Personal Finance for PhDs

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Emily

Should I Buy a Home During Grad School?

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While it may seem outlandish to some people, in certain college towns a graduate student stipend is sufficient income to purchase a home, particularly if combined with a second person’s income. However, should PhD students buy homes while they are still in graduate school? Graduate school is a somewhat unique life situation, so graduate students must ask themselves a number of questions beyond what is typical for the average person considering buying a home.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

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How many more years of school do I have? How likely am I to finish the program? Will I stay in the area when I’m done?

The broad rule of thumb is to only buy a home that you plan to stay in for at least 5 years (however, the exact breakeven point will vary with the local market and individual purchase). If you plan to stay in the same city post-grad school, buying is a more viable option. If you plan to leave the city and do not want to become a long-distance landlord, buying near the start of a PhD program is most advantageous.

Keep in mind that the overall PhD completion rate is only somewhat north of 50%; grad students who leave grad school earlier than anticipated may feel saddled with a home at an inopportune time. If you plan to rent the home after you move on from it, whether the property is a good investment must be considered before the time of purchase. Be as realistic as possible and consider the best- and worst-case scenarios with respect to a home purchase.

Further reading: Rent vs. Buy Calculator

Will I live alone, with my family, or with roommates/renters?

With whom one lives certainly will influence the size of the home and the mortgage cost. If living alone is your priority, it is more likely that you will find an affordable rental than home for purchase. If you are open to living with roommates and have enough savings to afford the home on your own if necessary, buying a multi-bedroom home may be a good option. If you want to live only with your family, you will have two incomes to consider when looking for a mortgage and need to seek an appropriately-sized home.

Will my housing needs change in the next few years?

Graduate school often corresponds with a period of life with many transitions, such as family formation. Will the home purchased at the start of graduate school as a single person serve a married couple and/or a child just as well in a few years? What if you tire of living with roommates?

Do I qualify for a mortgage (income type, job history, credit)?

Whether or not a graduate student can qualify for a mortgage is much more of a question mark than a person with a typical job with the same income. Of course, a graduate student’s income is low, so a co-borrower may be necessary in some markets. The way some graduate students are paid (namely, fellowships) may not qualify for a mortgage with some lenders who don’t understand fellowship income. However, if you shop around for a mortgage thoroughly you should be able to find a lender that is willing to scrutinize your situation and determine that you are a good risk if you can demonstrate that your income will be steady.

Do I have sufficient savings to cover a down payment, fees, repairs, and vacancy?

Buying a home is very expensive in the short-term, and some homeowners are unlucky to live in a home in just the period when it needs a lot of care.

First, there is the down payment and cost of purchase. Depending on the permissibility of the lending environment, it may be possible to get a home loan with little to no money down, but that is almost never a good idea. Assembling a larger down payment (10 or 20% of the price) gives instant equity in the home, proves to yourself and the lender that you are capable of saving money, garners better loan terms, and avoids paying Private Mortgage Insurance (PMI) (> 20%). Closing costs are 2-5% of the home’s value ($3,700 on average) and are typically paid by the buyer (source), while realtor fees are typically paid by the seller.

Second, a home requires ongoing maintenance. A rule of thumb is that you should expect to pay on average 1% of the home’s value per year in repairs. However, as that is only an average and an estimate, a homeowner’s emergency fund should be sufficient to cover several ‘years’’ worth of maintenance at once. If you are renting to roommates, the responsibility to keep a sufficient emergency fund is even greater for more immediate repairs and to cover vacancy.

Further reading: How Much Does It Cost to Maintain a House?

Am I prepared to care for a home?

This is a lifestyle question. Some people are very excited to maintain their own homes, while others lack the knowledge, skill, or time to do so. If you are a first-time homeowner, you need to consider what the home will require of you and whether you can provide it.

Can I afford to furnish the home?

Unfortunately, owning your own home is sometimes accompanied by the pressure to upgrade. Suddenly, the secondhand furniture from Craigslist doesn’t mesh with your new home, and you have additional rooms and a backyard to furnish. Whether or not you choose to buy additional or newer furniture is up to you, but just be aware that if you can’t afford to you may have to overcome some temptation and perhaps social pressure.

How strong is the market historically, both for selling and renting?

It’s not possible to predict which way a housing market will move; you should be financially and emotionally prepared for your new home to dramatically drop in value right after you purchase it. However, you can look at the history of the housing market in your city to see how the patterns of boom and bust have played out locally – some areas are more stable or tend to recover more quickly than others. College towns, generally, have a stable demand for housing, if you plan to rent your home while you live in it or after.

Whether or not you will be able to buy a home as a grad student depends both on the local housing market and the resources available to you (a second income, savings). While not many graduate students are homeowners, those that are have a great opportunity to grow their wealth through (possible) equity and/or rental income, at least in comparison to what is spent on rent.

Seonwoo, Georgia Tech, electrical and computer engineering – Commuting by Bicycle

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My commute is 4.5 miles each way and takes about 25 minutes on my bike. It’s a great way for me to start off my day because I really enjoy cycling. But what really clinches the deal is that there are showers in my lab building! In my mind this is a no brainer, especially because short drives are bad for your car. I never forsaw biking as much as I do now, but my dad gave me his old bike when he upgraded his, and I enjoyed it far more than I expected. This strategy can take a long time for it to pay off in a strict financial sense. While the marginal costs of cycling are certainly lower than the marginal costs of driving, you may need to cycle a lot of miles to realize a direct financial benefit depending on how much you spend on your bike and other accessories. However, there is a massive health benefit to cycling, which indirectly reduces future health care costs. Also, it gives you another backup mode of transportation (albeit with limited range) in case your car dies.

Seonwoo, Georgia Tech, electrical and computer engineering – Learning to invest

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Investing seems like a daunting task, but really, it doesn’t take very long to learn how. I knew nothing about investing before March 2014. By the end of the month I knew 90% of what I needed to know (and I didn’t know the other 10% because I simply didn’t know where to look – see links below). I opened a Roth IRA at the end of March and a brokerage account at the end of May. Keep in mind I wasn’t actively reading and learning about investing all the time during the whole month – I am a busy grad student after all! My investing strategy is really simple: I only invest in three mutual funds. At the end of every month, I figure out how much money I have left over after expenses, and just buy those three funds. I’m really glad I got started because I know that while it will be a bumpy ride, taking the plunge and investing in stocks is the best way to grow your money beyond inflation. To get started, I’d recommend Jim Collins’s stock series first and the Bogleheads wiki for details on specific topics.

Seonwoo, Georgia Tech, electrical and computer engineering – Tracking expenses

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It’s amazing how much money we can spend on an everyday basis. I think a lot of people will have noticed this at the grocery store – you pile many small non-costly items into your cart, and when you check out the bill is quite large. The same thing happens with your overall budget. It’s usually not the occasional big purchase that blows up your budget, it’s the regular small purchases. And it’s hard to realize just how much you’re spending on those small things until you track your spending. I think what really made this hit home for me was one month where I ended up going to bars more times than normal (out of town friends came by). I spent maybe $5 here and $7 there on drinks. By the time I sat down to total all of that, I realized I had spent $66 at bars that month! These seemingly small purchases really do add up. Imagine what happens if you eat out regularly! You can track your spending passively with something like Mint, or more actively with something like You Need a Budget. It doesn’t matter, so long as you track it.

What Is the Best Way to Pay Down Debt?

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The fastest way to get out of debt is energetically. If you want to get out of debt ahead of the schedule the minimum payments have you on, you must put forth effort and discipline both to free up cash flow by earning more or spending less and actually applying that cash flow to your debt in the form of additional payments.

One Debt

If you have only one debt or one type of debt and it’s going to be a long payoff process, you are going to have to find ways to keep yourself psychologically motivated through the process. You can do this by creating a visual representation of your progress, celebrating debt repayment milestones, treating yourself occasionally, reporting your progress to other people, etc.

Further reading: How to Get (and Stay) Motivated for Long-Term Debt Repayment, How to Stay Motivated While You Pay Off Debt

Multiple Debts

If you have multiple debts or multiple types of debt, there are two popular math-based methods for prioritizing your debt payoff journey, and one other practical option. In any case, it is considered psychologically beneficial to focus your energy on only one debt at a time. Make the minimum payments on all your debts, but channel your extra payoff money to just one until it is completely paid off.

The question is how decide in what order you should pay off your debt.

The Debt Snowball

The debt snowball method’s main champion is Dave Ramsey, a get-out-of-debt guru practicing today. In this method, you prioritize your debts by the payoff balance, smallest to largest, irrespective of the interest rates. The idea is that by getting an early win of paying off one debt completely, your motivation will grow and you will process through your list of debts at an ever-increasing rate. By the time you get to the debt that you expected to take you the longest to pay off, you have many smaller wins behind you to give you confidence to see the process through. Empirically, it has been shown that people who employ the debt snowball method get out of debt the fastest (psychology wins over math).

Further reading: ‘Snowball’ Debt Method Is Fastest Way To Pay Off Your Bills, Research Shows

The Debt Avalanche

In the debt avalanche method, you prioritize your payoff list by interest rate, highest to lowest. This method is the most mathematically optimal way to approach your debt payoff. If you devote the same amount of payoff money into the debt snowball method and the debt avalanche method, you will get out of debt faster with the debt avalanche method. Some people can become very motivated by interest rate math, and these people are especially suited to start their debt payoff journey well with the avalanche method.

Further reading: The Correct Way to Pay Off Personal Debt: The Debt Avalanche

What Bothers You the Most?

The debt snowball and debt avalanche methods both try to argue that there is one best way for everyone to approach paying off debt. But you know you best. If the goal is to pay off debt quickly and with great energy, you should ask yourself which debt bothers you the most or which one you are most excited to eliminate. Perhaps the answer will be the debt with the smallest payoff balance or the debt with the highest interest rate. Perhaps the answer will be the debt associated with the collector who is calling you multiple times per day or the debt you are most embarrassed to have taken out. Use what you know about your own individual psychology to start your debt payoff process off well and use that motivation to carry yourself through your list. It’s also perfectly fine to switch focus once you are left with only low-priority debt, if saving or other financial goals are more pressing than your remaining debt.

What Should I Do about My Existing Debt?

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If you have debt from the past and are currently living within your means, you have the option of doing more than making the minimum payments. How fast you want to get out of debt will depend both on the math of your situation and on your personal disposition toward debt and risk.

While you are a graduate student, you have the option of deferring your student loans, but the analysis laid out below will still be helpful in deciding whether to pay down those loans while you are in graduate school or to wait until after graduation.

Math and Facts

When deciding how quickly to get out of debt (or when evaluating new debt), the math of the situation should be given considerable weight. The most important factor is the interest rate on the debt. How does it compare to the long-term average rate of inflation? If you are considering paying down debt vs. investing, how does it compare to the long-term average rate of return you expect on your investments? How much interest are you paying on a yearly, monthly, or daily basis on your current debt balance? The higher the interest rate, the more weighty the argument that you should aggressively pay off that debt.

In addition to the interest rate, there are other attributes of your debt that should influence how quickly you pay it off (arguments for slower appear on the left, faster on the right):

  • fixed vs. variable interest rates – interest rates are set to rise at any time, so the low current variable rates are unlikely to stay low forever
  • low vs. high fees and penalties (pre-payment, late payment)
  • flexible vs. inflexible repayment options
  • secured vs. unsecured – this means whether the debt has collateral backing it, such as property, or whether it has no collateral tied to it, such as credit cards and student loans
  • bankruptable vs. non-bankruptable – student loans can virtually never be discharged in bankruptcy

Personal Disposition

Math alone is unlikely to hold 100% sway over your decisions regarding your debt, especially because risk is difficult to quantify. Your disposition toward debt matters greatly as well. There are some financial gurus today who will tell you that any debt you have is an emergency and you should pay it off as fast as possible. There are other financial gurus who won’t get fussed about you keeping low-interest debt while aggressively saving and investing. You have to determine where you fall with regard to your personal disposition toward debt, independent of the math of the situation. Does having debt give you anxiety? Are you more excited about meeting other financial goals while making minimum payments on debt? The only disposition that is really dangerous for your finances is an apathetic one in which you devote no energy to increasing your net worth; in that case, your debt is likely to become expensive.

Further reading: News Flash: Your Debt Is an Emergency, 11 Great Reasons to Carry a Big, Long Mortgage

What you bought with the debt may also play a role in how quickly you want to pay it off. If the debt was for a long-term appreciating asset such as a home or an education, you may be less inclined to pay it off quickly. However, consumer debt such as for cars or shopping (and sometimes student loans), which is debt that enabled you to live beyond your means for a time, is a type of debt that you may want to quickly put behind you.

In the end, the decision of how quickly to get out of debt is up to you, and it will depend both upon the math of your situation and how you feel towards debt. These factors also play important roles in your choice of which debt repayment method to use. As a graduate student, you likely don’t have a lot of disposable income to put toward debt repayment even if you want to. But wherever you start today, if you choose to be energetic about paying off your debt, you can find ways to increase the money you have available to pay down debt by implementing frugal practices or increasing your income.

Further reading: The Goal: Defeating Student Loan Debt