students.

44:46 Q7: Would you like to make any other comments on what it takes to get by where you live on what you earn?

Latisha takes the bus for her commute. She does not use her car for every day commuting, just for irregular driving, like taking her dog to the groomer. Penn state has a graduate students bus ridership program that Latisha says is a $180 one time fee, then free riding for the entire year. Just a few rides each month would make the pass pay off. She says this is definitely worth it.

Latisha says her budget is possible because she manages her time carefully and sticks to a routine. Her budget is a result of her focused lifestyle. Emily and Latisha agree that budgeting is easier and more accessible when you recognize the patterns you have in place in your life.

48:30 Final Comments

Latisha and Emily hope listeners learned more about frugal strategies for living on a graduate stipend.

48:45 Conclusion

A Graduate Student’s Balanced Money Formula

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Grad students frequently wonder how much they should spend on various expenses or even how much they should be saving. The Balanced Money Formula (BMF) answers this question for the average American, but how applicable is it to a grad student’s budget?

Further reading: The Power of Percentage-Based Budgeting for a Career-Building PhD

grad student balanced money formula

A version of this post originally appeared on GradHacker.

What Is the Balanced Money Formula?

The BMF, as defined in All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi, is a high-level allocation of your net (after tax) pay to three areas: needs, wants, and savings. The idea is that if you conform to this ratio throughout your life, you will have a great chance of feeling satisfied with your current spending while saving enough for your future. The trap that many people fall into is letting the needs component of their spending take up too much of their income, which crowds out saving and inhibits spending your money in areas that bring you a lot of comfort and satisfaction (your wants).

The magic ratio of the BMF is 50% to needs, 30% to wants, and 20% to savings. The definitions of these three categories are a little different than what you might intuitively think. Needs are defined as all expenses that must be paid on a regular basis, such as rent/mortgage, minimum debt payments, insurance, contracts, groceries, transportation, and utilities. Wants are defined as discretionary purchases such as restaurant eating, entertainment, shopping (beyond basics), and travel. Savings is broken up into a few stages and categories. When you have debt other than for your mortgage, savings means accelerated debt repayment (the minimum payments are in the needs category). Once you are out of all debt except your mortgage, the 20% to savings becomes 10% for retirement, 5% for extra mortgage payments, and 5% for your “dream” goal.

Keep in mind that the BMF was not designed for a Millennial audience. I’m particularly concerned about the advice to save only 10% of net income for retirement (and only after you’re out of non-mortgage debt). Millennials will likely only have one-and-a-half legs of the older generations’ three-legged stool available to them – personal retirements savings and a reduced Social Security benefit (no pensions). That personal retirement savings leg is going to be doing most of the heavy lifting, and 10% of net after you’re debt-free probably isn’t going to cut it.

What I think is valuable about the BMF is the emphasis that there is a place for each of needs, wants, and savings throughout your life, the stern warning against letting the needs category inflate, and the suggested 5:3 ratio between spending on needs and wants.

Can and Should Every Graduate Student’s Financial Management Conform to the BMF?

Absolutely not.

1. The BMF may be right for a lot of people, but ultimately it is just an opinion. You can create your own BMF with a different ideal ratio among needs, wants, and savings that works best for your life. The point is to find a ratio that keeps you on track to accomplish your financial goals without feeling too restricted.

2. Even if you do agree with the BMF, All Your Worth acknowledges that an individual might not stick to the BMF during special life circumstances. Living on a low stipend for a limited period of time while you’re receiving training can qualify as special life circumstances if you need it to. You can find another ratio to keep during grad school and set up your post-grad life to fit the BMF.

Given these caveats, the BMF is still a good starting point for planning how to allocate your stipend pay.

How Can a Graduate Student Create a Balanced Money Formula for Herself?

First, categorize your spending according to the BMF’s needs/wants/savings definition and see how it compares to the suggested 50:30:20 ratio. When I did this during grad school, I was pleasantly surprised that my financial allocation aligned within 1% of the BMF (though my full 20% to savings was going into retirement savings). This told me that my gut feeling that my spending and saving was in balance and sustainable was probably correct.

The danger for graduate students is the same as for the population at large: the needs category ballooning and edging out what makes your life stable (savings) and fun (wants). Even for graduate students, the percentage of your post-tax income that is spent on needs rising above 50% should give you pause and compel you to consider ways to reduce your spending. You may not get it under 50%, but the better you do with minimizing that category the more ‘in balance’ you will probably feel.

In some high cost-of-living areas, close to 50% of a graduate student’s stipend might be spent on rent alone and of course in those cases the BMF cannot be achieved. But if you are over 50%, you should be doing as much as you reasonably can to minimize that category of expenses overall. For example, perhaps your rent is high, but you live with a roommate to get it as low as possible, and the location allows you to live car-free, which minimizes your overall needs spending. Consider capping the percentage of your pay that you are willing to spend on needs at your absolutely maximum (e.g., 70%) to trigger yourself to reduce one of your large fixed expenses, even if it requires moving, should your needs ever rise to that level.

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Some graduate students with more generous stipends and/or a manageable cost of living may spend significantly less than 50% of their stipends on needs. In the case, the best course of action is not to intentionally spend more on needs (though you have the leeway if you would like to), but rather to increase the amount you save and/or spend on wants.

If you have asked yourself if you are spending a reasonable amount of money on your wants and needs and saving enough, the BMF is a great formula to use as a starting point for your budget. However, over time you will likely want to adapt how you allocate your money to best match your values and goals.

Savings in Graduate School

If you want and are able to follow the BMF, the 20% of your money that is saved during graduate school could go toward building an emergency fund, investing for the future, and/or paying down debt. You should start with at least a baby emergency fund of $1,000, if not a few months of expenses. According to All Your Worth, your next step should be to pay off all non-mortgage debt, but if (some of) your debt is at a low interest rate and doesn’t bother you, investing for retirement is a great choice as well. Let both the math of the situation (interest rates on debt vs. expected rates of return on investments) as well as your personal disposition toward the options lead you to the correct choice in your life.

While I am a proponent of adding money each month to targeted savings accounts to help you pay for irregular expenses, I think this type of saving should come from your needs or wants categories. Saving with respect to the BMF should be only for mid- or long-term goals, whereas saving for irregular expenses is a short-term goal.

It is enormously worthwhile to start building the habit of saving during graduate school, even if you can’t reach the 20% target from the BMF. Applying compound interest in the form of investing or debt repayment to even a small percentage of your pay is amazingly powerful.

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For Stipends that Are Just Too Low

Not having room for needs, wants, and savings to some degree in your grad student budget is an indicator that your pay is too low or your spending is askew. If you are earning too little from your role as a graduate student, your options are to develop a side income or take out student loans. You must carefully weigh the consequences of your choices. Student loans will hold you back from building wealth post-grad school. A side income might benefit you if it furthers your career goals, or it might distract from your degree progress, which should be your top priority.

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What percentages of your net pay do you spend on needs, wants, and savings? Have you ever successfully reduced the amount of money you were spending on needs?

How to Financially Navigate an Unfunded Summer

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One of the most frustrating aspects of graduate school is that your income may fluctuate with each term. In some fields and at some universities, you might change roles not just each academic year but perhaps as frequently as each semester or trimester. When each role (fellow, teaching assistant, research assistant, graduate assistant) comes with a different pay rate, the result is a variable or irregular income. It’s even common to go without an income for a term, most typically the summer. This does not mean that you are at loose ends over the summer or free to work any type of other job. Research must go on in order for you to graduate in a timely manner!

An unfunded summer – or even just an income decrease – is not at all financially trivial for a grad student, and the solutions to an irregular income that other people use are not necessarily available or optimal for a grad student because of his low overall income. Of course, the ideal situation is to secure funding over the summer from an RA position or outside grant. If that option is not available, you must consider other avenues. If you see the funding lapse coming or it occurs regularly, you can prepare for it throughout the entire year.

Video Series: How to Increase Your Income as a Graduate Student

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1) Get Another Job

You can take a job to replace the income you received during the academic year.

It may not be possible (or ethical) to find a regular full-time job since you plan to return to your fellowship or assistantship in the fall. A temporary or seasonable job is a good alternative, whether full-time or part-time.

First, look for a job that would advance your career in some way; it might help you demonstrate an existing skill, learn a new skill, expand your network, or simply look good on a CV. A paid internship is an example of a temporary job that is likely to advance your career.

Second, look for a job that you would enjoy doing, even if it’s not career-advancing. Your university is a great place to start when searching out opportunities, such as a work-study position. Inside or outside your university, there may be opportunities to work with younger students who are also on summer break, such as through camps or tutoring services.

Third, look for a job that pays you the highest available rate while still allowing you some time for your research and/or professional development on the side. If it isn’t advancing your career and you don’t enjoy it, just earn as much as you can per hour so you can minimize your work time.

2) Become Self-Employed

A way to earn an income that is an alternative to a temporary job is to work for yourself. It takes a certain personality and a lot of work to be successfully self-employed, but the advantages are:

  • You choose the type of work and clients,
  • It has the potential to pay a better hourly rate than a job, and
  • Your schedule and workload are under your control.

Try to think of a unique or marketable skill that you have and how you can leverage it to serve clients.

A few generic avenues for self-employment available to many grad students are:

  • Consulting (in your field),
  • Tutoring,
  • Freelance research, writing, and/or editing, and
  • Childcare.

If self-employment appeals to you, you should start pursuing it ASAP, because it often takes time to start generating an income/get paid. You might have to sustain your business year-round, though you could ramp it up or down depending on your academic workload.

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3) Save in Advance

The typical financial advice for dealing with an irregular income or lapse in income is to save up in advance so that you can cover your expenses from your savings instead of your income. This is good advice for someone with an income that far exceeds her expenses. For example, if you will go three months without an income, you should save approximately one-quarter of your income from each month that you are paid to sustain yourself during your unfunded summer. Setting this savings goal ensures that you keep your expenses in check year-round while building up the account you plan to draw from.

But how many graduate students are able to save one-quarter of their net income? And more so, how many of those well-paid graduate students might actually face an unfunded summer?

To the degree possible, you should save from your academic year income (your grad student income as well as side hustle if you have one) to pay expenses during your unfunded period if you don’t know you will earn as much from a different job/side hustle. In the face of short-term uncertainty, especially with respect to income, cash is king. But be honest with yourself from the first regular paycheck you receive about whether this plan is feasible.

4) Reduce/Shift Expenses

In the spirit of living within your means, if you are going to earn less or live off savings during your unfunded summer, you should try to reduce your expenses as well.

As your largest expense is likely housing, that’s where you should look first. If there is nothing physically keeping you at your university over the summer, you can move for the term. Sub-let your academic-year home and rent a less expensive place somewhere else, move in with your parents/relatives, or house-sit.

If any other of your typical expenses become unnecessary over the summer, try to jettison those as well. For example, many cities offer a slate of free activities over the summer, so you may be able to dramatically reduce the amount of money you typically spend on entertainment, eating/drinking out, etc.

Another possibility for making ends meet on a temporarily lower income is to shift any expenses possible to when you have a higher income. This doesn’t necessarily reduce the amount you would spend, but rather makes budgeting easier. Expenses that might be shifted include:

  • Shopping, i.e., for clothes, electronics, household furnishings,
  • Routine medical/dental/vision care,
  • Non-monthly insurance premiums or subscriptions, and
  • Vacation.

5) Take Out Student Loans

Finally, if you are enrolled as a student and taking a sufficient number of credits over the summer, you may be eligible to take out a student loan. (Credits don’t necessarily equal classes, depending on how your university registers graduate students.)

This is in my opinion a method of last resort and should only be used to speed progress toward graduation if a large salary bump is expected. A summer free from teaching or other service obligations can be an incredibly fruitful time for research progress – for some projects, it might be the only time when meaningful work is accomplished – so student debt can be reasonably justified for that purpose.

Do some math on the ROI of taking on the debt (principal and interest) vs. your other income options for an unfunded summer to make sure it’s worth it. You don’t want to end graduate school with an amount of debt that will be onerous to pay back with your post-PhD salary, but you also don’t want to tread water in graduate school and put off earning that post-PhD salary for too long.

Using student loans over the summer isn’t incompatible with any of the other options; use the other approaches to minimize the amount of student loans you need to take out/repay them immediately to the degree that they do not interfere with your research progress. Also, it is preferable to take out student loans than to accrue higher-interest rate debt (e.g., credit card debt) due to poor planning.

If you know your upcoming summer will be un/under-funded or you aren’t sure whether you’ll be able to secure an academic position or grant, start preparing now by:

  1. Reducing your expenses and saving as much as you can.
  2. Searching for temporary/part-time jobs.
  3. Pursuing a self-employment side hustle that ideally both pays well and complements your graduate work.

Even if you find funding for your summer and don’t need the side hustle or saved money, you will have put yourself in a better financial position and set your mind more at ease about the potential for subsequent unfunded summers.

The Power of Percentage-Based Budgeting for a Career-Building PhD

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I would imagine that most workers in the US don’t experience large income jumps after they start working full-time. They will receive periodic raises and perhaps some small jumps if they change career tracks or negotiate well with a new employer, but nothing like increasing their incomes by 50 or 100% at one time. However, those types of jumps are common for PhDs. The income jump from graduate school to a postdoc is roughly 50%, and the jump from a postdoc to a career job is perhaps another 50 to 100% or even more. At least, that’s the expected track! Having that expectation, whether or not it conforms with reality, can bring about some strange attitudes towards money. However, if a PhD(-in-training) adopts percentage-based budgeting, it has the potential to keep her finances in balance even through the income jumps.

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What Is Percentage-Based Budgeting?

There are many versions of percentage-based budgeting in terms of how it is enacted and the appropriate percentages to assign to various budgeting categories. The foundation of all of them is that your financial goals and expenses should scale with your income according to a consistent percentage.

Retirement Savings Rate

The most common example of percentage-based budgeting is the advice to save a percentage of gross or net income for retirement. It’s not reasonable to say that everyone should max out their 401(k)s ($18,500 in 2018) every year – though I have read that advice time and again in the personal finance blogosphere – not only because not everyone has a job that offers a 401(k) but also because that would be an incredibly high savings rate for someone earning what a graduate student or postdoc does. It’s much more reasonable to assign a percentage for your retirement savings goal, e.g., 5, 10, 15, or 20%.

The big advantage for using percentages instead of absolute numbers for savings rates is that it allows you to create a positive financial habit or even becomes part of your character (“I am a saver; I contribute 10% of my gross income to my retirement account”) at a level that is possible for your income. As your income grows, your absolute contribution to your savings grows as well.

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Other Budget Applications of Percentage-Based Budgeting

Tax

I like to think of income taxes as another type of percentage-based budgeting category, even though individuals don’t have control over the tax rate. If you have income tax withholding set up, you are sending a (more or less) fixed percentage of your gross income to the IRS throughout the year. If your withholding is accurate, this percentage is your effective tax rate. Your marginal tax rate is the tax rate on the income bracket that your income tops out in (e.g., 12%), but your effective tax rate is the amount of tax you actually pay divided by your gross income (e.g. 6%).

Another type of tax, FICA (Social Security and Medicare), is also percentage-based, although students and non-wage earners are exempted and the tax phases out at higher incomes ($127,200 in 2017).

Spending Categories

One of the most well-known percentage-based budgets is the Balanced Money Formula, which is detailed in All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. It is a recommendation of how much of your net income to spend in three areas: 50% on needs, 30% on wants, and 20% on savings and debt repayment. The 50% of net income to needs (defined as housing and transportation; contracted payments; and basic food, clothing, etc.) is emphasized as the category that tends to grow out of control and lead to financial stress in American households.

Further reading: A Graduate Student’s Balanced Money Formula

Dave Ramsey, a well-known get-out-of-debt financial guru, also makes budget category recommendations for his followers (after they have gotten out of non-mortgage debt). He lists percentage ranges for eight budget categories in addition to saving and giving, e.g., housing should be 25-35% of net income, food should be 10-15%, etc.

Further reading: Starter Percentages for an Every Dollar Budget

These percentage-based budget category suggestions are just that – recommendations based on what that particular expert has observed to work well for most American households. You will, of course, find your own levels of spending that feel comfortable for you. But these kinds of recommendations are great to compare with your current spending from time to time so that you can see if any category seems wildly out of line, especially if it’s a category you can adjust.

The advantage to basing your spending on percentages of your income is that, again, you spend less when you earn less and spend more when you earn more. Your lifestyle scales with your income, and you automatically live within your means.

Using Percentage-Based Budgeting on Only Part of Your Income

Percentage-based budgeting is a useful structure not only on your salary but also on any variable income you might have, such as from a side hustle. If you budget all your basic and regular monthly expenses on your salary, you can use your extra income to fund, in a percentage-based allocation, some extra splurges or savings.

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For example, for every dollar of side income money you earn, you could allocate a percentage for taxes (I use my marginal tax rate plus 15.3%, the self-employment tax rate), a percentage for saving, and the remainder for little luxuries or lifestyle upgrades. That way, you both further your financial goals and reward yourself for a job well done.

Further reading: Side Income (Category), Best Financial Practices for Your PhD Side Hustle

What Are the Pitfalls of Not Using Percentage-Based Budgeting?

For PhD trainees in particular who are anticipating income jumps, it is very tempting to tell yourself that you will work on financial goals such as saving and debt repayment once you are earning more. In fact, you might even allow yourself to live above your means and accumulate some debt in the confidence that you will pay it all off later on.

Further reading: A Low Income Is a Blessing in Disguise

If you’ve ever heard of the permanent income hypothesis, you might be tempted to add its label to the above line of thinking. However, I think rather than a strictly rational calculation, it is simply our natural procrastination and fear of financial sacrifice disguising itself as a reasonable argument. Keeping a lid on your lifestyle is difficult when your income is low. Saving and debt repayment are difficult. We imagine a brighter future when those actions won’t be so challenging, and assume we can make it Future Us’s problem.

Further reading: You Should Spend More and Save Less (Especially Grad Students)

While I certainly hope that you experience the income jumps you anticipate – and don’t forget, there’s no guarantee that they will materialize – it doesn’t really become easier to save with age the way most people think it will. As the decades pass, on average your lifestyle starts to cost more and more. You buy a house. You have some kids. You upgrade your car. You’re pressed for time, so you don’t practice frugality the way you used to. The fact is there is always a reason not to make financial sacrifice today, especially if you’re an optimist. Percentage-based budgeting keeps your lifestyle in line with your current reality and doesn’t allow you to defer accepting responsibility for your financial life.

Where Does Percentage-Based Budgeting Break Down?

Low Incomes

Percentage-based budgeting works well over a range of incomes, but there is a floor to its functionality, and it’s somewhere around the living wage for each local area. At some point, when your income is low enough, you can’t scale your basic needs down to that ideal percentage of your gross income. And unfortunately, a lot of graduate students and some PhDs are living right around that breaking point. Savings/debt repayment will be cut back or eliminated, needs will balloon out of proportion, and there will probably be little spent on wants. You may even find yourself accumulating debt. The best solution to this conundrum is to land a higher-paying position as soon as you can, following graduation if necessary. A side income may help keep you afloat in the meantime, but don’t let it slow down your progress to that better job.

Taxes

Some percentage-based budgeting formulations, like the Balanced Money Formula and Dave Ramsey’s, work off your net (after tax) income. I like to work off my gross income and think of taxes as part of my percentage-based budget, but as I said earlier, your effective tax rate is not a percentage that you as the taxpayer control. As your income increases, all else being equal, your effective tax rate will increase as well, meaning that everything else has to shift to accommodate it, so your percentages cannot stay totally fixed.

My Experience with Percentage-Based Budgeting

I implemented percentage-based budgeting early on in graduate school for my high-level financial goals that are still the same today. I paid my taxes (through quarterly estimated tax, at times!), contributed to my Roth IRA (starting at 10% of gross income, working my way up to 17% by the end of grad school, and 18% today), and tithed. Beyond that, I did check that my spending on needs and wants was more or less in line with the Balanced Money Formula. I found that a 5:3 ratio of spending on needs to wants is quite comfortable.

I’m so glad that I implemented percentage-based budgeting, at least for my high-level goals, during grad school. It has helped my husband and I keep perspective about our finances through the income increases and moves we’ve undergone. We now have one regular income (my husband’s salary) and a few variable income streams (from my business and side hustle), and we practice slightly different forms of percentage-based budgeting with each. We pay taxes (at different rates), contribute to our retirement accounts, and tithe from each income, but we budget all our expenses off my husband’s income and use mine for extra saving (usually for a house down payment).

Probably the thing I like best about percentage-based budgeting is that it’s so flexible; you can make it entirely your own based on your goals and your lifestyle preferences. Yes, there are guidelines out there for you to access if you want to, but the final decision is yours. If you find a comfortable ratio among savings, needs, and wants while your income is low and maintain it as your income grows, you can confidently enjoy the fruits of your success.

Give Yourself a Raise: Prepare Your Own Food Even with a Busy Schedule

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Grad students and postdocs typically spend a significant portion of their income on groceries and restaurant food; these budget categories are often targeted by trainees who want to cut back on their spending in favor of reaching other financial goals. Forming new habits around cooking and eating is challenging but certainly not impossible, even for busy researchers.

prepare food busy schedule

A version of this article was originally published on GradHacker.

If you are looking to “give yourself a raise” by reducing your spending on food, the go-to suggestions are to:

  • Reduce the number of meals you eat in restaurants or as take-out.
  • Prepare food from base rather than pre-processed ingredients; shop the perimeter of the grocery store.
  • Buy food in season.
  • Don’t waste food.
  • Buy in bulk.
  • Plan your menus.
  • Stick to your shopping list.
  • Patronize alternative food retailers.

Sometimes trainees justify their high food spending by citing long hours on campus and variable schedules. They tell themselves they don’t have time to plan, shop, or cook or they can’t commit to being home by dinnertime. They are often inexperienced in the kitchen, which means they rarely cook or are slow when they do.

Early on in my grad school career, I fell into some of these high spending patterns. I ate out with classmates because I wanted to bond with my peers. I wasn’t very capable in the kitchen, subsisting largely on sandwiches, fruit, salads, and canned goods. When I did cook, I picked rather involved recipes from cookbooks with several ingredients I wouldn’t use again, and making each meal took a large investment of time. I often stayed late on campus, and I ate far too many meals at Panda Express because I hadn’t planned ahead.

Over the course of my grad school career, I slowly improved both my time management and food preparation skills to the point that I was able to reduce the amount of money I spent on food while still feeling satisfied with what and with whom I was eating. My health also improved in parallel with my nutrition.

Sometimes the stumbling block in our efforts to reduce our spending is not that we don’t know how to spend less but rather that we don’t understand how to adjust our lifestyles to meet our new goals. The remainder of this post will not focus on how to spend less money, but how to make typical strategies for spending less money on food more palatable to a grad student or postdoc.

Think ‘Food Assembly’ or ‘Food Preparation’ Rather than ‘Cooking’

Novices in the kitchen may be intimidated out of preparing much of their own meals because they don’t know how to replicate, especially in a time-efficient fashion, the meals they are accustomed to eating in their parents’ homes, dining halls, or restaurants. But feeding yourself doesn’t have to involve skilled or elaborate cooking; you can reframe it as food assembly or food preparation.

Identify a few simple (components of) meals that you like that have only a single or a small number of ingredients and may or may not involve ‘cooking.’ You’re the only one you need to please with your meal, so don’t worry about whether it would be worthy to bring to a potluck.

Some of my favorite meals during grad school that involved little to no cooking were spinach salads loaded with vegetables and hardboiled eggs or ham, curry tuna salad paired with fruit, tuna mashed with avocado, a taco bowl, and a bunless cheeseburger with steamed broccoli.

Get into a Groove

Repetition is an amazing time-saver when it comes to eating out of your own kitchen. You don’t have to master every cooking technique out there; you just have to become competent at preparing a small number of meals that you like. Rotate through each meal in your wheelhouse at whatever frequency you need to keep from getting bored; add in new foods and techniques slowly so you don’t become overwhelmed.

Some personalities are more amenable to this strategy than others. My husband has eaten virtually the same breakfast and lunch nearly every weekday for years, and before we were married he only ever cooked a handful of different dinners; this amount of variety is satisfying to him and certainly has cost him very little in terms of time and money. Disabusing myself of the idea that I needed (or wanted) a different meal every day of the week was one of my big breakthroughs in committing to preparing my own food while pursuing my PhD.

Establishing patterns in your weekly or monthly meals also makes grocery shopping much easier; you don’t have to spend much time making a list or running to the store for forgotten items.

Acknowledge Your True Schedule

I didn’t have many peers in graduate school who seemed to keep a fixed work schedule, and I don’t remember any non-parents doing so. On top of the large number of hours many researchers put in each week, the nature of research often demands time flexibility. I frequently found myself staying on campus well past what my body told me was dinner hour to finish up labwork, meet up with classmates for a study session, or knock out some administrative tasks.

Early on in grad school, I didn’t plan ahead for these evening workday extensions; while I was quite consistent in bringing lunch to campus daily, I was ‘forced’ to buy dinner on campus if I wanted to stay late. Once I acknowledged that I would be eating dinner on campus from time to time, even if I didn’t know exactly on which days of the week that would occur, I started to plan for it. I prepared a few refrigerator-stable, microwavable, single-serving meals each week to keep in my office for the late nights, replenishing my supply as needed.

My favorite microwavable dinners to keep on campus were chili, split pea soup, flaxseed meal pizza, Mexican lasagna, and pasta with sauce. Full meals aren’t even needed in many cases to help you resist the convenience food available on campus; there’s really no reason to not keep some snacks around to tide you over. Easy room-temperature or refrigerator snacks to keep in your office are instant oatmeal, nuts or nut butters, yogurt, hardboiled eggs, cheese, raw vegetables, and fruit.

Don’t Allow Yourself to Get Too Hungry

‘Never go to the grocery store hungry’ is great advice; hunger can sap our willpower to stick with our eating plan, causing us to overbuy expensive, unhealthy, or unnecessary food. As a graduate student working sometimes long and late hours, I realized that allowing myself to become quite hungry caused me to make poor eating choices on campus and at home in addition to at the grocery store. It’s pretty difficult to arrive home hungry and take the time needed to prepare a meal, especially for a slow cook.

I started flipping my schedule around; nearly every weekday evening, I ate a pre-prepared dinner (or snack) right when I arrived home, and then cooked subsequent days’ meals later in the evening when my hunger was already satisfied. An alternative is to do as much food preparation as possible in advance (washing, chopping, saucing, etc.) so that finishing your meal when you arrive home takes a minimal amount of time.

Batch Cook

Acquiring a slow cooker halfway through grad school absolutely revolutionized how I prepared food; it was my introduction to batch cooking. Batch cooking is preparing multiple meals at once to freeze or refrigerate until they are consumed. Slow cookers are not the only way to batch cook, but they are an incredible tool for preparing large quantities of food at once with relatively little active work or skill needed. Batch cooking usually doesn’t take any or much more time than preparing a single meal, so it’s perfect for a busy trainee. A single person can prepare a meal of 4 or 8 servings and eat for a week off that one-time effort!

Socialize Economically

The connections you make in graduate school are very important for your career; I would not suggest that you skip chances to engage socially with your peers simply because you are trying to spend less money on food. You can, however, often socialize in a manner that limits the damage to your budget. For example:

Changing your eating habits is certainly not easy. However, by overcoming the challenges to eating out of your own kitchen while you are still a student or postdoc, you can effectively give yourself a raise both during your training and throughout the rest of your life.

How have you kept your food spending low as a graduate student or postdoc?

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?