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How Fellows Should Prepare for Tax Time at the Start of the Academic Year

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Most Americans don’t like to give any thought to their taxes between when their tax returns are due in mid-April and when their income forms arrive at the end of January. (Scratch that: they don’t want to think about tax anytime outside of the two weeks in early April when they scramble to assemble their returns!) The exception is when they start a new job and are asked to set up their income tax withholding by filing a W-4.

fellowship tax September

A version of this post first appeared on GradHacker.

Graduate students and postdocs – lucky us – have extra opportunities to consider tax withholding, namely every time we change funding from a compensatory source to a non-compensatory source or vice versa. Compensatory funding for your stipend comes from your job as a research, teaching, or graduate assistant. Non-compensatory funding for your stipend comes from fellowships and training grants that are technically awards, not payment for work. (If that distinction makes little sense to you, you’re not alone!) Similarly, postdoc salaries can come in compensatory and non-compensatory versions as well.

As the vocabulary that universities use for these types of funding varies somewhat, here’s how you can definitively determine which type you receive: Compensatory pay is reported at tax time on a W-2. The broadest statement that can be made about non-compensatory pay is that it isn’t reported on a W-2. Universities have different methods for reporting this pay, which include: a 1098-T in Box 5, a 1099-MISC in Box 3, a 1042-S (for international trainees), a courtesy letter, and not at all.

When it comes to tax withholding, compensatory pay is handled by universities the same way employee pay is handled by employers: The trainee files a W-4, which calculates the fraction of each paycheck that will be sent to the IRS throughout the year. Each spring, the taxpayer files a tax return that delineates her exact amount of tax due, and any excess money withheld is refunded or any additional tax due is paid. That system is relatively easy to grasp because it’s the same as what all employees in the US experience.

Fellows (by which I mean trainees whose stipends/salaries are non-compensatory) usually have a different experience with respect to tax withholding, which is the focus of this post.

A small number of universities allow fellows to set up tax withholding using a W-4, just like trainees who receive compensatory pay. If you are a fellow at one of these universities, file your W-4 and join the rest of the country in putting taxes out of your mind until next spring.

However, the large majority of universities do not handle any tax withholding on behalf of their fellows. This does not necessarily exempt those fellows from sending tax payments to the IRS throughout the year; by default, the IRS expects to receive regular payments from each taxpayer. Instead, fellows must engage with the 1040-ES and estimated tax payments, which are more typically used by the self-employed. (But: graduate students are not self-employed!) This omission of services on the part of the universities can be especially challenging for first-year graduate students on training grants or receiving fellowships, who not only may be unfamiliar with the quirks of non-compensatory pay but also the US tax system at large, especially if they have never been a full-time employee.

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

Fortunately, there are only a few simple steps that fellows need to take at the start of the academic year to prepare for their tax due next April:

1) Use Form 1040-ES to estimate the amount of additional tax you will pay for 2018.

Form 1040-ES is a one-page form (page 8) that assists you in making a high-level estimation of the amount of tax you will owe for this year. (If you want even more information, check out Publication 505.)

You will enter your expected adjusted gross income for 2018 in line 1. If your grad student stipend or postdoc salary is your only income, simply multiply the income on your paycheck by the number of paychecks you expect to receive in 2018. If you have a side income or were otherwise employed prior to starting your fellowship/training grant, add in that income as well.

The worksheet will then walk you through a truncated version of the calculations you will make on your tax return: subtracting your deduction (standard or itemized), calculating your tax due, and factoring in your credits and self-employment tax (from your side income, possibly).

In the end, you will have three relevant numbers: the estimated amount of tax you will owe for 2018 (line 11c), the amount you have to pay throughout 2018 to avoid being penalized (line 12c), and the amount of withholding expected in 2018 (line 13) (for instance, from your job or compensatory pay prior to your switch to non-compensatory pay).

2) Determine whether you are required to make quarterly estimated tax payments, and do so if you are.

If for 2018 you expect to have more tax withheld than the amount required to avoid a penalty, once again you can forget about taxes until next spring.

If for 2018 you will owe at least $1,000 in additional tax, you are required to make quarterly estimated tax payments. (Exception: If your withholding in 2018 is greater than the smaller of 90% of your 2018 tax due or 100% of your 2017 tax due if your 2017 tax return covered 12 months. See Figure 2-A of Publication 505.) You will send in to the IRS one-quarter of your additional tax due (line 15) by September 17, 2018 (for the period of June to August), January 15, 2019, April 15, 2019, and June 15, 2019. You can pay by mail using the vouchers in Form 1040-ES or online at www.IRS.gov/payments.

If in 2018 you will owe less than $1,000 in additional tax, you are not required to make quarterly estimated tax payment, but you will owe a lump sum at tax time.

3) Set up a system of self-withholding to prepare for your tax due quarterly or yearly.

Whether you are required to pay quarterly estimated tax or a lump sum at tax time, the best practice to handle those payments is to prepare for them with each paycheck. Basically, you should simulate your own personal tax withholding system to avoid being forced to come up with a large sum quarterly or yearly, which can be a shock to your budget or cash flow.

Divide your tax due, whether quarterly or yearly, by the number of paychecks you’ll receive in the period it covers. Transfer that amount of money each time you are paid to a dedicated savings account for tax payments. Then, when you pay your quarterly or yearly tax, draw your tax due from the “withholdings” you’ve created in that savings account. (You can also leave this money mixed in with other cash in your checking or savings accounts, but be sure to keep careful track of the amount you have earmarked for taxes so you don’t dip into it for other purposes.)

For the time that you receive non-compensatory pay, you’ll have to stay on top of making your quarterly estimated tax payments or verifying that you are not required to make them. First-year graduate students in particular should redo Form 1040-ES in January for their 2019 income, because while receiving non-compensatory pay for only the fall semester might not meet the requirement for paying quarterly estimated tax, receiving it for the entire calendar year probably will.

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Serving as a Resident Advisor Freed this Graduate Student from Financial Stress

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This episode’s money story features an interview with Adrian Gallo, a PhD student at Oregon State University. Adrian serves as a resident advisor in a fraternity house close to campus. For most of his four years in the role, it was a dream side hustle: high-paying (in defrayed costs), low time commitment, and personally gratifying. However, when the house experienced a calamity, the time he had to spend in the role rocketed up; his research suffered, and he had to have difficult conversations with his advisor. We discuss the pros and cons of side hustles generally and resident advisor roles in particular, including how this side hustle frees Adrian from the financial stress some of his peers experience.

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resident advisor

0:00 Introduction

1:06 Please Introduce Yourself

Adrian Gallo is a fifth year at Oregon State studying carbon cycling. He also hosts a radio show, Inspiration Dissemination, which interviews grad students about research and their path to grad school.

2:45 What is the scope of your role as a resident advisor?

Adrian started as a resident advisor concurrently with starting grad school. His contractual obligations are minimal: he is a liaison between undergraduates and landlords and responsible for dealing with big-picture items, such as replacing appliances.

The role is in a fraternity house; Adrian is also a member from his undergraduate years. He knew the possibility for growth inherent in participating in this fraternity, so he decided to also serve as a mentor to the fraternity members. He helps with big-picture planning such as five-year goals.

The time commitment of the role fluctuates throughout the academic year and has also varied year-to-year. When the fraternity leadership was running well, Adrian didn’t do as much, but he became more involved when it was warranted.

On average, the time commitment of the position is 2-3 hours per week, which includes two hour-long meetings. Typically, he chats with the kitchen manager or house director as well a few times. On the ‘big’ weeks, the job has taken 20+ hours.

7:33 What pay and/or benefits do you receive for the role?

Adrian doesn’t pay rent (the average rent in Corvalis is $500 to $700+) and lives very close to campus so it is quite convenient to get to and from campus. He has two bedrooms in the fraternity house (one serves as his office) and his own washer/dryer. Utilities and a parking spot are included.

He also receives food service during the academic year: breakfast, lunch, and dinner five days per week. He can get to and from the house and eat a pre-prepared meal in just an hour lunch break. This is an amazing degree of time savings.

10:09 How did you land this resident advisor position?

Adrian initially inquired with the local fraternity chapter about finding a place to live and a roommate. Instead, they offered him the resident advisor position, which he though was outlandish. He was nervous about living in a fraternity house with approximately 50 college students. However, after a few phone conversations, he decided to give the position a try for a year. After one year in the position, he realized he really enjoyed the role and had found a home.

13:41 How do you make sure you’re fulfilling the expectations of you as a graduate student while holding this side position?

At first, there was no problem as the time commitment was so low.

Last year, 10 rooms in the house flooded and the floors had to be removed. The damage was so extensive that it couldn’t be fixed right away, which deprived everyone of sleep and wore them down.

Adrian had to spend significant time dealing with contractors (all day on the phone) and contacting the landlords, which kept him out of the lab for some time. He wishes he had asked for help from the student leadership in dealing with this situation much earlier as the time management was so difficult.

17:00 Did you let your advisor and co-workers know what was going on during the house disaster?

For about a week and a half, Adrian wasn’t at work and finally his advisor initiated a conversation with him about what was going on, at which point Adrian filled him in. He wishes he had been more forthcoming.

Adrian’s advisor knew about the position and that he was able to balance the roles well for the first two years. His advisor started to question whether the resident advisor role was compatible with Adrian’s role as a graduate student.

Ultimately the floor repair took approximately 2.5 months. Adrian learned more than he ever expected to about working with contractors, repairs, etc. The time commitment was very intense at the beginning but tapered over time.

22:22 How did you decide to stay in the resident advisor role and also convince your advisor that it was a good idea?

Adrian finds witnessing and facilitating the growth of the undergraduate fraternity members so fulfilling that he didn’t seriously consider resigning his position. Another job wouldn’t compare to the resident advisor role.

25:10 Have you received any additional intangible benefits aside from the mentorship that you’ve found fulfilling?

Staying in close contact with the undergraduates helps Adrian in his teaching role because he can make relevant references, which his students find engaging.

27:28 What might cause you to resign this position?

Adrian had second thoughts about the position during the flooding situation, particularly because he couldn’t sleep in the house with the soundproofing missing. The sleep deprivation really got to him; he couldn’t think or work well.

30:30 Do you think you’ll continue with the role even through writing your dissertation?

Adrian already has written his master’s thesis while in the resident advisor role and actually found it helpful to live in the fraternity house. He would come out of his office mentally exhausted and find refreshment in the escape of interacting with the undergraduates. This approach isn’t for everyone, but it worked well for Adrian.

33:28 How has your role as a resident advisor affected your finances?

Adrian paid off his student loans from his undergraduate degree and bought a car. He bought a nice mountain bike, which bring him a lot of joy and health benefits.

The chief intangible benefit is that he doesn’t have to feel concerned about his finances. Many of his friends have to budget very tightly to make it on their stipends. In contrast, Adrian can absorb unexpected expenses without worrying.

As an undergraduate paying his way through college, Adrian found concern about finances to be a constant cloud over his head, but it’s not something he experiences any longer thanks to his side hustle. The resident advisor role frees Adrian from the constant cloud of financial stress in exchange for (usually) only a few hours per week.

The benefits of this role have on balance been very much worth the time put in, even though he went through the tough period during the renovation. Thankfully, his advisor was ultimately supportive.

Resident advising is a great solution to the problem of insufficient stipends, and often comes with the side benefit of mentoring students.

41:15 Final comments

There are a few other graduate students serving as resident advisors to the fraternities and sororities, including two who had not previously been involved in the Greek system. A social scientist might find it very interesting, and in fact the person who held the role prior to Adrian used observations from her resident advisor role in her dissertation.

Try serving as a resident advisor out! Being willing to experiment with this role has enabled Adrian to make significant financial progress during graduate school. What’s the worst that could happen by saying “yes” for a year?

Undergraduates are worth getting to know as well (networking)!

36:40 Conclusion

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

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Investing Strategies to Grow Your Wealth During Your PhD Training

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The most important investment you make during graduate school or your postdoc is in your career. But alongside that primary objective, many PhDs also invest money during their training. By far the top challenge or impediment to investing during graduate school or a postdoc is the low pay, and only a fraction of trainees are financially able and ready to invest. However, investing even a small amount of money on a regular basis throughout graduate school and a postdoc can have an enormous impact on lifetime wealth. The even better news is that the process of investing itself is simpler and easier than you probably think.

investing strategies phd training

 

Many investors, both novice and experienced, fall into the trap of thinking that to maximize their investment outcomes, they should focus on choosing the best investments. In fact, there is no reliable way to pick winning investments. There are only three aspects of your investments that affect your investment outcome that you can control: your savings rate, your investment asset allocation, and the cost of your investments.

This article outlines how to grow your wealth during graduate school by optimizing those three factors and implementing a few other key strategies.

A version of this post was originally published on GradHacker.

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Choose Passive Investments

Empirical studies have borne out time after time that passive investing is a more successful strategy than active investing after costs are factored in. Basically, what that means is that buying a set of investments that is representative of a market sector overall (e.g., the entire stock market) is more successful in the long term than trying to pick winners from that same sector. In trying to beat the market, both professional investors and individual investors consistently fail to even match it.

Passive investing is a far simpler strategy than active investing and much less time-consuming to initiate and maintain because there are plenty of high-quality passive investment products available. To enact a passive investing strategy, buy an index fund or an indexed exchange traded fund (ETF). For example, there are index funds and ETFs that reflect the entire stock market or the S&P 500, among numerous others.

The great bonus here is that passive investing is far more time-efficient than active investing. You don’t have to research individual investments to death; just buy them all!

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Maximize Your Savings Rate

Instead of putting your time and energy into agonizing over your investment choices and trying to optimize them, direct it toward increasing your savings rate into your investments. You can free up more cash flow for your investments by decreasing your expenses or increasing your income.

As simple as that sounds, every grad student knows that both time and money are very tight during this phase of life. If you pursue increasing your income or decreasing your expenses, you must be very selective about how you do so. The following posts discuss both of these strategies in much more detail.

Decreasing your expenses:

Increasing your income:

Increase Your Income

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Pick an Asset Allocation and Stick with It

Your asset allocation is the percentage of your investment that is in each asset class or sub-asset class. The three main asset classes are stocks, bonds, and cash. Your asset allocation should be chosen with respect to your investing goal. For a very long-term goal, such as retirement for someone in her 20s or 30s, a very aggressive asset allocation is appropriate, such as 80-100% stocks. If you are a DIY investor, your brokerage firm can help guide you to an appropriate asset allocation.

Your asset allocation should change as the timeline on your goal grows shorter, but not quickly or dramatically. A common pitfall that investors fall into is trying to time the market by changing their asset allocation, i.e., they pull money from stocks into bonds or cash when they anticipate a stock market drop and then try to find the right time to push it back in. While the theory of selling high and buying low is fine, it’s almost impossible to successfully time the market consistently, even for professionals. Instead, maintain your appropriate asset allocation and ride the market down and up.

Minimize Investing Costs

All investments have costs associated with owning and transacting them. You can think of those costs as directly coming out of your investment returns. Over the course of several decades of investing, these costs can reduce your balance in retirement by hundreds of thousands of dollars!

In fact, costs are one of the big reasons that active investment strategies fail to perform as well as passive investment strategies. While active strategies sometimes do generate higher top-line returns than passive strategies, their higher cost almost always knocks the real return experienced by the investor below than that of passive strategies.

With mutual funds, index funds, and ETFs, the cost of owning the investment is expressed very clearly in its expense ratio (a percentage). A low-cost ETF or index fund will have an expense ratio of a couple tenths of one percent or lower, while a high-cost, actively managed mutual fund will have an expense ratio of one percent or higher. For a passive strategy, look for funds with very low expense ratios.

Watch out as well for fees tacked on top of the expense ratio of the fund you purchased itself; these are often charged by the person or institution managing the account, such as a 401(k) administrator, a financial advisor, or a roboadvisor. Make sure that you have a compelling reason for paying such a fee before signing up for one, because it will come directly out of your returns.

Dollar Cost Average

The strategy of dollar cost averaging (as opposed to irregular lump sum investing) is to invest a set amount of money on a regular basis. If you receive a regular stipend/salary, this translates to investing the same amount of money every pay period, ideally through an automated transfer.

One of the big advantages of dollar cost averaging is that committing to the strategy prevents you from attempting to time the market. When you use your discretion over the timing of your investment schedule, many of us will try to guess whether the market is on an upswing or downswing and shift our buying behavior accordingly. This is rarely a successful strategy, whether it is done haphazardly or very deliberately.

In fact, dollar cost averaging actually guarantees that you “buy low and sell high” in a sense, although you are not selling. Because you invest the same dollar amount every period, when the market is low you buy more shares and when it is high you buy fewer shares.

Use a Roth IRA

If your investing goal is to save for retirement – likely the first investing goal you should set as it is the longest-term – it is a great idea to use a tax-advantaged retirement account. A tax-advantaged retirement account protects your investments from taxes over the decades between your contribution and withdrawal in retirement; paying tax year after year would otherwise eat away at your returns. Therefore, using a tax-advantaged retirement account maximizes your returns, as long as you abide by the restrictions on access that it imposes.

Only very rarely do graduate students have access to a tax-advantaged retirement account through their universities; therefore, an individual retirement arrangement (IRA) is their only option if they are eligible. Some postdocs receive retirement account benefits through their universities and some do not. IRAs are set up independently and managed entirely by the investor. This may sound like a big responsibility, but this freedom of choice means you can pick the optimal investments for you.

IRAs come in two varieties: traditional and Roth. Roth IRAs are generally recommended for current lower-earners with great income growth potential, so they are an excellent fit for graduate students and some postdocs!

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Get Started ASAP

Probably the biggest investing mistake you can make is to procrastinate getting started. On average, the stock market ends two out of every three years higher than it started; if you’re ready to start investing but put it off, more times than not you miss out on earnings that could have gone into your coffer. I frequently speak with PhDs-in-training who stay stuck in investing analysis paralysis for years on end. You can always course correct if you realize you made a poor choice with your investments initially, but you can never recover lost time. So even if you aren’t confident you’re making the perfect investment, just get started!

My Experience with Investing During Graduate School

Investing is one of my favorite subjects on which to teach, write, and coach, and my enthusiasm for the subject is due to the thrilling experience I had with investing during my seven years of PhD training. Starting at $0 in 2007, my husband (also a grad student over the same period) and I together grew our retirement investment portfolio to approximately $75,000 by the time we defended in 2014. The success we experienced is largely attributable to our aggressive and increasing savings rate and the long bull market that started in 2009.

I had an inauspicious start with investing when I first opened and funded my Roth IRA. I didn’t actually purchase the investment I intended to when I opened my account, so my money was going into cash! The really embarrassing part of the story is that I didn’t catch my mistake for over a year. When I finally did, I moved my IRA from that first brokerage firm to one I preferred and made sure that all my money went into my investment of choice, a target date retirement fund.

Deciding that a target date retirement fund was right for me only took a couple hours of research, and as it’s a set-it-and-forget-it strategy I have spent zero time over the last decade-ish maintaining it (though I do regularly check the balance). Instead of spending my time and energy monkeying with my choice of investments, I used them to find ways to add more money to my investments.

When I first started contributing to my Roth IRA in 2007, I saved 10% of my gross income, which was $200/month. After we married and combined finances, my husband and I set a lofty goal to max out two Roth IRAs each year. We used frugal strategies to incrementally reduce our spending to free up more money for investing. (Our top five frugal strategies alone helped us reduce our yearly spending by approximately $6,000.) While we didn’t quite achieve our goal during grad school, we did end with a 17.5% retirement savings rate.

Investing is about far more than just numbers to me. Investing throughout graduate school has not only given my family financial security, but it enabled both my husband and I to pursue our post-PhD dream jobs, even though they are risky and less remunerative in the short term.

I want other early-career PhDs to experience a similar degree of financial freedom as soon as possible in their lives, which is why I am such a proponent of investing even during the incredibly financially challenging graduate and postdoc training periods. If you’d like to go even deeper into this subject matter, sign up for my free 7-day email course on investing for early-career PhDs.

Give Yourself a Raise: Inexpensive Entertainment on or Near Campus

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With respect to entertainment and socializing, graduate students are facing a bit of a catch-22: their university affiliation affords them tons of opportunities for free and subsidized entertainment, yet they often think they are too busy to take advantage. However, all work and no play makes for a burned-out PhD student. When you do manage to escape from the lab or library, there are numerous ways to have fun without straining your wallet. When you plan a night out with your peers or want to see a show, check on your free or subsidized options through your university before paying full price.

inexpensive entertainment campus

A version of this post was originally published on GradHacker.

Low-Cost On-Campus Entertainment Ideas

University, school, and department social events

From happy hours to dances to sponsored outings, universities put on tons of free events year-round for students, anywhere from once per year to as frequently as once per week. Your graduate student government is probably the best place to start looking for sponsored activities and opportunities to socialize with your peers. The graduate student government at my alma mater hosted happy hours about once per month, paid for students to go bowling and to minor league baseball games, and hosted trivia nights and ice cream socials. Other student organization may sponsor similar nights out to bars or local attractions such as museums and planetariums.

Spectator sports

I have to admit that I was not a fan of any college sports until I got to graduate school, but I found my alma mater’s basketball culture irresistible. Grad students who enjoy watching football, basketball, or many other sports will be able to attend events for free or at a highly subsidized rate. Or if watching sports isn’t your thing, maybe tailgating is!

Intramural sports

Intramural sports are a great combination of entertainment, exercise, and socializing. There are most likely grad student teams competing against each other and undergraduate teams in softball, volleyball, flag football, basketball, etc. Because you are using university facilities, the fees to participate in such teams are typically nominal.

Theater, museums, movies, and concerts

Similar to spectator sports, you can likely attend student theater productions on campus for a very low price. There may be a museum or botanical garden on campus that is free for students. Free or subsidized concerts and movies are also common, though you might not see the newest releases. My alma mater screened both of the PhD Comics movies for free, which were wonderful events designed specifically for graduate students, and also hosted two large free outdoor concerts each spring.

Orientation activities

The start of the school year is a great time to find free entertainment as clubs are recruiting new members. You can keep an eye on club calendars for events that you might enjoy, such as stargazing, games, gardening, hiking, or volunteering.

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Low-Cost Off-Campus Entertainment Ideas

City events

Most cities cultivate a calendar of events for residents and visitors to reference. Over the summer months, these calendars burst with lovely outdoor activities that are often free or inexpensive, such as festivals, concerts, and movies. This can be a great way to stay entertained when the university’s calendar tends to be more dormant. Local bars and coffee shops in college towns also frequently host live performances that draw in a student crowd.

Theater, movies, museums, sporting events

Your graduate student ID almost always works just as well as an undergraduate’s for scoring reduced-price tickets in the community. Many venues such as theaters, sports stadiums, and museums offer discounted rates of entry to students on set days of the week or month or a few times per year. My husband and I held season tickets to the Broadway shows at our local theater for several years on Sundays or Tuesdays, which were the student discount nights.

Movies

You don’t need a subscription to Netflix, Hulu, or Amazon Prime to enjoy watching movies in your home. Your university and local public library should have an excellent selection of titles that you can check out for free.

Do-It-Yourself Entertainment Ideas

Social gatherings

One of the best aspects of grad school is the built-in social network it gives you within your school or program. Parties can be easily planned alone or with a few other hosts in homes, at pools, in bars or restaurants, or in parks, and designating them as potluck, Dutch, or BYOB means that no one is shouldering the cost alone.

Watch parties

One of my favorite aspects of grad student life was getting together with other basketball fans to watch our team play away games on TV. We even had an informal arrangement with another couple that we would host watch parties for all the games that were broadcast over the air while they would host for all the games shown on cable (removing the primary argument for us to keep paying for cable). You can arrange watch parties at home and sometimes at bars for whatever kind of entertainment you enjoy – sports, popular TV shows, movies – as long as you know a few other people with that common interest.

How do you keep yourself entertained and socialize on campus and in your city without busting your budget? How have you used your student status to get discounts on entertainment?

Dual PhD Couple in Seattle Spending $20k/Year on Rent

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In this episode, I break down my own budget from 2017. My husband and I earn about $100,000 per year and live in Seattle, WA with our two small children. I detail our top five expenses (rent, groceries, travel, kid spending, and transportation) as well as the financial goals that we’re currently working toward.  I give some advice for a budget-conscious person moving to Seattle. Finally, I share what it’s like to be a renter in Seattle’s rapidly inflating housing market, spending nearly $20,000 per year on rent and feeling shut out of the housing market.

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dual PhD couple Seattle

1:05 Q1: Where do you live and what is your income?

My husband, Kyle, and I live in Seattle, WA, with our two daughters, a 2-year-old and a newborn. We moved here in 2015 for Kyle to take a job at a biotech start-up. I am self-employed; Personal Finance for PhDs is my main business, and I also have a side hustle. Our household income in 2017 was around $100,000.

Further reading:

1:40 Budgeting Background Info

  1. Kyle and I practice percentage-based budgeting, which means that from our gross income we:
    • Pay income and FICA tax
      • through payroll deductions on Kyle’s income.
      • through quarterly estimated tax on my self-employment income.
    • Tithe (donate 10% to our church).
    • Save into retirement accounts (20% in 2018, 18% in 2017).
  2. We live on one income. Kyle earns most of household income and has a regular salary, so we base our budget entirely off of his income after the percentage-based allocations. All of my income after the percentage-based allocations goes to savings. This helped a lot when my self-employment income was irregular, although now I pay myself a salary.
  3. We budget for our regular (monthly) and irregular (yearly) expenses. More details about this system can be found in Season 1 Episode 1.

Further reading: How to Pay Tax on Your PhD Side Hustle

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4:19 Q2: What are your five largest expenses each month?

Our total spending in 2017 was approximately $47,500 (excluding the above percentage-based allocations and health insurance premium paid as a payroll deduction).

5:09 #1 Expense: Rent

In 2017, we spent $18,870 on rent, which is a monthly average $1,570 and 40% of our total spending.

Our rent went from $1495 per month to $1645 per month.

We live inside Seattle city limits. Our apartment in older building with no amenities. The apartment is approximately 850 square feet and has two bedrooms and one bathroom. We chose the apartment based almost solely on location and price.

When we next move, we definitely want to get a place with a dishwasher! Our kitchen is pretty small. We cook and eat in a lot and with two little kids so we wash a lot of dishes every day.

6:38 #2 Expense: Groceries and Household Consumables

In 2017, we spent $7,733.54 on groceries and household consumables, which is a monthly average of $644.46 and 16% of our total spending.

This amount of spending feels high to me, and this is a category that I keep a close eye on.

We meal plan, eat virtually every meal out of our own kitchen, and usually buy food on the less processed side of the spectrum. We shop mostly at Costco and Fred Meyer and also a little at QFC. We don’t seek out organic or similar food except when we buy directly from the from farmer’s market.

Most likely the reason we spend a lot in this category is simply that we eat a lot, and the food we eat is on the more expensive side of the spectrum. These days, we alternate between eating low carb/Whole30-ish and eating the standard American diet, which means we are consistently eating meat and often dairy, which are both more expensive categories.

Our typical meals are:

  • Breakfast: Egg casserole with sausage, sweet potato, onion, and spinach.
  • Lunch: Chicken yellow curry, chili, sausage and eggplant hash, fish plus sautéed spinach or zucchini.
  • Dinner: Meat with vegetable, e.g., balsamic vinegar chicken and roasted asparagus. Kyle’s favorite meal: Brussels sprouts bowls. One of my favorite meals: Mexican breakfast bowls.
  • Snack: PB and almonds

Our toddler is a very good eater. We followed the baby led weaning technique, and now she eats the food we do plus more milk, fruit, and cheese.

9:57 #3 Expense: Travel

In 2017, we spent $3,482.47 on travel, which is a monthly average of $290.21 and 7% of our total spending.

I was surprised that travel ended up in our top 5 because I perceive that we travel much less than before we had children.

In 2017 we traveled on five occasions: two weddings, our 10-year college reunion, a memorial service, and to one of our parents’ homes for Christmas.

In addition to the flights, on various of these trips we paid for hotels, rental cars, meals, entertainment, and registration.

We definitely spend more per trip than when we were in grad school. Flying with a baby has spurred us to take direct flights at convenient times of day instead of purchasing the lowest fare available.

Our current frugal practice regarding travel is to rewards credit cards; we currently have the Alaska Airlines credit card and the Chase Sapphire Reserve credit card.

12:10 #4 Expense: Miscellaneous Kid Spending

In 2017, we spent $2,688.66 on miscellaneous expenses for our oldest daughter, which is a monthly average of  $224.06 and 6% of our total income.

This is the category I have the least handle on as it is so unpredictable.

Our one regular expense included in this category was preschool tuition, but that only applied for a few months

Our spending out of this category was all over the place

  • Medical copays, occupational therapy copays, breastfeeding medicine.
  • Travel car seat and travel stroller (in addition to the ones we use at home).
  • Bookcase, mattresses for grandparents’ houses, jacket, and teether.
  • Toddler class at the local community center and zoo membership

This is a fly-by-the-seat-of-your-pants category.

I was surprised these miscellaneous kid expenses as a category cracked top 5 because our first-time-parent start-up expenses hit in 2016.

14:30 #5: Transportation

In 2017, we spent $2385.77, which is a monthly average of $197.98 and 5% of our total spending.

I really thought transportation expenses wouldn’t be in our top five; low transportation spending is a point of pride for me!

It turns out that 30% of the spending was from our regular monthly budget, and 70% was from our irregular expenses budget. Our regular expenses included gas and parking, whereas our irregular expenses included car insurance, registration, and maintentance.

We own one older car and don’t use it for commuting. Kyle has a sub-10 minute bike commute and I work from home. We generally just use the car for errands, activities with the kids, church, grocery shopping, etc.

Those irregular expenses hit in only 3 months of the entire year, which is why I sort of forgot about them. We pay our car insurance once every 6 months, and it’s inexpensive. We spent over $1000 in car repairs/maintenance in 2017, which was unusually high and not a yearly occurrence.

All of our top 5 expense categories together accounted for 74% of total yearly spending.

17:20 Q3: What are you currently doing to further your financial goals?

1: Retirement Savings

We save a fixed 20% of our gross income into our retirement accounts.

We actually don’t use Kyle’s 401(k) through work at all because of high fees. Instead, we put our retirement savings into our two Roth IRAs and my individual 401(k), which we had total control over. Kyle’s 401(k) is the account of last resort because there is no match.

Details on Emily's Roth IRA

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2: Down Payment Savings

In 2017, we saved 21.7% of my income and all of our self-tax refund for a down payment on a home.

Further reading: Creating Our Self-Tax Refund

In early 2018, paused our down payment savings to save into a fund to help with expenses and lost income associated with the birth of our 2nd daughter’s.

Once those expenses have settled, we’ll resume saving for our down payment. In the remainder of 2018, we plan to save a fixed rate from Kyle’s income plus 22.7% of my income.

Our initial down payment goal was $60,000, but now that we’re getting close to that number, we want to keep saving and perhaps make $100,000 our next goal. We’re not necessarily shooting for a 20% down payment, but having a lot of money available for the down payment, other fees and expenses, and moving costs will be good.

3: Kids’ College

We save a nominal amount of money toward our children’s college expenses. We plan to hit this goal harder after we buy our first home.

4: Paying Down Student Loan Debt

We are currently making only the minimum payments on a standard 10-year repayment plan on my student loans. Episode 1 explains why we have not yet paid off these loans. However, as of the day of the recording, we received an update on the loans and decided to pay them off completely.

20:47 Q4: What don’t you spend money on that might surprise people?

1: Kid Expenses

A: Childcare

We don’t spend much money on childcare because of the way we have structured our life. Kyle has a regular job, and I’m self- employed. I’m also our children’s primary daytime caregiver. I work when Kyle is home with the kids and when they are sleeping. In 2017, I worked around 20 hours per week with this system. When I travel for speaking engagements, we hire sitters through a service we subscribe to, but this is irregular. We don’t have any regular childcare as of now. We are considering hiring a part-time nanny this fall since we now have two kids to help keep my work hours up.

B: Diapering and Clothing

We cloth diaper, which means we paid a bunch of money for diapers in 2016 but not in 2017. We use disposable diapers when we travel and disposable wipes sometimes.

Further reading: Cloth Diapering in an Apartment

We didn’t have to spend any money on clothes in 2017. The communities we’re plugged into gave us lots of gifts, hand-me-downs, and borrowed clothes.

Further reading: Outfitting Our Baby with Hand-Me-Down, Borrowed, and Used Stuff

When we buy stuff for our kids, we often look to the secondhand market first.

2: Eating Out

We only spent $254.38 on eating out in 2017, which is an average of $21.20 per month. This is a shockingly low figure to me. Since having our first child, we basically don’t go out to eat or get take-out any more!

We don’t drink coffee, which many people pay for out of the house.

Kyle does buy a beer at occasional happy hours with his coworkers, which probably accounts for a good fraction of the spending in this category. I’m in a non-drinking phase of life due to breastfeeding and pregnancy.

3: Entertainment

Our only recurring entertainment expense is Netflix. We are still avid Duke basketball fans, but as we’re not attending games anymore that is an inexpensive hobby.

This low spending is a big change from before we had kids. We used to have season tickets to the Broadway musicals series our local theater, which is not something we’re doing now.

Most of our entertainment now revolves around our toddler: going out doing activities or playing with friends and even at home. We attend lots of free activities around Seattle: parks, toddler rooms and gyms at community centers, and libraries. We also hang out with her toddler friends and our kids tag along to game nights with our friends.

I’m chalking this low spending up to this being a unique phase of life! We expect to spend more in this category again later.

26:31 Q5: What are you happy with in your spending and what would you like to change?

Overall I am quite happy with our spending and progress toward our financial goals.

I don’t love that we spend almost $20,000 per year on rent, but it is reasonable for this city.

I’m not so happy with the grocery and kid expenses.

I feel like we’re spending a lot on groceries. I have some frugal practices, but could do more. During the Frugal Blitz this coming September, I will focus on frugalizing my groceries.

I don’t mind spending what we do on the children, I just want it to be more predictable! Perhaps we will institute a monthly cap on spending or try to anticipate the larger expenses as they grow.

28:11 Q6: What is your best advice for someone new to your city who is budget-conscious?

Focus on housing and transportation: Do your research in advance about where to live and what your commute will be like.

Renting and buying in Seattle is on a quick timeline. Places listed for rent are available immediately or like one week out, and little notice is required when you move out of a place. In 2015 when we moved to Seattle, the rental market was quite competitive. We had to make quick decisions on where to apply and compete with others.

We handled this market by researching the prices in the neighborhoods of interest before we started our moving trip, even though we were not expecting that any of those same rentals would be available when we arrived. This gave us the ability to spot a good deal.

Further reading: Apartment Search in Seattle

You should factor in your commute if you know where you’ll be working. A lot of people avoid the higher housing prices by living outside of Seattle, but that usually increases their commute time. We chose to eliminate the commute and pay the higher housing cost so that we could have more time together.

Don’t assume you’ll commute by car. Over 50% of people in Seattle commute by other methods: bus, biking, walking.

30:52: Q7: Would you like to make any other comments on what it takes to get by where you live on what you earn?

In Seattle, the high tech industry is quite dominant. Those positions are very well paid, and housing costs are being driven up quickly.

In 2017 and the first half of 2018, Seattle had the fastest-appreciating housing market.

Housing prices are heading up quickly, and it’s very discouraging for renters/first-time buyers.

Purchasing a home in our current neighborhood (maintaining that short commute) would be very difficult for us. Even earning $100,000 per year, the most we could afford in our neighborhood is the lowest priced condo possible. The median home value in our neighborhood is almost $1,000,000. The median condo price in Seattle is nearly $550,000. It’s also very hard to not get swept up in the hype of the market.

We are leaning against ever buying in Seattle. Housing is quite a struggle for first-time home buyers.

I’d love to hear from other PhDs (in training) who make less than what we do on how you manage your expenses!

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Should a Graduate Student Save for Retirement in a Roth IRA?

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For graduate students with sufficient stipends, investing during graduate school is a fantastic financial goal. Counterintuitively, the long-term goal of funding retirement should be the first or one of the first investing goals any individual has. An Individual Retirement Arrangement (IRA) may be an appropriate vehicle in which to invest during graduate school, when the vast majority of graduate students do not have access to a retirement account at their universities such as a 403(b) or 457. But not all graduate students are eligible to contribute to an IRA, and an IRA is only the best choice for certain investing goals. If a graduate student opens an IRA, she must choose either a Roth or a traditional version.

grad student Roth IRA

A version of this article originally appeared on GradHacker.

What is an IRA?

An IRA protects your investments from being taxed while they are growing. An IRA is not synonymous with certain investments, but rather is an envelope around whatever investments you have chosen. As the name implies, the IRA is intended to be used for retirement savings, and by protecting your investments from taxes over the decades, your investments will grow at their fastest possible rate. Due to the power of compound interest, not having to pay tax on the growth of your investments can make a significant positive impact on their value. Therefore, it is a very good idea to use tax-advantaged retirement accounts to the greatest extent of your ability.

In 2018, the contribution limit for people under the age of 50 is $5,500 per year or your amount of taxable compensation, whichever is lower. You can make contributions to your 2018 IRA until April 15, 2019.

Many brokerage firms require a certain minimum account size that may be too high for a grad student just starting out with saving. If that is the case for your preferred brokerage firm, you can save into a savings account or IRA at another brokerage firm (some waive account size minimums if you set up a monthly auto-transfer) and transfer the money when you reach the minimum.

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Who can contribute to an IRA?

Only taxable compensation (previously known as earned income) can be contributed to an IRA. A graduate student’s stipend is taxable compensation if it is reported on a W-2 at tax time. If a grad student has only fellowship or training grant income during a calendar year (not reported on a W-2) and no outside income, he will not be able to contribute to an IRA for that year. Senators Elizabeth Warren and Mike Lee proposed the Graduate Student Saving Act of 2016, which would include fellowship stipends as taxable compensation for the purposes of IRA contributions, but it was not enacted.

If you are married to a person with taxable compensation, you can contribute to a spousal IRA, again subject to the limit of $5,500 or the amount of taxable compensation. There are income limits as well for IRAs, but they are much higher than grad student stipend levels.

If your stipend is not taxable compensation, you can still save for retirement, though it may not be inside an IRA.

Is a Roth or a traditional IRA better for a graduate student?

There are two versions of IRAs available: Roth and traditional. The first-pass difference between the two types of accounts is when you will pay income tax on the money inside it. While the money in your IRA grows tax-free, you do have to pay income tax either upon the contribution (Roth IRA) or withdrawal (traditional IRA).

Initially, when people decide between the Roth and traditional IRA, they compare the marginal tax rates the taxpayer will be in upon contribution vs. withdrawal. The idea is to opt to pay the tax when they are in the lower marginal tax bracket. You know your marginal tax bracket currently; for graduate students without outside income, it is usually the 15% tax bracket or lower. You do not know what your marginal tax bracket will be during your retirement, as both your income and the tax brackets themselves will change in the intervening decades. However, this educated guess applies to the majority of graduate students: You are currently in a relatively low tax bracket because you are in training and building your career. Later in your life, you expect to have a much higher income and be in a much higher tax bracket. If that assumption holds, the Roth IRA is the more appropriate choice. Virtually every graduate student I’ve spoken with about this has chosen to contribute to a Roth IRA during graduate school.

The Roth IRA has some additional flexibility that the traditional IRA does not that may be attractive for graduate students.

Details on Emily's Roth IRA

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What are the pros and cons of using a Roth IRA?

As graduate students usually lack access to other tax-advantaged retirement account options, the best practice is to only contribute money to a Roth IRA that you intend to invest for retirement. This is in line with the government’s purpose in creating IRAs. The main con of using any tax-advantaged retirement account is that accessing the funds earlier may trigger an income tax payment and a 10% penalty. However, the Roth IRA is unusually flexible.

As you have already paid income tax on the contributions to your Roth IRA, you can remove them at any time without additional tax or penalty. Five years after opening a Roth IRA, a first-time home buyer can remove up to $10,000 without incurring a penalty.

Because of the Roth IRA’s flexibility, some people use it “off-label” as a general savings vehicle. Others may make contributions even if they are not 100% sure they will preserve the money for retirement. Just be sure to match your investment strategy with your intended use for the money; the type of investments you choose for long-term money should be different than those for mid- or short-term money.

Of course, saving for retirement is not an appropriate goal for every graduate student. If you are currently taking on debt (student loans, personal loans, credit cards), your first priority should be to minimize that debt acquisition or even start to repay it. If you can keep your head above water with your stipend but don’t have any kind of cash savings for emergencies or short-term expenses, saving those funds should be your goal, not investing (yet). Even graduate students whose stipends allow for saving may not want to start investing for the long term if they have other financial priorities and their values don’t align with early wealth-building.

If you are a graduate student with a livable stipend who values financial security or independence, using a Roth IRA for your retirement savings is a wonderful choice. If you don’t have taxable compensation, you can still save for retirement in another vehicle. If you aren’t sure what financial goal you are saving for, using a Roth IRA is an option but saving in a taxable account is almost as beneficial and prevents the different purposes from becoming confused.

Did you save for retirement during graduate school? If so, did you use a Roth IRA?