Personal Finance for PhDs

Live a financially balanced life - no Real Job required

Emily

How to Establish and Improve Your Credit as a Graduate Student or PhD

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In this episode, Emily explores the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, she also reveal the biggest credit killer that she sees among the PhD community and how to overcome it. As ever, the content is tailored to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

Links Mentioned in the Episode

Intro

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 6, and I don’t have a guest today, but rather I’m exploring the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, I also reveal the biggest credit killer that I see among our community and how to overcome it. As ever, I have tailored the content in this episode to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

I’m eager to devote time to this important topic because many PhDs, especially those who grew up outside the US or are from underprivileged backgrounds, don’t have credit or have poor credit or are concerned about their credit. If you have good credit, it’s not something you have to pay much attention to. But if you have poor credit or no credit, it can really hold you back financially and limit your life choices.

The credit bureaus start tracking our financial actions as soon as we start taking any. For many of us, that starts when we’re minors or college students, long before we may have the financial acuity to safeguard and foster our credit. Very sadly, some children and adults are victims of financial fraud, which can destroy your credit through absolutely no fault of your own, and it can be very difficult and painful to rectify.

I expect listeners of this episode to run the gamut, from PhDs and graduate students with great credit to those with poor credit to those with no credit. You will all find great information in this episode, including what steps you should take to establish or improve your credit, if necessary, and some reassurance as to when you can put your credit out of your mind.

What Is Credit?

Asking the question “What is credit?” seems like a basic place to start this episode, but I actually had to search a little harder for a good definition than I was expecting. In fact, the best definition I found was for the term creditworthiness rather than credit, and it’s from Investopedia.

“Creditworthiness is… how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you. Creditworthiness is determined by several factors including your repayment history and credit score.”

Basically, credit is a tool that lenders use to evaluate how risky you are to lend to, which affects whether whether they will work with you at all and what interest rate you’ll be offered. This evaluation is based on your past use of credit.

All of your credit-related activity is tabulated in your credit report. Actually, you have multiple credit reports, each prepared by a different credit bureau. There are three main credit bureaus: Equifax, Experian, and Transunion. In theory, they are all working off of the same information.

The information that is included in each of your credit reports is 1) personally identifiable information, such as your name, social security number, and address; 2) lines of credit and payment history, which is all of the loans and credit that have been extended to you and your repayment history with each, going back approximately seven years; 3) credit inquiries, which is a record of each time your credit is viewed by a potential lender; and 4) public record and collections, which is a record of bankruptcies or bills that have gone to collections because you neglected to pay them.

Your credit reports are used to calculate credit scores. You actually have many credit scores calculated in different ways by different bodies for different purposes. The most popular credit score for mortgages and similar loans is the FICO credit score. A close second is the VantageScore. We’ll return in a few minutes to how those scores are calculated and what they mean.

The main points I want you to take from this section are that your credit scores are based on your credit reports, which are records of all of your credit-related activity.

Why Credit Matters

Why should you or anyone else care about your credit or your credit score in particular? You can see that your credit is based on how you’ve treated your debt and some other financial obligations in the past, and it was developed to help lenders asses whether they should lend to you under the assumption that you will behave in the future as you have in the past. So clearly your credit matters if you are trying to take out a loan, like a mortgage or car loan, or a line of credit, like a credit card.

Rather strangely, your credit score is also often referenced when someone wants to quickly judge how financially responsible you are. Landlords, utility companies, and insurance companies often access credit scores, and some employers and even governments do as well. It is a big leap to assume that how you’ve treated debts in the past is predictive of general financial responsibility in the future, and I think it’s quite unfair.

People who have no credit are often quite financially responsible because they have managed to run their lives without the use of debt, but that’s not reflected in their nonexistent credit score. Also, credit you may have had in your home country does not translate to the US; you have to start over. And for anyone with poor credit, the actions and/or circumstances that created that low credit score are not ones that will necessarily be repeated in the future. You can change your financial behavior on a dime, but it takes a long time for your credit score to catch up.

The Equal Credit Opportunity Act of 1974 ostensibly prohibits discrimination based on race alongside other factors, but in practice there is a credit gap. A recent study by Credit Sesame found that 54% of Black Americans had no credit score or a poor or fair credit score, while only 41% of Hispanic Americans, 37% of white Americans, and 18% of Asian Americans had the same. The credit gap stems from the Black-white wealth gap, homeownership gap, employment gap, and income gap, and perpetuates the wealth gap and homeownership gap.

The credit gap is caused by systemic problems, and systemic solutions are warranted. However, in this episode, I’m going to focus on what you can do as an individual to impact your own credit score.

What is a good credit score and how is it calculated?

The FICO credit score and VantageScore range from 300 to 850. According to a lovely Nerdwallet graphic linked in the show notes, a score of 720 to 850 is considered excellent, 690 to 719 is good, 630 to 689 is fair, and 300 to 629 is poor. For another reference point, a FICO credit score of 760 and above will get you the best interest rates on a mortgage.

https://www.nerdwallet.com/article/finance/what-is-a-good-credit-score

While the exact algorithm for calculating FICO credit scores is proprietary, we know that 35% of the FICO score is based on payment history, 30% on amounts owed, 10% on new credit inquiries, 15% on the length of your credit history, and 10% on the mix of credit. We’ll get into what actions you can take in each of these areas to improve your credit score momentarily.

How do I establish credit?

Before we get there, I want to speak to those of you who do not have any credit history in the US. I do think it’s worthwhile to establish credit history and a credit score if you are not yet financially independent. A good credit score is useful as a renter and a virtual necessary when taking out a mortgage.

As I explained earlier, credit is self-referential. To have credit, you must have had credit. So how do you get your foot in the door?

The simple and free way to do so is to take out a secured credit card. This is a special kind of credit card designed to help people establish credit. You turn over a deposit, which becomes your line of credit. You borrow against that line of credit and then pay it back. After about six months, you should have a credit score and be able to move on to more conventional debt products, if you want to. These credit cards are often marketed as student cards.

Alternatively, if you have a family member who is very responsible with credit, you could ask to be added as an authorized user on one of their credit cards. In this way, their good credit sort of rubs off on you. You don’t actually have to even have or use your authorized user card. Just make sure that the person you ask to do this pays off their credit card balance in full every statement period. As soon as your credit score is established and high enough, take out your own credit card to establish your independent credit history. As I learned from Sam Hogan, a mortgage originator with PrimeLending (Note: Sam now works at Movement Mortgage) and an advertiser with Personal Finance for PhDs, in one of the live Q&A calls we’ve held, your credit score may look good with only an authorized user card in your history, but you won’t qualify for a mortgage on that alone.

There are two other solid ways to establish credit, but they are not usually free, and therefore I suggest you only undertake one of them if it is very financially important to you to establish the highest possible credit score quickly. That’s not usually necessary, so these are sort of extreme steps.

Method #1 is to take out a loan with a bank, sometimes specifically called a credit builder loan. This is an installment loan, so it’s a good complement to the revolving line of credit you likely already have with a credit card. It’s not enough to take out the loan, but rather the point is to make the minimum payments consistently to demonstrate that you are capable of repaying debt responsibly. The cost here is the interest you’ll pay throughout the repayment period, so you should shop around for the best rate available to you. You could also consider doing this with a student loan if you are a student, but since the loan won’t go immediately into repayment, I’m not certain it will have as positive an effect on your score as a credit builder loan would. Plus, student loans are not dischargeable in bankruptcy, if it came to that, so that’s a strike against them in comparison with a bank loan.

Method #2 is to pay a service to report the payments you are already consistently making to the credit bureaus. For example, the service might report your rent payment, which would not normally be included in your credit report. The cost here is the fee for the service, so again, shop around. You won’t have to keep the service up indefinitely, only long enough to qualify for another debt product.

This last tactic of reporting rent payments to credit bureaus and having them be calculated into credit scores is, from what I can tell, the top method being pursued to address the credit gap. A few landlords are starting to report rent payments to the credit bureaus on behalf of their tenants for free. The newest versions of the FICO and VantageScore algorithms do take rent payments into consideration, but most lenders still rely on older versions of the algorithms.

How do I improve my credit?

Now that we’ve covered establishing credit, let’s go deep into how to improve credit. Please take note from the outset here that improving your credit score is a long game. You must practice good credit behavior consistently for years. Since the length of your credit history is taken into account, you really can’t attain a top credit score until you’ve been using credit for at least a handful of years.

I’m going to give you at least one suggestion from each category that goes into the FICO credit score. Don’t be shocked when one or two of the suggestions contradict each other!

35% of the FICO score is based on payment history. This is the key category. Make your payments on time and in full every time. For years.

30% of the FICO score is based on amounts owed. Pay down your debt. Pay off your debt. For a specific hack, keep your credit card utilization rate low. Your utilization ratio is the balance you owe across all your credit cards divided by the sum of your credit limits. You should keep this ratio below 30% or ideally below 10%. Please note that your utilization ratio can be viewed at any point in your statement period. So even if you pay off your credit cards in full every period, as you should, having a high utilization ratio at some point earlier in the period will still ding your score. You can keep your utilization ratio low without changing your spending by 1) requesting credit limit increases across all of your cards, 2) applying for new credit cards to increase your overall credit limit, and 3) paying off your cards multiple times each statement period instead of just at the end.

10% of the FICO score is based on new credit inquiries. Don’t apply for any new loans or lines of credit. I warned you that some suggestions would be contradictory!

15% of the FICO score is based on the length of your credit history. Basically, you just need to let time pass. It helps to keep your oldest credit card open indefinitely and to close newer accounts if you want to close any. If you haven’t opened a credit card yet, choose one without an annual fee to be that first card.

10% of the FICO score is based on the mix of credit. Specifically, this means having both revolving lines of credit, like credit cards and home equity lines of credit, and installment loans, like a mortgage, car loan, student loan, etc. If it was really important to you to improve your credit score and you didn’t have any installment loans, you could take one out, like the credit builder loan I mentioned earlier, but it will cost you.

Another great, general step to take is to check your credit reports for accuracy once per year through annualcreditreport.com, which is the government-sponsored website where you can order one credit report per year from each credit bureau. During the pandemic, that limit was increased to once per week. Keeping tabs on your credit reports is part of your basic good credit behavior.

Credit killers

Now I’d like to explore the main credit killer that I see PhDs and particularly graduate students falling into. And it’s not student loans! Believe it or not, as long as you’re current on your payments and your balance isn’t inordinately high, student loans are kinda good for your credit score. No, the big credit killer, and killer of your finances overall, is credit card debt.

According to the Council of Graduate Schools’ recent report, Financial Education: Developing High Impact Programs for Graduate and Undergraduate Students, 85% of graduate students have a credit card. Forty-five percent of those carry a balance on their cards, with 9% only making the minimum payment.

Everyone listening to this podcast episode knows that finances in graduate school are challenging at best. We can all understand how readily an emergency or unexpected expense could result in a carried balance on a credit card. But, I implore you, instead of accepting that your credit card balance will be with you until and through graduation, get aggressive about ridding your balance sheet of this most toxic kind of debt.

Ideally, you would pay your balance off by increasing your income and/or decreasing your expenses and throwing all available cash—outside of a starter emergency fund—at the debt. Depending on how high that balance is, you may not have to make these sacrifices for long.

If it is absolutely impossible for you to increase your income or decrease your expenses before you finish graduate school, you could at least mitigate the negative effects of your credit card debt. If your credit card debt resulted from the hard reality that your stipend is insufficient to pay for basic living expenses, please consider taking out a student loan to pay off the past debt and supplement your income going forward so you stay out of credit card debt. While it’s not great to be in student loan debt either, at least you can defer the payments until after you graduate. If your credit card debt resulted from an unexpected expense that is unlikely to recur, you might consider paying off your credit card debt with a personal loan from a bank or with a balance transfer credit card. That way, you can at least get a break on the interest you would have paid while you’re paying down the balance.

If you’d like to learn more about increasing your cash flow and paying down debt, please join the Personal Finance for PhDs Community at PFforPhDs.community. Inside the Community, you will find the recordings of two workshops I gave in August, titled How to Up-Level Your Cash Flow as an Early-Career PhD and Whether and How to Pay Off Debt as an Early-Career PhD. After working through the materials, you will have a plan for how to handle your credit card balance in the short and long term.

When your credit doesn’t matter

The final credit topic I’ll address in this episode is when your credit doesn’t matter and when it does. Once you have attained a great credit score of approximately 740 or above and you keep up your good credit habits, you don’t need to pay much attention to your credit. Keep paying your bills on time and in full, use your credit cards as you would debit cards, chip away at your debt, and check your credit reports for accuracy once per year. You don’t have to actively work on increasing your credit at that point—with one exception. If you are planning to take out a loan in about the next year, it would behoove you to get a little more protective about your credit. I’m particularly speaking about taking out a mortgage, but this would also help you with a car loan or similar. For example, you might stop opening credit cards months or a year in advance of applying for your new loan so that you don’t have any recent hard credit inquiries. You might pay off a smaller debt in its entirety. You might pay special attention to your utilization ratio. Above all, when you start working with a mortgage loan officer, listen to that person’s advice about what to do regarding your credit. They might instruct you to make absolutely no changes. I know that Sam Hogan, the mortgage originator I mentioned earlier, advises his clients all the time about their credit in the lead-up to taking out a mortgage. If you are looking to take out a mortgage in the near future and you want to work with someone who understands PhD income, please reach out to Sam over text or a call at 540-478-5803.

Conclusion

I hope this episode was instructive for you and clarified what steps, if any, you should take regarding your credit as a graduate student, postdoc, or PhD with a “Real Job!”

Outro

Listeners, thank you for joining me for this episode!

pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast. I’d love for you to check it out and get more involved!

If you’ve been enjoying the podcast, here are 4 ways you can help it grow:

  1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use.
  2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
  3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and effective budgeting. I also license pre-recorded workshops on taxes.
  4. Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

 See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps!

The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

What to Do at the Start of the Academic Year to Make Next Tax Season Easier

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In this episode, Emily teaches what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. She covers tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

Links Mentioned in the Episode

easier tax season

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 2, and I don’t have a guest today, but rather I will tell you what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. We will discuss tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

We are at or near the start of a new academic year, which means it’s time to take a moment to think about taxes. A few minutes of consideration at this time of year can save you a big headache and wallet-ache during tax season, so it’s worth it.

This episode has four sections, and I’m going to clearly identify at the beginning of each section who the information is for, because it will switch around. Overall, this episode is for US citizens, permanent residents, and residents for tax purposes living in the US. The various intended audiences for the sections are full-time graduate students; postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries; full-time graduate students age 23 and younger; and grad students who either moved states in 2021 or whose income is coming from a new state. Our overarching topic is what you can do now to make next tax season easier.

Please note that I am not a Certified Public Accountant or Certified Financial Planner. This content is educational in nature only and should not be considered tax, financial, or legal advice for any individual. You are entirely responsible for your own financial decisions.

Tracking Education Expenses

Section A is for full-time graduate students.

In early 2022, once you get into preparing your annual tax return, you are going to need to use your so-called “qualified education expenses.” You can use these expenses to reduce your tax liability. Depending on which higher education tax benefit you employ, your qualified education expenses will either be used as a deduction or a credit. I’m not getting into all the details now because you will figure that out during tax season, but if you want to read more, go to PFforPhDs.com/prepare-grad-student-tax-return/ for my article updated for 2020.

The action step for you at this point in the year is to keep track of any education expenses that you suspect might be qualified education expenses. Now, the education expenses that are paid through your student account are already tracked for you, and you should be able to access your 2021 statement during tax season to look at all of the transactions for items like tuition and fees. What I’m suggesting that you manually track is any education expense that you transact outside of that student account, such as textbooks, course-related expenses, and computing purchases.
What I mean by tracking is to save two types of documents: 1) The receipt of the purchase showing the price paid. 2) The document stating that the purchase was required by your course instructor, your department, your school, or your university. The document could be a course syllabus, an email, or a screenshot from a webpage. You can choose how you want to save these records, but I suggest a digital copy maintained in cloud storage.

Now, not every education expense that you track may turn out to be a “qualified education expense” as that will depend on which higher education tax benefit or benefits you choose to use for your tax return. I suggest you leave the task of figuring out what is qualified and what is not to Future You. Present You only has the responsibility to track the expenses, and Future You will thank you for that.

Awarded Income and Estimated Tax

Section B is for postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries.

Right up front, I need to define what I mean by a non-W-2 stipend or salary. I use a framework wherein there are two basic classifications for a stipend or salary that a PhD trainee might receive: employee income and awarded income. These are my own terms, so you won’t find ‘awarded income’ in IRS documentation or used by universities.

Employee income comes from the work than an employee performs for their employer. At the graduate student level, employee positions are often but not exclusively called assistantships, e.g., research assistantship, teaching assistantship, or graduate assistantship. If you have employee income and are a US citizen, permanent resident, or resident for tax purposes, this income will be reported on a Form W-2 at tax time.
The other type of income, awarded income, is more difficult to define. It is given as an award rather than for work performed. At the postbac, grad student, and postdoc levels, awarded income is often but not exclusively called fellowship income. If you are a US citizen, permanent resident, or resident for tax purposes, this income could be reported on a Form 1098-T, a Form 1099-MISC, a Form 1099-NEC, or a courtesy letter. However, there is actually no IRS reporting requirement for this type of income, so many PhD trainees receive absolutely no documentation whatsoever.

If you want to understand this framework more fully, I suggest listening to Season 8 Episode 1 of this podcast, which is titled “What Your University Isn’t Telling You About Your Income Tax.”

Now, the important things to know about awarded income, which I also call non-W-2 stipends or salaries, at this time of year are that 1) this is taxable income and 2) your university is likely not withholding income tax from your paychecks.

There are endemic rumors running around universities that this non-W-2 type of income is not taxable. While it is very tempting—and self-serving—please do not believe these rumors. Listen to Season 2 Bonus Episode 1 of this podcast, titled “Do I Owe Income Tax on My Fellowship?”, in which I clearly delineate which portion of your awarded income is taxable and which is tax-free.

One of the reasons these rumors sound believable is that, with rare exceptions, universities and institutes do not withhold income tax on behalf of their non-employees.

If your stipend or salary recently switched to an awarded income source or this is the first time you’re learning about this income tax issue, you have a few action items:

1) Figure out if income tax is being withheld from your paychecks. If it is, you’re done until tax season.

If income tax is not being withheld:

2) Fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. Essentially, you will do a high-level draft of your 2021 tax return, and the worksheet will tell you whether you are required to pay estimated tax and if so in what amount. The principle behind estimated tax is that the IRS expects to receive income tax payments from each taxpayer throughout the year as they receive their paychecks. If your employer does not withhold income tax on your behalf, this becomes your responsibility. However, there are some situations in which estimated tax is not required, and the Estimated Tax Worksheet will tell you if you fall into one of the exception categories. If you are required to pay estimated tax, please be aware that the next due date is September 15, 2021. The due dates typically fall in mid-April, mid-June, mid-September, and mid-January of each year. If you are required to pay estimated tax and fail to, you may be fined by the IRS.

3) Whether you are ultimately required to pay estimated tax or not, the Estimated Tax Worksheet will tell you how much you can expect to pay in tax above your withholding for the year. I strongly encourage you to start saving up for your eventual tax payment or payments. Divide your additional tax liability in Line 14b by the number of remaining paychecks you’ll receive in 2021 and start saving that amount of money from each paycheck. Personally, I have a dedicated savings account named Taxes into which I transfer money from each paycheck. Then, when my quarterly bills are due, I have the money ready to go, and the payment doesn’t strain my cash flow at all.

Please keep in mind that if you have a state tax liability in 2021, you may be required to pay estimated tax to your state as well.

If you want some help with filling out your Estimated Tax Worksheet, please check out my workshop, Quarterly Estimated Tax for Fellowship Recipients at PFforPhDs.com/QEtax/. The workshop explains how to fill out every line of the Estimated Tax Worksheet plus how to handle common scenarios that PhD trainees encounter, such as switching onto or off of fellowship mid-year and being married to someone who has income tax withholding. The workshop comprises numerous pre-recorded videos, a spreadsheet, and an invitation to the next live Q&A call, which will take place on September 12, 2021. To join the workshop, go to PFforPhDs.com/QEtax/. That’s q for quarterly, e for estimated, t a x.

By the way, I give a discount for bulk purchases of this workshop, and it’s not too late to ask your department, graduate school, graduate student association, postdoc office, etc. to buy it on behalf of a group of graduate students, postdocs, or postbacs. Simply email me at emily at PFforPhDs dot com to get the ball rolling on that purchase.

Commercial

Emily here for a brief interlude!

We have a special event coming up on Friday, August 27, 2021! It’s the fourth installment of my Wealthy PhD Workshop series. The subject is debt repayment.

This workshop is for you if you are in debt of any kind and want to learn the best strategies for getting out of debt. These strategies are tailored to the PhD experience, particularly that of graduate students. We will cover student loans, of course, which are such a complex topic, as well as mortgages, credit card debt, auto debt, medical debt, etc. I’ll give you a spreadsheet that will help you work through in which order to tackle your debts, taking into account the type of debt, the interest rate, and the payoff balance. We’ll also discuss how to sustain your motivation through a long debt repayment process.

This is going to be a value-packed session, so please join us on August 27th. You can register at PFforPhDs.com/WPhDDebt/. That’s PF for PhDs dot com slash W for Wealthy P h D D e b t.

Now back to our interview.

The Kiddie Tax

Section C is for full-time graduate students age 23 and younger.

I want to give you a heads up that a higher tax rate might apply to you if you meet the following criteria:

  1. You are age 23 or younger on 12/31/2021.
  2. You are a full-time student.
  3. You receive a non-W-2 stipend or salary for at least part of 2021.

If you checked all of those boxes, you might be subject to the Kiddie Tax, which means that part of your income may be taxed at your parents’ marginal tax rate instead of your own. The Kiddie Tax can apply even if you aren’t being claimed as a dependent.

I can’t say for sure that you will or will not be subject to the Kiddie Tax as there are more calculations that have to be performed, but I suggest that you look into this before the end of the calendar year and possibly take some mitigation measures if your parents’ marginal tax rate is higher than yours. You may need to engage a professional tax preparer to help you and your parents with tax planning and preparation for 2021. You may need to save more from each paycheck for your eventual tax bill than I laid out in Section B.

I have an article about how the Kiddie Tax affects funded PhD students at PFforPhDs.com/kiddietax/. That P F f o r P h D s dot com slash k i d d i e t a x.

State Residency

Section D is for graduate students who moved states in 2021 or are receiving income from a new state.

I find that people get rather mixed up about state residency and taxes, especially when they are in graduate school. For a traditional college student who is a dependent of their parents, it is common to maintain your residency in the state your parents live in even while you attend college in another state. However, I rarely come across a compelling reason that a graduate student should do the same.

The pandemic has also thrown a wrench into the question of state residency due to how common remote work is now. So even if you lived in only one state in 2021, if your income comes from a different state, that’s something to contend with.

What I think you should do at this time of year to make tax season easier is to figure out and/or decide in which state or states you will be a resident, part-year resident, or non-resident in 2021. This will require you to read about how your new state and your old state define residency and how they tax residents, non-residents, and part-year residents.

My totally generic, blanket recommendation if you have moved states to start grad school is to consider yourself a resident of your new state, even if technically your former state allows you to still be considered a resident due to your student status. You’re a full-fledged adult with a more-or-less proper income now. Why would you want to keep close ties to your parents’ address? In almost all cases, there is no financial advantage to doing so plus you’ll likely have to file two state income tax returns, one as a non-resident in the state you live and work in and one as a resident in the state you don’t live or work in. For how long do you want to keep that up?

If you agree that you don’t want to keep filing two returns indefinitely if there’s nothing in it for you, take a few steps this fall to firmly establish your ties to your new state. Reference how your new state defines a resident for the definitive word on how to do so, but for some starting ideas you should get a new driver’s license, register to vote, change your address with your car insurance, and update your mailing address with all your financial institutions.

Now, if you really do have a compelling reason for maintaining your residency in your old state while you’re a student, by all means try to do so. You still have to read all the material I mentioned before, but this time with the goal to maintain your residency in your old state and avoid being considered a resident in your new one. By the way, in all my conversations with grad students about taxes, I’ve only ever heard one reason that I considered compelling: A resident of Alaska who was attending graduate school in another state wanted to maintain their Alaska residency so they could continue to receive universal basic income. Please remember that even if you do have a great reason to want to maintain residency in your old state, you have to cross all your ts and dot all your is to make sure you meet the requirements.

Conclusion

That it for this episode! I hope you’ll check in with me during next tax season for more tax education and support for PhD trainees. I offer a workshop titled How to Complete Your Grad Student Tax Return (and Understand It, Too!) during each tax season, which can be purchased by individuals or groups at a discounted rate. I’m making plans for how I can help PhD trainees with their tax returns in brand-new ways in the upcoming tax season. Join my mailing list at PFforPhDs.com/subscribe/ to stay in the loop! You can expect to receive 2-3 emails per week from me on various personal finance topics.

Before you go, would you please share this episode with your peers, especially new graduate students? Join me in helping to make next tax season go smoothly for all PhD trainees!

Can I Qualify for a Mortgage with a Short-Term Fellowship or on an F-1 Visa?

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In this episode, Emily shares a few clips from the first-time homebuyer Q&A that she hosted with Sam Hogan on May 6, 2021. Sam is a mortgage originator with Prime Lending (Note: Sam now works at Movement Mortgage) specializing in graduate students and PhDs, an advertiser with Personal Finance for PhDs, and Emily’s brother. The first pair of questions is on whether having three years left on your fellowship offer is required to get a mortgage. The second pair of questions is on qualifying for a mortgage if you’re on an F-1 visa. These questions are among the most common that Sam receives.

Previous Episodes with Sam Hogan

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 8, Bonus Episode 1, and today I’m sharing a few clips from the first-time homebuyer Q&A that I hosted with Sam Hogan on May 6, 2021. Sam is a mortgage originator with Prime Lending (Note: Sam now works at Movement Mortgage) specializing in graduate students and PhDs, an advertiser with Personal Finance for PhDs, and my brother.

Sam has been on the podcast before in Season 2 Episode 5, Season 5 Episode 17, and Season 8 Episode 4. As Sam has gained experience working with PhD clients over the last few years, he’s been able to get mortgages approved in scenarios that didn’t seem possible a couple of years ago. We’re using this bonus episode to update you all on this evolving situation.

What you will hear next is me reading questions that were submitted over chat during the Q&A call and Sam’s answers. We selected these questions because they are among the most common that Sam receives. The first pair of questions is on whether having three years left on your fellowship offer is required to get a mortgage. The second pair of questions is on qualifying for a mortgage if you’re on an F-1 visa. There were a few dozen people on the call so you will hear some background noise as well.

If you would like to attend a Q&A call of this type, please sign up for the Personal Finance for PhDs mailing list at PFforPhDs.com/mortgage/. I’ll be in touch over email about the next scheduled call. As of now we anticipate holding another one in June 2021 and periodically after that.

If you would like to get in touch with Sam directly regarding your own mortgage, you can call or text him at (540) 478-5803 or email him at [email protected].

Without further ado, here are the clips from the first-time homebuyer Q&A call with Sam Hogan.

Conclusion

Thank you, Sam, for giving your time and expertise to this call and thank you, participants, for your excellent questions! If you, listener, are interested in attending a Q&A call for first-time homebuyers in the near future, please go to PFforPhDs.com/mortgage/ and register for my mailing list. I’ll be in touch over email when we schedule the next call. If you would like to contact Sam directly regarding your own mortgage, you can call or text him at (540) 478-5803 or email him at [email protected].

This Grad Student and Her Family Lived on Her Stipend While Banking Her Spouse’s

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In this episode, Emily interviews Dr. Jacqueline Kory-Westlund, who recently completed her PhD in the MIT Media Lab. During their five years in Boston, Jackie and her husband lived on her grad student stipend and saved and invested all of his income. Jackie and Emily discuss the frugal tactics Jackie and her husband used to keep their expenses low, even after having their first child. Saving and investing Jackie’s husband’s income gave them a sizable nest egg by the end of grad school, which they used to purchase a home in cash in a low cost of living area of the country. Jackie and her husband have designed their lifestyle around location-independent work so they can live where they want to while they expand their family, which is now an option for more workers made remote during the pandemic.

Links Mentioned in This Episode 

Teaser

00:00 Jackie: We started out with a generic retirement fund, and then at some point later that year realized we could probably get better returns if we were more selective about what funds we invested in. So then we switched to some market index mutual funds and over the course of the next three years made almost $40K.

Introduction

00:26 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts. This is season eight, episode eight, and today my guest is Dr. Jacqueline Kory-Westlund, who recently completed her PhD in the MIT Media Lab. During their five years in Boston, Jackie and her husband lived on her grad student stipend and saved and invested all of his income. We discussed the frugal tactics Jackie and her husband used to keep their expenses low, even after having their first child. Saving and investing Jackie’s husband’s income gave them a sizeable nest egg by the end of grad school, which they used to purchase a home in cash in a low cost-of-living area of the country. Jackie and her husband have designed their lifestyle around location-independent work, so they can live where they want to while they expand their family.

01:18 Emily: It’s a model that is now an option for many more people whose positions went remote during the pandemic. This interview is a wonderful example of how an early, intense focus on a lofty financial goal can often result in financial freedom within a short time. Financial freedom means something different to everyone, but it could include leaving, or not taking in the first place, jobs that are unsuitable to you, location independence, working part-time, starting a business, staying home with a child, full-time travel, or just living your best life. Even if it is a bit unconventional. Financial freedom means choices. And this freedom can arrive quite a bit earlier than full financial independence, which is when you never have to earn an income again. We’ve had many stories on the podcast of guests working on or accomplishing a financial goal that seems outlandish for their career stage.

02:10 Emily: Some examples, which are linked from the show notes include Dr. Jenni Rinker paying off over $60,000 of student loan debt during grad school, Beth Moser clawing her way out of financial ruin during the great recession, Jonathan Sun and Dr. Matt Hotze house hacking during grad school, Courtney Danyel growing her freelancing writing business to over $100,000 per year, and Dr. Rachel Blackburn investing for retirement, despite her $1,000 per month grad student stipend. There are even more examples than that in the archives. Even my and my husband’s own story of increasing our net worth by over $100,000 during grad school qualifies. I can tell you that I appreciate my past self for being aggressive about frugality and retirement contributions more with every year that goes by. I don’t this to wag my finger at anyone who has not been working on a lofty financial goal. Personal finance is personal, and we all have different things we value. I just say it because I had no idea when I was in grad school and racking my brain for ways to increase our savings rate by another half a percent, how sweet financial freedom would taste just a few years later. If you’re looking for motivation to push yourself with your own finances, dream about what your best unconventional like might look like.

Book Giveaway Contest

03:28 Emily: Now, it’s time for the book giveaway contest. In February, 2021, I’m giving away one copy of The Simple Path to Wealth by JL Collins, which is the Personal Finance for PhDs Community book club selection for April, 2021. Everyone who enters the contest during February will have a chance to win a copy of this book. The Simple Path to Wealth has quickly become the go-to text in the financial independence community to explain passive investing, which is the style of investing that I practice and teach. It sometimes comes as a surprise that the most effective form of investing is both low cost and low maintenance. If you’ve been sitting on the investing sidelines, this book will almost certainly motivate you to get started by showing you how simple successful investing really is. If you would like to enter the giveaway contest, please rate and review this podcast on Apple Podcasts, take a screenshot of your review, and email it to me at [email protected]. I’ll choose a winner at the end of February from all the entries. You can find full instructions at pfforphds.com/podcast. Without further ado, here’s my interview with Dr. Jacqueline Kory-Westlund.

Will You Please Introduce Yourself Further?

04:55 Emily: I am welcoming to the podcast Dr. Jackie Kory-Westlund, and she’s a recent graduate of her PhD program. And we are going to discuss her finances during her PhD and how she accomplished a massive financial goal, right upon completing her PhD, which was purchasing a home in cash. When Jackie emailed me about this prompt, I literally misread it because I could not believe that anybody would possibly do that. So this is going to be really exciting to figure out. But Jackie, why don’t you tell the audience a little bit about yourself first?

05:28 Jackie: Hi. Yeah. I did my PhD at MIT in the MIT Media Lab with Dr. Cynthia Breazeal. So I worked on small, cute fluffy robots that helped kids learn stuff. And I, let’s see, I finished in 2019, so I’m currently an independent scholar, writer, artist. I do not have a full-time job because I’m staying home for the most part, hanging out with my kids. My husband is a software guy so he works from home, has his own startups and all of that going on. And we had our first kid during the PhD. So that’s relevant to our finances and our financial goals.

Jackie and her Husband’s Finances at the Start of PhD

06:08 Emily: All right, let’s dive into it. This is such an exciting story. Okay. So please give me a snapshot of your finances when you started the PhD. If your husband was in the picture at the time, include him, too.

06:20 Jackie: Right. So when I started the PhD, this was back in 2012. I was one year out of undergrad. So I’d spent one year kind of doing a research internship thing. So I hadn’t made a lot of money at that point. My husband and I, we were not married yet at the time, but we both moved to Boston for MIT at the same time. I had a used car that was probably worth $2,000. We had a couple thousand in our bank accounts that we used for our first month of rent in the rental deposit and the realtor fee and a couple of thousand in student loans. And that’s about it.

06:56 Emily: Alright. Yeah. Almost zero, close to zero. It sounds like. And then what was your stipend?

07:04 Jackie: My stipend was about $30K a year. And MIT paid for healthcare for me, not for my husband. We had to add him to the plan later, once he couldn’t be on his parents’ plan anymore, you know, hitting 25 years old there. And that stipend increased slightly year to year because MIT made cost of living adjustments. And it also went up slightly when I switched from the master’s program to the PhD program, but it was never more than like 32K or so.

07:33 Emily: Okay. So from 30K, in 2012, when you started to about 32K, when you finished, you said 2019, right?

07:39 Jackie: Yeah. Though, actually for the PhD. So we actually moved and got the house the year before I finished. I finished up the last bit remotely.

07:49 Emily: Okay. Okay.

07:51 Jackie: Because I was just writing at that point, so we actually moved in the middle of 2018.

07:55 Emily: Okay, great.

07:56 Jackie: And at that point I stopped getting the stipend because I wasn’t on campus.

08:01 Emily: Oh. So you, you left the stipend behind in 2018 and finished self-funded after the last month or up to a year. And how about your husband’s income during that period?

08:11 Jackie: So initially, for the first couple of years in 2012 through about 2015 or so, he was working on a couple of startups and as a contractor, primarily working on his self-funded software startup. So was not making a huge salary, probably around $50K a year in the last couple of years. And throughout the entire time I was in grad school, our combined income never went over about $80K on our tax returns.

Strategies to Decrease Expenses During PhD

08:39 Emily: Okay. So that gives us a range to think about over that period. So pretty low at the start a little bit better by the end, but again, we’re talking about Boston, so yeah, pretty high cost of living area. So $30K is a pretty decent grad student stipend, but in a high cost of living area, it’s still really challenging. Okay. So that’s your finances when you started the PhD. So as you’re going through the PhD, I’d love to talk about, you know, both sort of frugality, like how do you keep a lid on your expenses? And also did you increase your income in any way? You just told us what the total was, but were there any, you know, methods that you used to increase it? So let’s start on the decreasing expenses side. What, you know, what were your strategies? What were the things that worked out best for you in terms of controlling those expenses?

09:21 Jackie: The biggest thing is we both just kind of by default are fairly frugal people. Neither of us like tend to eat out much. You know, we don’t usually buy that much stuff. We ate a lot of rice and beans. Probably were in the range of only about $250 a month on food. Probably the entire time we were there. I’m the one who started the trend in my lab of people packing their own lunches to bring to the lab.

09:46 Emily: Great influence.

09:49 Jackie: So we primarily lived on my stipend of about a $30K a year. And two thirds of that was rent. And our vehicle expenses tended to be pretty low because like we did have the car, but we didn’t use it that much. I took public transit and walked to MIT and that was half subsidized by MIT. And the other big thing was we had an awesome landlady who did not increase our rent.

Housing and Rent

10:13 Emily: Wow. Okay. Well, you just hit kind of the big three expenses right there. You hit housing, which at $20,000 per year is yeah. It’s a bit expensive on that grad student stipend. Really admirable, by the way of structuring your budget so that you would live just off the one income and save, presumably, the higher income. That’s really, really impressive. So you hit housing. Now was it luck that you found someone who was not going to increase rent, or was there any strategy involved in finding that place?

10:42 Jackie: That was entirely luck. When we were moving up to Boston, we spent about a week there prior to moving looking at places. And we talked to a realtor who was like, Hey, I’ve got this landlady who just needs someone. We just got lucky that she just had this policy on her own where she just didn’t like increasing rent too much. And she’s a nice old lady, lives downstairs, you know?

11:04 Emily: Yeah. I mean, actually that’s, you know, it could be luck for you, but it might be strategy for someone else. I wonder if there is something there around being neighbors with your landlord and like cultivating a positive relationship, because I think it’s definitely harder to raise rent on someone whose face you see like multiple times per week, rather than some, you know, unknown number or whatever in some system. So, yeah. So it sounds like you were living in a duplex kind of situation?

11:28 Jackie: Yeah. It was one of those three-story, three-family homes.

11:32 Emily: Triplex.

11:32 Jackie: Yeah. Triplex, that’s the word I’m looking for. Yeah. And my husband and our landlady, they both went to the same church, so that maybe was a relevant factor there, you know.

11:43 Emily: Yeah, any kind of connection you can make.

11:45 Jackie: Yeah. Yeah.

11:46 Emily: That’s awesome. Okay. So, you know, housing expense is clearly number one, but managing to get a place, you know, by luck probably that didn’t increase the rent is an incredible advantage because that, you know, the rate that rent often rises at is higher than, you know, what you’re getting in your salary increases for cost of living. So you hit housing, number one. You also mentioned transportation. You know, it’s a city life kind of thing. Like you don’t have as much need for like the car usage. And did you have one car or two?

 Sharing a Car, Reducing Food Costs

12:14 Jackie: Just the one.

12:15 Emily: Just one. Okay. So sharing a car as well, another great strategy. And you mentioned, you know, the food expenses. So not eating out very often and also, I mean, $250 per month in food is like really keeping a lid on things. You mentioned rice and beans. Presumably you’re cooking a lot. Do you have any other like, tips in that area around like managing the grocery? Both the budget and like the time that goes into cooking and meal prep?

12:40 Jackie: Well, I kind of have a hobby of cooking, so we did a lot of the crock pot full of a big dinner on Sunday, and then eat leftovers all week to reduce time cooking. Buying things in bulk, instead of popping out to the store every couple of days. We tended to go for beans over meat, which decreases expenses. You look for what’s on sale, you know. That kind of stuff.

13:05 Emily: Yeah. Do you have any like Boston specific tips, like a grocer that you really liked for good deals or something?

Roberto’s Produce (in Boston)

13:11 Jackie: Ooh, let’s see. Actually, we lived about half a mile from a produce store that had way cheaper produce prices than the main grocery store that we drove to.

13:22 Emily: And what was the name of it?

13:23 Jackie: That was, let’s see, what was it called? It was Roberto’s. Roberto’s produce. Cute little place. Just, just produce.

Financial Goals with Savings

13:30 Emily: Yeah. We actually frequented a little shop like that in Seattle as well and had great prices. You mentioned earlier that you actually bought your home prior to finishing your graduate program and that you had been, I think, saving your husband’s salary during that whole period. What were your financial goals during that time, aside from you said, living on just your income, what were you doing with your husband’s salary?

13:56 Jackie: So, in about, I think 2015 was when we realized that we had some money in the bank, we should probably do something with it, which was about my third year of grad school, I think. So we took all of our extra money and put it, invested it primarily in the stock market using Vanguard. We started out with a generic retirement fund, and then at some point later that year realized we could probably get better returns if we were more selective about what funds we invested in. So then we switched to some market index mutual funds, and over the course of the next three years made almost $40K just from having money invested, which is like free money! It’s just so cool. It was like, when we first started doing that, we were like, wait, we just get money from having our money sitting here? Like it’s pretty cool when you figure out how that works.

14:49 Emily: It doesn’t always work out like that over the short-term.

14:53 Jackie: It’s true, we got lucky with which, which years we were investing there.

14:57 Emily: Yeah. I felt that way too. I started investing basically in 2009, like at the nadir of the market and just the last decade has been incredible with, you know, a few hiccups along the way, but overall, obviously really, really strong. And was that in like retirement type accounts or was it more just taxable accounts that are accessible to you?

15:17 Jackie: We had a little bit in some IRAs and the rest of it was just like a generic account that we could move money around whenever we wanted.

Having a Child Motivated the Goal of Home Ownership

15:27 Emily: Okay. So you’re basically living on your stipend, investing your husband’s salary or whatever income he has during that period. At what point did the goal of home ownership materialize?

15:38 Jackie: About the same time we had a kid. So it was in my fourth year of the PhD. That’s when I started thinking, Hey, you know, we’ve got a baby now, at some point I’m going to finish this PhD and where are we going to go? What are we going to do? So that’s when we started doing a lot more life planning and getting a house with a yard somewhere for kids to play. And that’s when that started being like really on our radar.

16:01 Emily: Yeah. We glossed over the whole having a kid during grad school thing. How did that work out with like, did insurance cover pretty much everything? Like, how did the finances of the having a child work?

Health Insurance and Parental Leave

16:13 Jackie: MIT’s healthcare program like yeah. Insurance covered pretty much everything. We paid probably $200 total to have a baby.

16:19 Emily: Amazing. And did you get any leave?

16:22 Jackie: Yes. MIT was good about that as well. And the Media Lab gave me an extra month. So MIT had a policy of two months paid leave for any parents. And then the Media Lab gave me an additional month and that was all paid leave.

16:35 Emily: Amazing.

16:35 Jackie: So I had three months off and then last thing on that was my advisor was awesome. And my lab was awesome in that they’re all very supportive of this and I could work remotely a lot more and was at a point in the program where I didn’t have to go into class anymore because I was just able to just research stuff. So a lot of, a lot of things went into that being, not that bad, like being like a reasonably doable thing. I know it’s not for a lot of women. It can be difficult.

Did You Also Pay for Childcare?

17:06 Emily: So I think about three big expenses when it comes to having a child. We just covered two of them, health insurance and the leave. And then the third one is childcare. You just mentioned working from home, but did you also pay for childcare?

17:18 Jackie: We did not, actually. My husband and I split that.

17:21 Emily: So interesting.

17:22 Jackie: And just managed to work that into our work schedules. That was part of why he was doing such flexible work at the time. And then my lab was flexible. So we just squished childcare and somehow, you know, did lots of work when the baby was napping kind of thing.

17:36 Emily: Yes. I remember those days very well. I have two kids as well, and I’ve actually done one other interview on the podcast from season one. So if newer listeners haven’t seen this one yet, but you’re interested in having a child during graduate school, check it out because I interviewed another graduate student mother married to another PhD father who also did the same thing. I think for the first six months after their first child was born, they completely split childcare and I did not pay for any outside services in that regard. And yeah, she talks about how she managed to you know, complete her dissertation and get a TT job and have the baby. And it’s kind of a really crazy year for her. But it’s incredible that, you know, you took that on and then were able to accomplish it. Was that motivated by finances? Was it motivated by, we just wanted to spend time with our child a lot of time or, you know, what was the reasoning behind that?

18:29 Jackie: All of the above. So, childcare in Boston is ridiculously expensive. But also a lot of you want to spend time with this baby. Like, why would you have a kid if you don’t want to spend time with it? And there are some philosophical things around how we wanted to approach raising our kids and actually being around a lot of the time. I was homeschooled actually growing up. So that’s probably very influential in how I’m thinking about how to raise my kids.

18:57 Emily: Yeah, so a familiar model for you.

18:58 Jackie: Yeah.

How Did You Choose Where You Wanted to Live?

19:00 Emily: Gotcha. Okay. So got the baby, but we’re not paying for childcare or the other associated expenses. MIT did a good job providing you with the appropriate benefits. Okay. So then you said that home ownership became a goal. Once you had the child and you were like, we want to get out of the city life, how did you choose where you wanted to live?

19:19 Jackie: So we decided based on kind of two factors. One, we were not tied to any particular location first. So we could kind of pick anywhere because of the kind of flexible job situation that we’re setting up for ourselves. And then we wanted to move nearer to some of our family. We were like, we’re having kids. We’d love to have some grandparents around. We’d love to live near some family finally, because it’s been a long time since we’d done that. It was really nice. So my husband’s family is in North Carolina. Mine, a lot of them were in Idaho, North Idaho. So between the two of those, we were looking at the different areas and ended up picking Idaho for a variety of reasons. I mean, both places had a lower cost of living. It’s hard to get a higher cost of living than Boston, New York, or San Francisco. Lots of nice, pretty lakes and mountains up here.

Commercial

20:15 Emily: Emily here, for a brief interlude. Taxes are weirdly unexpectedly difficult for funded grad students and fellowship recipients at any level of PhD training. Your university might send you strange tax forms or no tax forms at all. They might not withhold your income tax from your paychecks, even though you owe it. It’s a mess. I’ve created a ton of free resources to assist you with understanding and preparing your 2020 tax return, which are available at pfforphds.com/tax. I hope you’ll check them out to ease much of the stress of tax season. If you want to go deeper with the material or have a question for me, please join one of my tax workshops, which you can find links to from P F F O R P H D S.com/T A X. It would be my pleasure to help you save time and potentially money this tax season. So don’t hesitate to reach out. Now, back to our interview.

Location Independence

21:21 Emily: Sounds like you know, you have intentionally chosen a route that not many PhDs do. You know, a lot of PhDs feel that they have to be geographically flexible to have the type of job that they want. And you’ve gone another direction and said, my primary goal here is to be in certain locations in the country and the job is going to be, it sounds like the job is going to be secondary to that in that you want to work in a way that is flexible to live wherever you want. You want to be location-independent. Is that right?

21:52 Jackie: Yep.

21:53 Emily: And that’s what you’ve done and your husband has done.

21:55 Jackie: Yes. Yeah. That’s one of the main reasons he was working on his smaller software startup was so that he would be able to work from anywhere and not be tied to someone else’s you have to work in this location. And I was not looking at the end of grad school to get an academic job, necessarily. I mean, there’s a university here, but I’m not looking for an academic job or a full-time job currently because I wanted to be able to spend time with my kids and also work on some part-time things.

22:25 Emily: Yeah. I see actually, a lot of similarities between your story and mine actually. I mentioned to you when we started the call that my husband and I recently became location-independent. He still has a job job, but it’s just remote now. And I would imagine a lot of people are in that situation and going forward, a lot of people are not going to be going back into offices and labs and all of that. So depending on the nature of the work that you do, a lot, I think more people in my audience are going to have location independence in their future.

22:54 Emily: And it’s really, it’s exciting, I was telling you too, but it’s also a little bit intimidating to figure out where exactly do I want to live.

23:01 Jackie: We made spreadsheets, we made spreadsheets.

23:05 Emily: You went the direction of going to a lower cost of living area, which is known as geographic arbitrage in the financial world. We are actually choosing to live in a very high cost of living area because we love it and want to be there, but have to make the finances, you know, work out to have balance in that area too. So, in different ends of that spectrum. Okay, so you chose based on, you know, more personal factors where you wanted to live and then comes this, you know, huge accomplishment of buying this home in cash. And I think we’ve already heard how you saved up for it, right?

23:39 Jackie: Yeah, pretty much.

How Much Money Did You Have for Home Buying?

23:40 Emily: So do you want to share like the numbers around that? Like how much money you had to work with by the time you did buy?

23:46 Jackie: Yeah. So when we decided to move, we had about $150K from our non-retirement accounts. We also emptied our IRAs for the most part which was about $25K. So we had around $200K to work with when we were buying a house up here. And relevantly because I no longer had the stipend from MIT when we were moving and my husband’s startup had, like no long-term proven history of income, we wouldn’t have been able to get a loan. So that was also relevant in us deciding to get a home in cash. So we had about $200K to work with and the market up here was moving very quickly at that time. So we came out to Idaho for about two weeks that summer with the plan of when we leave, we will have a house.

24:39 Emily: That’s an incredible story. You say, now you couldn’t have gotten a loan or it would have been, Oh my gosh. So, so difficult, so much paperwork or something. Did you know that that would be the case, like looking forward when you started that taxable savings, savings and investment, or was it just more about having flexibility at that point?

24:59 Jackie: Well, when we first started saving money, we had no idea what we were going to do with all of it. And then we were like, Hey, we should buy a house when we move out of here. And then when we started looking into, how do you buy a house? How do you get a loan? How, how much money do you have to put down on a house? How expensive are houses in the different areas that we’re looking at? As I said, we, we did spreadsheets for a lot of things and calculations about how much money might we have and how much money would we need for this kind of house in this area. And having provable income for getting a loan from just about any bank seemed to be pretty relevant. And because my husband’s business was not quite off the ground yet, it kind of got off the ground a lot more in the year right after we moved, there was relatively little income that we could prove at that point in time, which was, you know, fine for how we lived, because we didn’t need much income to live off of.

25:51 Jackie: But for the purposes of buying a house would have made getting a very expensive house difficult or getting one with a smaller down payment more difficult. And maybe, maybe there was a bank that if you talked to the guy and explained all your situation in lots of detail, lots of paperwork, maybe, maybe they could work something out. But the other factor, I guess, that I should probably talk about was our goal of being debt-free when we moved as well, because we only had a couple of thousand in student loans and we paid that off before we went for the house. So as soon as I was done with grad school I was like, all right, pay off student loans, get rid of any other debt that we have.

Challenges of Mortgages for Fellowship Recipients

26:31 Emily: Gotcha. I probably know a little bit more than I should about getting a loan at this point because my husband and I are anticipating buying a house soon. My brother is a mortgage loan officer, so he sells mortgages. So I’ve talked with him quite a lot about this process. And thirdly, he’s actually helped me quite a bit. We’ll link in the show notes to some episodes I’ve done before on how people receiving fellowships during grad school or a post-doc can or cannot ultimately get a mortgage because a lot of times they’ll be just flat, turned down right away. There is sometimes a way to get a mortgage, but it’s really tricky. So we’ve done all that in these other episodes, but to your point, self-employment income is another really kind of dodgy form of income. I know because that’s what I have that is going to be looked at a lot more carefully and you have to prove a lot more than, you know, you would for like a W2 type of situation.

27:24 Emily: So, yeah. It sounds like, you know, you, you started the savings investing for whatever, you know, because you were in a position to be living on just the one salary and saving the other, and it turns out that it helped you accomplish this like major goal. So now, you know, sounds like you have little housing expense, it would just be like insurance taxes, this kind of stuff, very minor relative to what a mortgage would be, correct?

27:51 Jackie: Correct. Yeah.

What Are Your Future Financial Goals?

27:52 Emily: Yeah. And so what are you thinking now about your finances? Like your, you know, your living expenses must be quite, quite low. So what are you working on next?

28:03 Jackie: So for what’s next we like the idea of having a bigger house with acreage around it. Because up here, we have, you know, the small neighborhood house on, you know, maybe a quarter acre, you know, enough space for a garden, a lawn. But we really liked the idea of having some more acreage out here because this is a great area for that. And then be able to keep this house and rent it out as side income. We would like to keep increasing our income enough that we can increase charitable giving, investing in the local economy and community, that kind of thing. Relevantly, we got our house for about $210K and it’s now worth over probably over $300K, just in the last two years because of the increased, this area is growing a lot. So we liked the idea of maybe being able to get something else soon and then maybe get into more real estate in this area. It seems to be growing a lot.

29:01 Emily: So what would be the plan for the next house? Would you try to take out a mortgage given the change in your husband’s income or in whatever you have going on or is it saving up more cash?

29:12 Jackie: That’s still up for debate. Kind of depends on what kind of house we want to have. Yeah we still have been talking. So that’s been actually a fairly recent conversation. We’re like, okay, we’ve been here for a couple of years now. Like jobs are working out better, you know, one is increasing, income’s increasing, like what are we doing next? So that’s something we’ve actually just been talking about a lot recently is like, what kind of house would we want next? And would we want to do that in cash again, or not? Because now we could deal with a mortgage payment, you know, we could do that now, but not sure.

Best Financial Advice for Another Early-Career PhD

29:46 Emily: Yeah. So still under development. Well it sounds, I don’t know, really lovely. It sounds like a real, you know, you’ve really done lifestyle design, I guess is the way that, you know, it’s kind of put in like the entrepreneurship community of figuring out how you want to make money, where you want to make money, where you want to live getting your expenses down very, very low, if you want them to be. And then maybe even turning this house into an income producing asset, ultimately. Wow. Like what a story. As we wrap up this interview, is there, what’s your best financial advice for another early-career PhD?

30:21 Jackie: Probably to actually have long-term financial goals. Because having something you’ve got your sights on helps a lot when you’re coming up with like, if you’re, if you’re trying to stop spending money or trying to budget and keep to a budget or whatever it is, having something in mind that you’re going for helps a lot. Because we got a lot more conscious about what we were doing with money when we were like, Oh, we have a baby and we want to move and we want to get a house. We started paying a lot more attention to what we were doing with our money. As the second thing, don’t actually be afraid of investing money in the stock market or mutual funds because in a good year, that can actually make you quite a lot.

31:01 Emily: Yes. We also made some investments in a taxable account that has grown quite a bit in the last decade, I guess. It’s actually part of our house down payment of money. Now it’s been allocated in that direction. I of course like need to say like past performance is no indication of future return. So like this was a great, you know, three or so year period where you got to do this, it’s been a great time for me investing, but you know, this ride is not going to continue forever. And so I think what you were just saying, like if you have a specific goal for your money, like think about the timing and think about how much risk you want to take with it. And if you’re flexible about it, like the house was not necessarily quite, you know, a goal on your horizon yet, it makes sense that you would, you know, invest at that time. But once you have the goal in mind, like really think about, okay, do I need the money, do I need to take it out of the market now, do I need to, you know, go a little bit more conservative in the investments because you can hit a bumpy period and then not have the time you need to write it out. But if you’re flexible, keep the money invested, then you know, you can go for the higher return over time.

32:03 Jackie: Yeah, we actually lost about $10K right before we bought the house because Trump started a trade war with China. We were like yeah so I guess we should pull this out of the stock market.

32:13 Emily: It’s really, really hard to time the market. Yes. Well, great lessons here and thank you so much for sharing, you know, again, the lifestyle design, the frugal living, the goals. I think it’s, you know, a wonderful story and well illustrated for my audience. So it’s really been a pleasure talking with you Jackie.

32:29 Jackie: Thanks. Thanks for having me on.

Listener Q&A: Tax Claims

32:36 Emily: Now, on to the listener question and answer segment. Today’s question actually comes from a survey I sent out in advance of one of my university webinars this spring. So it is anonymous. Here’s the question. Quote, how do I do my taxes? What can I claim on my taxes? Can I claim a laptop that I needed for school as an expense? End quote. So this is a really big question. Obviously not one I can answer in a few minutes on this podcast. So the best place to go for further resources about your taxes, especially as a funded graduate student, is my website pfforphds.com/tax. That’s my tax center from which I’ve linked all of my relevant podcast episodes and articles and videos and so forth. This answer is even too big for a set of articles. So I have created an entire tax workshop to help answer this question. The workshop comprises 11 videos, two worksheets, and one Q&A call per month throughout tax season. So if you’re interested in getting into the workshop and having a full exploration of this question, please go to pfforphds.com/taxworkshop.

33:55 Emily: Okay. The part of the question I do want to tackle on this episode is the last part. Can I claim a laptop that I needed for school as an expense? There are four higher education tax benefits. However, one of them is virtually always used by funded graduate students. This benefit is called tax-free scholarships and fellowships. I’ll tell you whether or not you can use a laptop or a personal computer as a qualified education expense for the purposes of making scholarship and fellowship income tax-free. I won’t comment during this episode on whether or not you could do it through one of the other three benefits. So how tax-free scholarships and fellowships generally works is that you have some income as a graduate student, for example, the scholarship or waiver that pays your tuition. If me mentioning scholarships as income shocks you, please go check out my further resources.

34:59 Emily: On the other side of the ledger, you also have some higher education expenses such as tuition. Now, tuition is always is considered a qualified education expense for the purposes of making scholarship and fellowship income tax-free as long as you are enrolled in a degree program at an eligible educational institution. So in the case of tuition for a fully-funded graduate student, how this usually works is that the tuition charge and the tuition scholarship or waiver exactly equal one another. And so basically use the qualified education expense to make the scholarship tax-free. So they cancel each other out. The income, the scholarship, has no net effect on your taxable income. You’ve made it tax-free. And furthermore, you can’t use that tuition charge to take any of the other higher education tax benefits because you’ve already used it for this one. Okay. So that’s generally how the benefit works.

36:00 Emily: The question that I’m drilling down to is, is a laptop or a personal computer considered a qualified education expense for the purpose of making scholarship and fellowship income tax-free? Now, please note, to get down to the question of whether your laptop or personal computer is a qualified education expense, you have to have some scholarship and fellowship income to cancel against it. If you’ve already canceled all of your scholarship and fellowship income against other qualified education expenses, like tuition and required fees, then you would not have any additional scholarship and fellowship income to try to cancel against a laptop. So this benefit wouldn’t apply in that situation. However, there are lots and lots of funded graduate students who have scholarship and fellowship income that exceed the tuition and required fees and so forth. So this question would apply to them. So is a laptop or a personal computer, a qualified education expense for the purpose of making scholarship and fellowship income tax-free?

37:04 Emily: I’m pulling up IRS publication 970 because I’m going to read the definition of a qualified education expense. Quote, for the purposes of tax-free scholarships and fellowship grants, these are expenses for tuition fees required to enroll at, or attend an eligible educational institution and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction. End quote. The definition goes on to specify some types of expenses that are not qualified education expenses, laptops and personal computers were not included in that list. So we go back to the second half of this definition of qualified education expenses regarding supplies and equipment that are required for the courses at the eligible educational institution. They must be required of all students in your course of instruction. So the question is, does a laptop or personal computer fall under that definition? Here’s my opinion on the matter, this is not tax advice, by the way. If you can prove, if you can show in writing that a laptop or personal computer is required of every student in your course of instruction, that could be an individual course that you’re taking.

38:27 Emily: That could be the degree program that you’re enrolled in. That could be everybody in the graduate school. At whatever level, if a laptop or computer is required of all the students, then it can be considered a qualified education expense. I know that we both know that pretty much a laptop or a personal computer is required of every PhD student, especially in the time of COVID. However, you and I knowing that it’s a tacit requirement is not the same as it being an official requirement that the IRS would accept. The theory is that you, as a graduate student can go to the computer labs provided on campus and do all your work there, I guess, which obviously is ridiculous. But in my opinion, for this to work as a qualified education expense, it needs to be down in black and white somewhere that having your own computer was required.

39:29 Emily: Now I went searching to see if I could find some of these in-writing requirements. So I did a few different Google searches. Does X university require students to own their own computers? Obviously, you would do the search for just your own university. I found a really clear example at Iowa State University, page titled Computer Requirement, quote, beginning in fall, 2020, all students at Iowa State University will be required to own or obtain a laptop computer or other device appropriate to their discipline. End quote. The page goes on explaining why this requirement is in place, but having this page, you would be able to show to the IRS, Yes, I am required as a student at Iowa State University to have my own laptop or computer. It is a qualified education expenses for the purpose of making scholarship and fellowship income tax-free. Super clear. However, you will not find this kind of requirement or clear language everywhere.

40:25 Emily: For example, on the computing and information technology page on Brown’s website, it says, quote: Brown does not require students to own a computer. End quote. Of course, there’s more text on that page, but there it is, you’re not required to own a computer as a student at Brown. So unless you can find maybe something more specific to your course or your graduate degree that says something else, this would probably apply. So you would not be able to say that your laptop or personal computer is a qualified education expense. Now, as I said earlier, you know, there could be a university-level requirement. It could be a graduate school level requirement that could be, you know, for your individual department or program, even for an individual course, you know, you might find a requirement, any one of these levels. So please do look at all of those levels to see if you can find in black and white, this kind of requirement.

41:13 Emily: So for example, I searched out Georgia Tech, and I found their page titled, Required Computer Ownership, quote, all undergraduate students, entering Georgia Tech are required to own or lease a computer. End quote. So I could find that requirement for the undergraduates, you would have to search and see if they had a similar requirement for the graduate school or, you know, your degree program. I couldn’t find that. So I think that’s what it comes down to. Can you find in black and white that a laptop or a personal computer is required for you at some level by your university? If you can, it’s a qualified education expense, and you can use it to make some of your scholarship and fellowship income tax-free that was not already made tax-free by other qualified education expenses. This question showcases really well why you can’t rely solely on your 1098T to provide you with information about your qualified education expenses.

42:06 Emily: A laptop that you purchase from a retailer that’s not your university would not be reflected on your 1098T, yet, as we’ve seen under certain circumstances, it can be a qualified education expense for the purposes of making scholarship and fellowship income tax-free. There are other examples like this of qualified education expenses that don’t show up on your 1098T. So you cannot trust your 1098T alone. You have to really think holistically about what your higher education expenses were for the year, and then figure out whether they can be considered qualified education expenses. So I know that was a lot to follow, especially if you’re new to my tax material and you’ve never heard me talk about how your fellowship scholarships are part of your potentially taxable income. Again, if you want more resources, pfforphds.com/tax is the best place to go for articles and podcast episodes and so forth. But you’re going to find the really in-depth information in my tax workshop. Again, pfforphds.com/taxworkshop. I answer questions like this one once per month during our Q&A calls. The next Q&A call is coming up on Sunday, March 14th, 2021. Thank you so much to Anonymous for submitting this question. If you would like to submit a question to be answered in a future episode, please go to pfforphds.com/podcast and follow the instructions you find there. I love answering questions. So please submit yours.

Outtro

43:34 Emily: Listeners, thank you for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episode show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast, and instructions for entering the book giveaway contest and submitting a question for the Q&A segment. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. If you leave a review, be sure to send it to me. Two, share an episode you found particularly valuable on social media, with an email listserv, or as a link from your website. Three, recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt, repayment, and taxes. Four, subscribe to my mailing list at pfforphds.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC. Podcast editing and show notes creation by Meryem Ok.

What Your University Isn’t Telling You About Your Income Tax

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In this episode, Emily lists six things that your university isn’t telling you about your income tax. Point 1 is on why and how this lack of communication manifests. Point 2 is on what your Form 1098-T, if you even receive one, is not telling you. Points 3 through 5 are on the extra steps that grad students, postdocs, and postbacs on fellowships or training grants need to take but are rarely instructed on or even warned about. Finally, point 6 is on the tax pitfalls that anyone under age 24 needs to watch out for.

Links Mentioned in the Episode

university income tax

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Intro

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 8, Episode 1, and I don’t have a guest today, but rather will list for you six things that your university isn’t telling you about your income tax. Point 1 is on why and how this lack of communication manifests. Point 2 is on what your Form 1098-T, if you even receive one, is not telling you. Points 3 through 5 are on the extra steps that grad students, postdocs, and postbacs on fellowships or training grants need to take but are rarely instructed on or even warned about. Finally, point 6 is on the tax pitfalls that anyone under age 24 needs to watch out for.

Please keep in mind that I’m recording and publishing this episode in early January 2021 for tax year 2020, so if you are listening to this at a later date, please check the Tax Center on my website, PFforPhDs.com/tax/ for any relevant tax law changes or other updates.

For Season 8 of the podcast, I’ve shifted up the format! There are two new short segments, one before and one after the interview or, in the case of this episode, expert discourse. I hope this new format will encourage more interactions between me and you, the listener!

Book Giveaway

Without further ado, here’s my episode on what your university isn’t telling you about your income tax. I have seven points for you today.

Preliminary Comments

Before we get into my list, I need to make a few general comments.

First, this episode is for US citizens and residents living and working in the US who have household incomes below about $150,000. I am discussing federal income tax only, but don’t forget that you might be subject to state and local income tax and other types of taxes as well.

Second, I am not a CPA or any kind of tax advisor, so none of this is advice for financial, legal, or tax purposes.

Third, I’m going to use the terms employee income and awarded income throughout the episode, so I need to define them for you up front because I semi made them up.

Employee income is the stipend or salary you receive in exchange for working for your university or institute. It is reported on a Form W-2 at tax time. Typically, employee positions at the graduate student level are called assistantships and max out at half-time positions.

Awarded income is the stipend or salary you receive from your fellowship or training grant, provided it is not reported on a Form W-2 at tax time. You are not considered an employee with respect to awarded income. Awarded income also includes the money that pays your tuition and fees if you are a funded grad student and your health insurance premiums if you are a postdoc or postbac non-employee. We’ll talk more about the tax forms awarded income may or may not show up on momentarily.
Fourth, if you want to learn more from me about any of the subjects I mention, the best place to go is PFforPhDs.com/tax/, where you can find many free articles, podcast episodes, etc. If you want to really dive in deep, I have two paid workshops available.

How to Complete Your Grad Student Tax Return (and Understand It, Too!) goes over how to handle your higher education income and expenses with respect to your tax return, whether you ultimately prepare it manually, using software, or through a human tax preparer. You can find that at PFforPhDs.com/taxworkshop/.

Quarterly Estimated Tax for Fellowship Recipients explains how you know if you’re responsible for paying quarterly estimated tax and goes line-by-line through the relevant tax form to show you how to estimate your tax due. You can find that at PFforPhDs.com/QEtax/. That’s q for quarterly. e for estimated, t, a, x.

Finally, if you want to bring this tax content and more to your peers at your university or institute, I am available for live speaking engagements. Head to PFforPhDs.com/speaking/ for more info on that.
All right! With that out of the way, here is my list of six things your university isn’t telling you about your income tax.

1. Anything

Your university is not telling you anything about your income tax. This can happen in one or both of two ways.

The first mode of non-communication is through tax forms or a lack of tax forms. Now, employees definitely will receive a Form W-2 at tax time that lists their stipend or salary. But the university isn’t necessarily required to send you any forms regarding your awarded income. It’s actually quite common for grad students and postdocs to receive zero tax forms or any kind of formal or informal communication regarding their income. And that obviously leaves them totally adrift, and many don’t even realize that they are supposed to account for their stipends or salaries on their tax return.

Not all universities take this zero communication approach for their PhD trainees receiving awarded income. A lot of them report grad student awarded income on Form 1098-T in Box 5, even though the IRS does not require them to. A minority report awarded stipends or salaries on Form 1099-MISC in Box 3. Some send an informal letter listing the amount of the awarded stipend or salary. These approaches are helpful to a degree, but it would be even better if there was one standard way of reporting awarded income that was used by all universities in the US.

The second mode of non-communication is through staff members. Almost universally, staff members are instructed to not discuss income tax with individual students or postdocs. The university does not want to make itself liable for erroneous tax returns. Even though that’s frustrating, I think it is understandable.

As a sidebar, despite this prohibition, grad students and postdocs frequently repeat misinformation to me that they heard from staff members. Now, whether the staff member said something incorrect or the student simply misinterpreted what was said, I can’t be sure. A perfect example is the phrase “Your stipend isn’t subject to income tax,” which many students have repeated to me. What I think the staff member said or meant to say is “Your stipend is not subject to income tax withholding.” However, what the student hears is “You don’t have to pay income tax on your stipend.” You can see that this is a topic that needs to be discussed carefully.

The best case scenario seems to be when universities host educational workshops on higher education tax topics. Those are typically led by knowledgable staff members, volunteers from local accounting firms, or me, an outside contractor. None of us are giving individual tax advice, but we are teaching grad students and postdocs how the university reports their income and higher education expenses and how the IRS views the same.

So super best case scenario, you receive some kind of tax form or letter and have the opportunity to attend a workshop. Worst case scenario, no forms or letters and everyone clams up.

2. Your Form 1098-T Lacks Vital Information

I want to like Form 1098-T, I really do. It’s the best we have. And, without getting too much into the weeds, Form 1098-T has undergone a couple edits recently that make it far, far easier to use. So that is great. I wish its usage was universal.

Where Form 1098-T still falls short is in failing to catalog all awarded income and all higher education expenses that are relevant to a funded grad student.

On the income side, it’s typical to include tuition and fee scholarships and waivers in Box 5. Often, though not always, the awarded stipend or salary appears as well. But you might have received other awarded income as well during the year from your university or another source, and if that funding was not processed by the department that prepares the Form 1098-T, it may be left out. So you can look at the number in Box 5 of your 1098-T, but you still need to wrack your brain to come up with any additional awarded income you might have had for the year.

On the expenses side, Form 1098-T Box 1 reports “payments received for qualified tuition and related expenses.” A lot of people and software conflate the sum listed in that box with the total of their qualified education expenses for the year. Qualified education expenses are used to reduce your taxable income or your tax liability. I don’t want to get too technical in this episode, but if you make that assumption, you might be missing out on hundreds or even thousands of dollars of qualified education expenses, meaning you could overpay your true tax liability by tens or hundreds of dollars. This is because the definition of “qualified education expenses” is actually different depending on which higher education tax benefit you’re using them for, and Form 1098-T uses the most conservative definition. So unfortunately you can’t just go with the number listed in Box 1. You have to look into all of your higher education expenses individually to determine which you can use for the tax benefit you chose. That means combing through your student account as well as considering other spending you’ve done.

I wish Form 1098-T were completely trustworthy so you wouldn’t have to track down all the underlying expenses in your student account, but it’s just not the case right now.

If you would like some support through this process, I recommend joining my tax workshop at PFforPhDs.com/taxworkshop/. I provide a detailed discussion of what qualified education expenses are missing from Form 1098-T and worksheets to help you keep all the numbers straight.

3. Your Fellowship or Training Grant Income Is Taxable

I just wanted to close the loop I brought up in point #1. In case you were not aware, awarded income is taxable to the extent that it exceeds your qualified education expenses such as tuition and required fees.

Now, just because some income is taxable doesn’t mean you will actually end up paying income tax on it. If your total income is low enough or your have enough deductions and credits to claim, you may not end up paying any income tax. But you have to go through the exercise of filling out your tax return to determine if and how much income tax you owe, and that is true whether your income is awarded or employee or both.

There is a persistent rumor within many universities and departments that awarded income is tax-exempt. That actually used to be the case several decades ago, so there is a kernel of outdated truth in the rumor. And I can understand why the rumor lives on and spreads, because it is what people want to hear. Plus, at many places it is not countered by direct communication from the university as in point #1.

If you would like to hear my full argument with IRS references to prove that awarded income is taxable, please listen to Season 2 Bonus Episode 1 of this podcast, titled “Do I Owe Income Tax on My Fellowship?” It is linked from the show notes for this episode.

4. Your Paycheck Is Pre-Tax, Not Post-Tax.

I’m going to expand on the issues related to awarded stipends and salaries now.

With employee income, your employer withholds income tax on your behalf to send to the IRS and gives you a paycheck for the rest of your income, which is your net or after-tax income. A pay stub is also generated for each paycheck that lists your gross income and all the tax that has been withheld, though you might have to proactively seek it out.

While it is possible to withhold income tax from awarded income, most universities and institutes don’t offer this benefit. There is typically no pay stub generated, either. In the absence of clear communication, harkening back to point #1, many, many fellows who are on board with point #3 assume that their income has already had income tax withheld. After all, that is how paychecks work for the great majority of people who receive them.

It’s a nasty surprise when they realize that their pay is pre-tax, not post-tax, and they have a large tax bill to pay.

5. Your Income Tax Is Due Four Times per Year, Not One

This point follows on on from point #4 for those who do not have income tax withheld from their awarded stipends or salaries:

If the amount you owe in income tax exceeds $1,000 for the year and you don’t fall into an exception category, you are required to make what are called estimated tax payments. This is when you, personally, send the IRS money up to four times per year to stand in for income tax withholding.
Going along with point #1, this is rarely discussed or even mentioned to grad students and postdocs receiving awarded income. A heads up would be nice.

Ideally, fellowship recipients would be told that they might owe income tax—point #3—and that tax is not being withheld from their paychecks—point #4—and that the best practice is to set aside money from each paycheck for their future tax payments, whether that is once per year or up to four times per year—this point.

If you would like more information about estimated tax for fellowship recipients, I have a great long-form article on it that I’ll link to from the show notes. If you want my help to determine if you are required to make estimated tax payments and in what amount, I recommend checking out my workshop at PFforPhDs.com/qetax, that’s qe for quarterly estimated t a x.

6. Those of You Under Age 24 Need to Be Extra Cautious

If you are under age 24 at the end of the tax year and receive primarily awarded income, there are two tax potholes for you to watch out for. Your university won’t tell you about these subjects because it comes way too close to giving tax advice.

The first is potentially being claimed as a dependent by your parent or other relative, which generally speaking is not good for your bottom line but good for theirs. I have observed that parents and the people who prepare their tax returns tend to default to assuming that anyone under age 24 who is a student is a dependent. The thing to know about being claimed as a dependent is that it’s not a matter of preference. There is a set of five objective tests to determine if a young person is a dependent, which you can read about in Publication 501. There is a tricky part of one of the tests, though, the support test, which is different depending on if your stipend or salary is employee income or awarded income, so watch out for that. You should go the extra mile to discuss with your parent or relative whether you can be claimed as a dependent before either of you files in case there is a difference of opinion to work out, because it’s much easier to do it that way than to mediate a disagreement via the IRS.

The second is the Kiddie Tax. The Kiddie Tax is an alternative way of calculating your tax liability based on your parent’s marginal tax rate instead of your own graduated tax rates. Ostensibly, the Kiddie Tax is supposed to disincentivize high-earning parents from sheltering income-generating assets in their children’s names, but in a mind-boggling twist, the Kiddie Tax applies to awarded income, not just investment income. I have an article on my site on the Kiddie Tax linked from PFforPhDs.com/tax/. I sincerely hope that it does not apply to you or you can find a way to avoid it or minimize it, but in any case it is something to be aware of and watch out for.

I have a whole video in How to Complete Your Grad Student Tax Return (and Understand It, Too!) dedicated to people who were under age 24 during the tax year, so if you want a more in-depth exploration of these topics, please go to PFforPhDs.com/taxworkshop/.

Conclusion

I’m really glad you joined me for this episode! If you found something of value in it, please share it with your peers. You can save them a lot of emotional and financial turmoil and stress by giving them a heads up about the topics I covered. I really appreciate it! Good luck this tax season, and don’t hesitate to reach out if you need any help!

Listener Q&A

Outro

Listeners, thank you for joining me for this episode!

pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast and instructions for entering the book giveaway contest and submitting a question for the Q&A segment. I’d love for you to check it out and get more involved!

If you’ve been enjoying the podcast, here are 4 ways you can help it grow:

  1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. If you leave a review, be sure to send it to me!
  2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
  3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes.
  4. Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

 See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

How to Solve the Problem of Irregular Expenses

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In this episode, Emily tells the story of starting to use the strategy that completely revolutionized her budget when she was a grad student. She teaches this strategy in almost all of the seminars she gives for universities, and it never fails to generate a high level of interest and follow-up questions. The strategy is called targeted savings, and it is a solution to the problem of irregular expenses. Irregular expenses are any expenses that occur less frequently than monthly that are difficult to pay for in the moment, such as flights, car repairs, electronics, gifts, etc. Irregular expenses don’t pose a problem for every budget, but they commonly do for lower earners like grad students. Targeted savings is a particular method for predicting and saving up in advance for these irregular expenses. If you listen through this episode and are motivated to implement a system of targeted savings, you are invited to join the Personal Finance for PhDs Community to access a full course on targeted savings, including a custom spreadsheet, and the December 2020 Challenge to create or update their targeted savings for 2021.

Links Mentioned

irregular expenses targeted savings

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 7, Episode 15, and today I don’t have a guest but rather am going to tell you about the strategy that completely revolutionized my budget when I was a grad student. I teach this strategy in almost all of the seminars I give for universities, and it never fails to generate a high level of interest and follow-up questions.

The strategy is called targeted savings, and it is a solution to the problem of irregular expenses. Irregular expenses are any expenses that occur less frequently than monthly that are difficult to pay for in the moment, such as flights, car repairs, electronics, gifts, etc. Irregular expenses don’t pose a problem for every budget, but they commonly do for lower earners like grad students. Targeted savings is a particular method for predicting and saving up in advance for these irregular expenses.

If you listen through this episode and are motivated to implement a system of targeted savings, I invite you to join the Personal Finance for PhDs Community.

I recently added a full course on targeted savings, including a custom spreadsheet, and in December 2020 I’m running a Challenge for the Community for all participants to create or update their targeted savings for 2021. If you want to take the course and/or participate in the Challenge, join the Community at PFforPhDs.com/targeted/.

Without further ado, here’s my episode, on how to solve the problem of irregular expenses.

Definition of Irregular Expense

I’d like to first expand on the definition of irregular expenses and explain why they are such a problem for early-career PhDs in particular.

Irregular expenses are expenses that occur less frequently than monthly, so they don’t really have a spot in a traditional monthly budget the way rent, utilities, groceries, etc. do. Yet, these expenses are predictable, at least in a general sense. You probably have some irregular expenses that occur in a fixed amount at a reliable point in the year, such as an insurance premium or a fee for your university. Other irregular expenses might not have a precise amount or date assigned to them, but it’s fairly certain they’ll crop up sometime, such as purchasing clothes or shoes.

I believe that irregular expenses cause more trouble for early-career PhDs than for our peers who have Real Jobs in their 20s and 30s for two reasons.

First, graduate students and sometimes postdocs have relatively low incomes. For someone whose income far exceeds their fixed expenses, irregular expenses don’t pose much of an issue. They can pay for the expense in the month it arises by cutting back slightly in some variable spending areas of the budget or deferring some spending. Maybe they save a little less or aren’t able to pay off as much debt as usual. But what if the irregular expense rivals or exceeds the portion of your income that doesn’t have to go to fixed expenses? That is fairly common situation for graduate students.

Second, graduate students and sometimes postdocs have more irregular expenses because they are graduate students or postdocs. PhDs often move away from loved ones and therefore incur travel expenses to visit them. Universities often charge fees that have to be paid once per year or term instead of being prorated to be taken out of each paycheck. If income tax on fellowships is not withheld by the university, that creates another irregular expense for the fellow. Research and conference expenses, whether reimbursed or not, are another type of irregular expense. These are all in addition to the irregular expenses that anyone might have.

Common Solutions for Irregular Expenses

Now that we’ve established what irregular expenses are, let’s discuss the various ways people handle them.

I mentioned one solution already, which is simply to cut back in other spending areas or savings goals in the short term so that you can pay for the irregular expense fully in the month that it arises. This solution pairs really well with keeping what I call a unique monthly budget, which is to write a unique budget for every single month that accounts for one-off expenses. However, this is not a viable solution, like I just outlined, if your income does not far exceed your monthly necessary and/or fixed expenses.

Probably the most common solution is to put the expense on a credit card to buy some time. By floating the charge on a credit card until the due date, you can spread the expense out over about two months and therefore have a better chance of paying for it using the prior strategy. For a larger expense, you might even end up carrying a balance for several months to spread out the repayment even more. Using credit cards in this way is not ideal, because you are obligating your future income to past purchases that should be paid for with past income, plus if you do carry a balance you’ll be charged interest.

The final common solution for irregular expenses is to have some cash savings available that you can draw from when an irregular expense arises. Then, you can replace the savings over time. One of the subtle advantages to this solution is that you will almost certainly consider the irregular expense more carefully and look for alternatives if you are spending cash vs. using debt. You might end up choosing not to incur the irregular expense at that time or shopping around for a better value. Plus, of course, there are no interest charges, and you can handle larger expenses than if you were only using the first strategy.

Targeted savings, the strategy I’m teaching you in this episode, is a more detailed version of this third strategy that involves advance planning as well as advance saving.

How I Started Using Targeted Savings

I first noticed my need for an intentional solution to this problem of irregular expenses about two years into my PhD.
Prior to that point, I had used all three of the solutions I just mentioned to handle irregular expenses.

When I was living paycheck to paycheck with no cash savings and an irregular expense came up, I would cut back as much as I could in my discretionary variable spending in that month to pay for it.
On an occasion or two, I still wasn’t able to swing the expense, so I put the expense on a credit card to float it into the next month, meaning the frantic cutting back on expenses lasted even longer. This was super difficult and unpleasant because on a stipend there’s not exactly a lot of fat in the first place.

Later, I did have a small general savings account, which I could dip into and then refill to pay for the irregular expense.

What happened after my second year of grad school is that I got married to another grad student, Kyle. We burned through almost all of our cash savings paying for our rings, honeymoon, and our portion of the wedding expenses. When we got back from our honeymoon and started combining our finances and setting up a joint budget, we realized that we only had $1,200 remaining in cash savings, which I felt obligated to call our emergency fund. So paying for irregular expenses out of existing savings was no longer an option.

It turned out that the summer we got married was a wedding boom among our friends. In fact, and I’m sure this will sound familiar to many of you, that summer kicked off a period of several years in our mid-twenties in which we were invited to about half a dozen weddings each year, most of them requiring us to travel.

Now, I love attending weddings. I very much wanted to share the joy of every couple who invited us to their wedding as we had so recently shared our joy. But we had no savings to help make that happen, and I had become savvy enough about personal finance to know I shouldn’t use a credit card if I couldn’t pay off the charge right away.

In that particular summer, we ended up declining a couple of the wedding invitations and cash flowing the irregular expenses associated with the weddings we did attend. We took a hard look at our new joint budget and found ways to reduce our spending on a monthly basis so we could handle the irregular expenses that we did incur.

As we financially caught our breath at the end of that summer, I resolved that I did not want to go through that again. I assumed—correctly—that we would have another big wedding season the next summer, and I didn’t want to have to scramble to pay for the travel and gifts and attire and everything, and I didn’t want to have to turn down invitations for financial reasons.
I had heard of this strategy known as targeted savings or sinking funds, so Kyle and I agreed to start saving up right then for the wedding guest-related expenses we assumed would come our way in fewer than 12 months. We didn’t know all the details at that moment of what the expenses would be and when they would occur, but it was a reasonable assumption that they would occur. We opened a new savings account, called it “Travel and Wedding Gifts,” and set up an autodraft to contribute money to it every month. The frugal measures we had put in place over the past few months helped us to establish that savings rate. The next year, when we did incur those expenses, we drew from that account to pay for them, and we didn’t have any of the stress and scramble associated with that spending that we did the year before.

General Solution

This is the basic concept of targeted savings. You anticipate an irregular expense, and you do your best to predict the amount and timing of that expense. Then, you establish a savings rate into a dedicated account that will sum to that amount by that time. It’s a really simple idea, though it can be tricky to implement, especially when you endeavor to capture and prepare for all of your irregular expenses, as I soon did.

Expanding the Solution

We didn’t stop with just wedding guest-related expenses. Over the course of the next few months, other types of irregular expenses arose. In September, Kyle and I paid up front for our two yearly university parking permits. In October, we purchased a season ticket to the Duke men’s basketball home games—Go Devils!—and two season tickets to the Broadway musicals series at our local theater. In November, we purchased cross-country flights to see our family over winter break.

We decided to apply our new system to these other expense categories, plus even more. Each time we cash flowed one of these irregular expenses by cutting back our other spending, we set up a new savings account and autodraft to fund that purchase for the following year.

It was not trivial to both pay for these irregular expenses out of cash flow and start saving up for the next year, but we managed it through putting in place frugal strategies that we hadn’t tried before. We canceled cable TV, stopped eating out for convenience, switched where we shopped for groceries, line dried our clothes, pursued credit card rewards, and more.
By the time a full year had passed, we had encountered or thought of every irregular expense in our lives at that time. We had set up separate savings accounts with our bank, and each one had a monthly autodraft to fund it.
Here are the names of our six targeted savings accounts and their savings rates from that time:

  • Appearance $35/mo
  • Cars $185/mo
  • Community Supported Agriculture $35/mo
  • Entertainment $60/mo
  • Medical/Dental/Vision $70/mo
  • Travel and Gifts $390/mo

Key Insight

This system worked very, very well for us, and it works well for many people I’ve spoken with about it. Targeted savings turns large, irregular expenses into small, fixed expenses that are easier to write into a budget. An effective monthly budget is a cornerstone personal finance strategy and is instrumental in helping you reach just about any financial goal, but a budget cannot be effective if it is continually derailed by irregular expenses.
Predicting and preparing for irregular expenses, whether through savings or a cash flow plan, is so important that I made it its own step in the Financial Framework I developed for PhDs, right after paying off high-priority debt and before investing for retirement.

The value of the strategy is not only in predicting and preparing for irregular expenses, although that alone would be reason enough to use it. What I’ve learned from using this strategy is that it helps you compare regular and irregular expenses head-to-head, which is really difficult to do otherwise.

In the absence of a system for predicting and preparing for irregular expenses, you’re flying by the seat of your pants with every irregular expense or spending opportunity that arises. You have to make a quick decision about whether or not you will spend and how your budget will accommodate that spending. In that moment, there is nearly always intense pressure to spend, either internal or external.

Implementing targeted savings has you take a bird’s-eye view of your spending over the course of a year, both regular and irregular. By considering spending decisions well before they actually arise, you take a lot of the pressure off the decision. By converting one-time expenses to expenses that you save for every month, you can more easily answer the question, “Would I rather spend $120 on this irregular expense or $10 per month on this regular expense?”

The trade-off was always there, but targeted savings makes it easier to make an optimal decision. Sometimes, you really rather would spend the $10 per month on a regular expense, so you can make a clear-headed decision to decline the $120 irregular expense. Targeted savings help you organize your spending so that it brings you the maximum possible satisfaction over the course of a year.

Our Targeted Savings Accounts Today

Kyle and I used targeted savings throughout the rest of grad school, and it helped us to spend on travel, car repairs, a DSLR camera, Christmas gifts for Kyle’s huge extended family, fellowship tax bills, dental checkups, business formal clothes, spontaneous charitable gifts, and much more—without anywhere near as much financial stress as we had experienced before using the system.

In fact, we kept using targeted savings even after we finished grad school and our household income increased. Even though we could cash flow pretty much any irregular expense now, I prefer to try to predict them and weigh how much we should spend in one budget category vs. another. In fact, we stopped using the system for the first year after we moved from Durham to Seattle because that was a major upheaval, but we started up again after that year because it was psychologically much preferable.
Targeted savings is not static, and you should iterate it every year at least to keep up with your shifting priorities and spending opportunities. Wedding guest-related expenses are no longer a big driver in our targeted savings system, and spending on our children now holds a place.

Our targeted savings categories as of early 2020 were:

  • Appearance
  • Cars
  • Childcare
  • Electronics
  • Entertainment
  • Gifts
  • Housewares
  • Life Insurance Premiums
  • Medical/Dental/Vision Copays and Coinsurance
  • Miscellaneous Kid Expenses
  • Travel

Course on Targeted Savings

I’ve thoroughly explored targeted savings through reflecting on my practice, talking with other PhDs about theirs, and reading how other personal finance experts use it. I’ve distilled the insights I’ve gained into my new course, Targeted Savings: The Solution for Irregular Expenses.
The course delves deeply into how to design and implement a system of targeted savings so that it captures all your problematic irregular expenses.
The course answers or helps you find your own answers to:

  • What kind of account or accounts should I keep my targeted savings in?
  • Do I need to switch banks to facilitate this practice?
  • How do I predict my expenses for the upcoming year?
  • Should I prepare for my irregular expenses individually or as groups?
  • Should I dedicate existing general savings to targeted savings and if so how?
  • How do I calculate the savings rates?
  • What do I do if an expense pops up that I didn’t predict?
  • Should my emergency fund be separate from my targeted savings?
  • How do I tell if an expense should be covered by my emergency fund or targeted savings?

and, the one that I have to answer for myself every single time I update my system:

  • What should I do if my calculated targeted savings rates are too high to fit into my monthly budget?

If you’re excited by the idea of targeted savings but not sure how to really get it going, please consider joining the Personal Finance for PhDs Community to access the course and December 2020’s Community Challenge. The Challenge is to create or update your system of targeted savings to be ready to go in January 2021. I know I personally need this update as our 2020 spending did not go at all as we had expected. As you go through the course and work on your system, you can report your progress and/or ask for help from me and the other Community members in the forum threads dedicated to the Challenge. The Challenge exists to keep you accountable to your goal of creating targeted savings and to assist you in overcoming any speed bumps you encounter. Even if you’re listening to this later on, as a Community member you’re always welcome to participate in past Challenges, and I’ll still provide support.

You can learn more about Targeted Savings: The Solution for Irregular Expenses and join the Personal Finance for PhDs Community at PFforPhDs.com/targeted/. I actually have made available on that page the first module of the course to give you a flavor of the content, and that module includes a list of two dozen common categories of irregular expenses for early-career PhDs.

Thank you so much for joining me for this episode! I highly recommend you test out the strategy of targeted savings in your own budget. It is a game-changer.