How to Financially Manage a Once-Per-Term Fellowship Paycheck

In some PhD programs, graduate students on fellowship are paid only once per semester or trimester, between 2 and 4 times per year. This pay frequency engenders unique challenges and opportunities for those PhD students. The less frequent your pay, the more dire the consequences can be if you don’t manage it satisfactorily. This article will walk you through all the areas of financial management that you need to consider when you only receive one fellowship paycheck every three to six months.

The Good News

Fellowship (and training grant) income is different from most income. I call it “awarded income” as it is technically not given in exchange for work. On the other hand, “employee income” is what you receive for work, such as research (a research assistantship) or teaching (a teaching assistantship).

Some universities use these terms differently, but at the end of the day the way to differentiate them is by what tax form you do or do not receive at tax time. Employee income is reported on a Form W-2, and awarded income is not.

In a typical employer-employee relationship, the employee works and then receives their pay after the pay period has ended, whether that is weekly, biweekly, semimonthly, or monthly.

Because fellowship income is awarded and does not have to follow a period of work, it can be awarded at any time.

Since your fellowship income is awarded once per term, the good news is that you’re receiving that income up front, in a sense. You receive the income near the start of the multi-month period that it is intended to fund, which I’ll call the budgeting period in this post.

That’s the good news: You receive your income at the start of your budgeting period in a sense, instead of at the end of a pay period. That makes the transition onto fellowship income much easier since you do receive a lump sum up front. However, the corollary is that coming off of this type of income can be very difficult—more on that later.

When Exactly Will Your Paychecks Arrive?

As soon as you find out that you are switching to a once-per-term pay frequency, you should inquire about the date on or by which you can expect to receive your paycheck and whether you have to do anything to trigger its payout.

Often, the answer will be vague, for instance a range of a couple weeks or even a month. If it is specific, ask if fellowship pay has ever been doled out late—this is a good question to ask the administration as well as your fellow PhD students.

Then, no matter the information you are given, build into your plans that the pay might come at the end of the stated range or some time after the stated date.

I have heard horror stories from graduate students whose once-per-term fellowship income arrived weeks later than the date they were told, and sometimes that the student had to request a “refund” from the Bursar’s office before it was paid (of which they were not informed in advance).

It’s quite unlikely that an employer would issue their employee’s paychecks late. But again, this is awarded income, so the same rules are necessarily in place.

When it comes to your paycheck dates, play “offense” by being proactive about finding out the above information and taking any steps you are supposed to, but also play “defense” by reserving within your own finances the ability to pay for your expenses for an extra few weeks or month in case your next paycheck does arrive after you expected it to.

In What Amount(s) Will the Paychecks Be?

When you found out that you won your fellowship, you were certainly told its value, i.e., how much money you would be paid over the course of a year.

However, your fellowship award might not be distributed to you evenly throughout the year. If nothing else, it’s common for the summer term to be paid at a lower (even zero!) or higher level than the academic year.

Another consideration is whether you are responsible for paying any fees or similar out of your pocket. In the case of fellowship income, those fees might be automatically deducted from your award before it is distributed to you, which can be jarring if you are not expecting it.

Income Tax

With this type of once-per-term fellowship income chances are good that your university/institute is not withholding income tax on your behalf. (If it is, you can disregard this section!)

If no income tax is withheld from your fellowship paychecks, you have two important money management tasks to accomplish:

1. Calculate and set aside the right amount of money to pay your eventual income tax bills.
2. Determine if you are required to pay quarterly estimated tax.

Basically, in step 1, you’re estimating the amount of tax you’ll have to pay, and in step 2, you’re figuring out when you have to pay it (quarterly or yearly).

The best way to accomplish both with respect to your federal tax (you may also be responsible for paying state tax!) is to fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. If that seems intimidating to you at all, please check out my resources to assist you and provide workarounds:

Step 1: Estimate Your Tax Bill

Sign up below to receive by email a spreadsheet that helps you with estimating your federal tax due for the year and how much you should save from each of your paychecks. You’ll receive follow-up emails explaining more about how taxes work for fellowships and then be subscribed to my mailing list!

Step 2: Determine If You Must Pay Quarterly Estimated Tax

It’s very common for fellowship recipients, if they are on fellowship for a full calendar year, to be required to pay quarterly estimated tax. Basically, instead of your employer (if you had one) sending the IRS a slice of each of your paychecks automatically, you receive your full pay and have to make manual payments to the IRS.

The Estimated Tax Worksheet on p. 8 of Form 1040-ES will definitively tell you if you are required to pay your estimated tax quarterly or if you can pay your full bill when you file your annual tax return.

If this is daunting to you, I recommend that you sign up for my workshop, which assists fellows in exactly your situation. It walks you through how to fill out every single line of the Estimated Tax Worksheet and covers several special scenarios that are common to PhD students, such as what to do when you switch on or off of fellowship midway through the calendar year. I even outline a shortcut method that allows you to skip filling out most of the form and still avoid being penalized by the IRS!

How to Manage Spending

The most common question I hear regarding once-per-semester or once-per-trimester fellowship income is, “How do I budget with this infrequent income?”

Yes, it is a good thing that this money is paid in a lump sum up front, but it does put a lot more responsibility on the graduate student than they may have bargained for.

Budgeting Regular Expenses

A robust budget is even more vital for a fellow in this situation than it is for a person receiving more frequent paychecks. While Americans living paycheck-to-paycheck might experience a few days of austerity when it turns out there is “more month than money,” in your case overspending could require weeks of austerity, which is rather infeasible.

What I mean by a budget in this case is to predict very well the expenses you will incur over the course of your budgeting period plus an extra few weeks or month.

Those expenses include all your regular and necessary fixed expenses (e.g., rent, fixed-rate utilities, insurance premiums, subscriptions) and variable expenses (e.g., groceries, utilities billed by usage). They also include what you project that your regular discretionary expenses will be (e.g., eating out, entertainment, shopping).

Budgeting Irregular Expenses

Irregular expenses are expenses that you incur once per year or a few times per year.

Examples of irregular expense categories are:

• University bills, e.g., tuition, fees, health insurance premium, textbooks, parking permits
• Insurance premiums paid yearly or every six months
• Car maintenance/repairs
• Travel
• Electronics
• Moving expenses
• Household furnishings
• Tax

Irregular expenses end to trip up graduate students for two reasons:

1. The expenses tend to be large relative to a graduate student’s cash flow.
2. Graduate students are often relatively new to budgeting and managing money, so they don’t have past experience to rely on to predict these expenses.

If a graduate student identifies this kind of expense as a budgeting issue, I recommend that they create a system of targeted savings accounts to help predict and save up in advance for the irregular expenses in their life.

You can read more about how to create this type of system in this podcast episode: How to Solve the Problem of Irregular Expenses.

Essentially, you create a unique savings account for each category of expenses and save regularly into that account, pulling money from it only when you incur a related expense.

The advantage that you have in receiving your income for several months up front is that you can also fund your targeted savings accounts up front, at least for the several-month period that your paycheck covers.

Account Structure

I really believe in setting up checking and savings accounts to serve your needs, not simply following the crowd—hence the system of targeted savings accounts I just reviewed.

While I imagine some people can keep all of their fellowship income in their checking account and draw it down over the course of the semester or trimester without running out of money or making sub-optimal financial decisions… I wouldn’t risk it!

Many graduate students I speak with who have once-per-term fellowship income use a separate savings account to hold the bulk of their paycheck and pay themselves a salary of sorts with a once-per-month automated transfer.

While this system simulates a monthly paycheck, it doesn’t take advantage of the unique property of receiving the large paycheck up front.

Instead, what I would do is set up several accounts (you might need to use two banks for this!):

• One checking account for your monthly expenses that are fixed or only vary slightly with usage, e.g., rent, utilities, subscriptions. You should set up auto-drafts to pay these bills directly from this account.
• One checking account for your variable and discretionary spending, e.g., groceries, eating out, entertainment, shopping. You can spend directly from this account and/or use it to pay your credit cards.
• One savings account that holds the part of your fellowship paycheck that you will draw down.
• Your set of targeted savings accounts.

Here is how I propose that you use this set of accounts:

1. When you receive your fellowship paycheck, deposit it into your ‘monthly bills’ checking account.
2. Calculate using your budget the amount of money you will spend on those necessary monthly expenses throughout your budgeting period; round up or leave some buffer. This amount will stay in this checking account, and all those monthly bills will be paid from this account.
3. Transfer the rest of the income to the savings account for holding it over the budgeting period.
4. Fund your targeted savings accounts according to your calculations for your irregular expenses.
5. Above a certain buffer amount of money, divide the balance in your holding account by the number of weeks in your budgeting period. Set up an auto-transfer to move this amount of money from savings to your variable and discretionary spending checking account. That is the amount of money you can spend that week on the categories it covers.
6. Pull money from your targeted savings accounts into your checking account as needed to cover your planned-for irregular expenses.
7. Repeat every time you receive a fellowship paycheck.

While somewhat complex, the advantage of this system is that it helps you make spending decisions across three time frames: yearly (for the targeted savings), monthly (for the monthly bills), and weekly (for the variable and discretionary spending), which are otherwise difficult to synthesize.

Reaching Long-Term Financial Goals

In the budgeting exercise I outlined above, I did not include any line items for saving or repaying debt. While these steps are out of reach for graduate students who are paid only enough to survive (or not even that much), as a fellowship recipient, you might have more financial wherewithal.

If you are being paid above the local living wage or more than your peers who are not on fellowship, I encourage you to set a monetary financial goal so that you come out of graduate school with more money to your name than you went in with.

If you don’t yet have any emergency savings, make a ‘starter’ emergency fund your #1 goal! Open up yet another savings account and nickname it ‘Emergency Fund.’ Contribute money to it until you reach at least $1,000 and perhaps up to two months of expenses. When you are just getting started with savings, this Emergency Fund can double as your in-case-my-paycheck-is-late fund, but as you create more financial wherewithal, they should add on top of each other.

After that, your goal might be to increase your emergency fund to 3-6 months of expenses, pay off debt, or invest for retirement or other goals.

You can still accomplish these goals with infrequent fellowship income. As you catalog your expenses, write in a savings goal to your budget as well. You can put money from your paycheck toward this goal shortly after you receive it if you’re confident you won’t overspend the money you keep in cash. Alternatively, you can put the money toward your goal near the end of your budgeting period once you’re sure you won’t run out of funds! A combination of the two might be even better: contribute a minimum amount first and set aside another amount as a stretch goal that you can contribute once you near the end of the budgeting period.

Switching Off of Fellowship Income

Just as you looked into the dates of your expected paychecks when you switched onto infrequent fellowship income, you need to ask about the frequency and pay dates of the assistantship or other type of income that you are switching onto when your fellowship ends.

Again, you can expect to be paid at the end of or after the pay period rather than at the beginning. That means you will have to pay for your living expenses for an extra couple of weeks or a month off of your fellowship income before your assistantship income arrives.

For example, if your fellowship was for an academic year and summer, September through August, and you switched onto assistantship pay at the start of the following September, it would be typical for your first assistantship paycheck to come at the end of September or beginning of October. That’s 13 months of living expenses that your fellowship needs to fund, not 12.