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Break the Taboo: Talk with Your Peers about Money

April 3, 2017 by Emily

A version of this post originally appeared on GradHacker.

Traditionally, there have been certain topics that were off-limits for dinner table conversation. The prohibitions against discussing sex, politics, and religion have largely fallen away, but in many pockets of our society the money taboo persists. Over the past several years, I have fought against the money taboo among my grad school peers, and in return have experienced financial and relational benefits.

I encourage you to begin or continue discussing money with your peers for the following reasons:

1) Take advantage of your own malleability.

One major upside to discussing finances as a young person is that you don’t yet have deeply ingrained habits around money—or at least not as deep as they will be in a few decades! As you are trying to figure out your own relationship with money, you can learn from the best practices of those willing to share theirs with you. Grad students are by and large not locked in to large financial commitments (such as expensive cars and homes) and have the flexibility to change as they gain new information.

2) The information you get from your peers is the most relevant.

The internet has bountiful resources on how to manage your money well—so bountiful as to be overwhelming at times (Google “frugal tips” and find hundreds on just the first results page). When you talk with people who live in the same city, have the same employer, and have a similar lifestyle as you do, the information they impart is as relevant for your situation as it can get. This could be anything from a benefit you didn’t know you had to a tip on a discount retailer to a new-to-you money management strategy. When you discuss money with your peers, you can find mentors all around you and be a mentor yourself.

3) Expose “the Joneses.”

I hope that none of us are comparing our lifestyles to those of our college classmates who got jobs instead of going to grad school—that’s a game you just can’t win. But it may be the case that your jealousy has been kindled by some of your own peers’ apparent spending habits. When you are open to talking about money with your peers, you can find out the real story behind those shared photos, which is likely to dampen your envy.

4) Grow closer by discussing your values.

The biggest reason I like talking about money with people is that money is really a stand-in for our own individual life values. How you choose to use your money reflects your priorities. When my friends and I are open about our money with one another, we are learning what really matters most to the other person, and that spurs us to grow closer (even when we disagree).

Get the conversation started.

Money can be a difficult subject to broach for the first time with a friend. Two baby steps to take toward breaking the taboo are to share something from your own financial life and to ask for advice. Focus your icebreaker on yourself so your friend doesn’t feel as if she is under the microscope. For example, when communicating a spending decision, share your reasoning as well as the final yea or nay. Instead of just rhetorically complaining about pain points in your finances, ask your friend if she has found a good solution in her own life.

When you bring up money for the first time, be especially attuned to your friend’s facial expressions and body language. If he subtly communicates that he is offended, uncomfortable, or bored, change the topic and steer clear for a while!

We have so many superficial conversations with one another. Why not take a chance on a topic through which you may learn something really practical, improve your balance sheet, and deepen a friendship?

Do you discuss money with your peers, and if so what outcomes have you experienced? What keeps you from discussing money more openly?

Why Every Grad Student Should Have a $1,000 Emergency Fund

March 20, 2017 by Emily

If you’re not sure what financial goals you might want to set as a graduate student, look first at how your finances would handle an emergency. An emergency fund is a vital component of financial health; being a graduate student, whether funded or unfunded, does not exempt you from this basic requirement. If you don’t yet have an emergency fund, set a goal to save $1,000.

What is an emergency fund?

An emergency fund is a designated sum of money that has been set aside for use in emergencies only. The vast majority of the time, the emergency fund will appear to do nothing, but its only job is to be available to you. When an emergency occurs, you draw upon the money to pay for it. After the emergency ends, you rebuild your fund to its original level.

Emergencies are any necessary expenses that you have not anticipated in your planned spending. Depending on your insurance coverage and the level of your planning with your targeted savings accounts, an emergency might be a medical incident, a leave of absence from school, damage to your home or possessions, a theft, a car accident, etc.

Why have an emergency fund?

When an emergency occurs in your life, the last thing you want to have on your mind are your finances. It is an amazing stress-reliever to have a sum of money set aside for just these circumstances. You will actually have the ability to pay for emergencies that fall within the amount you have saved, which can help you mitigate the potential financial damage. You won’t have to weigh different pots of money or credit against one another in the midst of your trying situation.

Where should you keep an emergency fund?

Emergency funds should stay in cash-equivalents such as a checking, savings, or money market account.

According to Murphy’s Law, if you invest your emergency fund, the very moment you need to access it will be the moment that your investment drops like a rock. Similarly, you shouldn’t compound your emergency by using a line of credit as your emergency fund; this strategy will cost you stress and interest at the most inconvenient time.

You might keep your emergency fund in your checking account with your regular monthly income, in a designated savings account at the same bank as your checking account, or in a savings or money market account at another financial institution.

Funded and unfunded grad students

If you are living on your grad student stipend, you have a very limited amount of income each month. It can be quite difficult to cash flow larger expenses on your available discretionary income. Having an emergency can compound the problem of trying to cash flow the main expense as you may have no time or energy to devote to being frugal with your existing income – or you may lose the income itself. Although it is challenging, it is preferable to have the money for the emergency saved ahead of time in a designated fund.

Unfunded graduate students who are taking out student loans should also set aside a small emergency fund. It is a bit counter-intuitive to take out additional loan money, which is accumulating interest, just to set it aside, seeming to be doing nothing. But how would your finances play out in an emergency if you didn’t have some money set aside? Would you turn to a credit card, ultimately paying a much higher rate of interest on the balance? If your plan is to access additional student loans, what about the time it takes to be approved and for the paperwork to be processed? It’s preferable to keep that small cash emergency fund available.

Why is $1,000 the key number?

One thousand dollars is a fantastic initial emergency fund goal. If you haven’t yet put aside $1,000 in your emergency fund, make achieving that a top financial priority.

One thousand dollars is first and foremost a nice round number. It’s difficult to be specific about the ideal emergency fund size across a population, so a round number is as good as any to start with. It’s a great accomplishment to set aside a four-figure number in your savings.

One thousand dollars will also take care of a large percentage of emergencies. Big, catastrophic events are rare, but if you haven’t set aside $1,000 your budget can be busted just as easily by a small emergency as by a large one. One thousand dollars will cover a large array of low-level emergencies – the kind that are likely to occur over the period in which you’re in training.

What do you do after you reach $1,000?

After you’ve set aside $1,000 in your emergency fund, it’s time to turn your attention to other financial goals.

Certainly you can keep building your emergency fund above this starter level. The general advice for a full emergency fund size is 3-6 months of expenses. If that number seems daunting, work on saving $1,000 first, and then perhaps another $1,000. Working out that saving muscle means that you will achieve the next goal even faster.

But there are other worthwhile financial goals that may take precedence over bulking up your emergency fund. If you are in debt, especially moderate- or high-interest-rate debt, start whittling that down. It’s incredibly valuable as well to start investing at a young age to allow compound interest ample time to work. You could even turn your focus to building up short-term savings to handle your irregular expenses to take that burden off your emergency fund.

If you are a graduate student who does not have $1,000 in a designated emergency fund, make saving that up your top financial goal! Not only will you have peace of mind that your finances can handle a low-level emergency, but you will also put yourself on a path to financial health. The strategies you implement to save up your first $1,000 can then be applied to your next financial goal.

Do you have a $1,000 or larger emergency fund? How did/will you save up your first $1,000? Have you had any emergencies occur that $1,000 could have handled?

Your Most Important Budget Line Item in Graduate School and Why You Need to Re-Evaluate It

March 15, 2017 by Emily

The largest line item in nearly every graduate student’s budget is housing. Whether you own your home or rent, whether you live on campus or off, whether you live in an apartment/condo, townhouse, or single family home, unless someone is subsidizing it, you are almost certainly spending the biggest chunk of your income on your abode.

If your rent is $400 per month and you spend five years pursuing your PhD, over the course of your studies you will spend $24,000 on rent. If your rent is $1,000 per month and you spend six years pursuing your PhD, you will spend $72,000. These are staggering numbers, especially when you compare them to your annual stipend. Your decision of where and with whom to live is almost certainly the most financially impactful budget decision you will make during graduate school.

Housing is a very tricky expense category to budget. There is no argument that you need somewhere to lay your head. A certain fraction of your housing spending is simply a baseline that covers a necessity. (That is, unless you can get really creative, such as by living in a van.) But you can’t write off your entire housing expense as a “need,” especially if you then let yourself off the hook from evaluating its cost carefully. A fraction of your housing spending is “want” as well. Perhaps you are paying a bit more for a desirable location, an amenity, extra square footage, updated features, a parking spot, or solitude. There’s nothing wrong with wanting to upgrade from a Spartan home, but you must be honest with yourself about what aspects of your housing you could dispense with if push came to shove.

What makes housing even more special in terms of your budget is that it is a fixed expense. Once you settle on where you’ll live, your housing costs are locked in for the term of your contract. It’s difficult to change your housing costs because that involves moving or adding/subtracting a roommate. That means that you can lock in a high rate – or a low rate. Fixed expenses represent excellent opportunities for cost reduction. If you are looking for a simple, long-lasting way to reduce your spending, target a fixed expense. You have to make the decision to reduce it and put in the effort one time to carry out your decision, but after that you have the lower rate set every single month in perpetuity. And what better fixed expense to target for reduction than your largest one, housing?

The most remarkable aspect of your housing decision is that you typically have to make its first iteration before matriculating into your graduate program. If you are moving to a new city, you have to search for and secure your housing with next to no knowledge of the rental market, possibly sight unseen or after one scouting trip. Therefore, your first dwelling in graduate school may not be the most optimal for you financially. Although you should ask for advice from older graduate students when you make that initial housing decision, nothing is as informative as actually living in your city for a few months or a year.

If you haven’t yet moved once within your grad school city, take the opportunity right now to re-evaluate your current living situation. You likely have a totally new perspective on the decision compared to the last time you made it. Even if you have moved once with an intimate knowledge of the local housing market, your financial goals and budget evolve with time; perhaps you are different now and you require a new housing arrangement. It takes some patience and commitment to decide to move and then wait several months to follow through, but a significant enough reduction in housing expense makes the process worthwhile.

[The decision to purchase a home while in graduate school has an enormous financial impact. There is a great amount of financial risk associated with buying a home (both upside and downside). Buying a home is more expensive in the short term while renting is more expensive in the long term. The problem is that no one can predict whether your time in graduate school is short-term or long-term. The housing market could boom or bust during your tenure at your university. You might end up with a home that needs a lot of costly repairs. You could arrange for renters who essentially pay your mortgage for you, or end up with a landlord’s nightmare. You have to make careful calculations and considerations, but there is always a gamble involved. If you are already a homeowner, there are still a few ways for you to reduce your housing costs, such as selling and moving, taking on a roommate, or refinancing your mortgage.]

Have you re-evaluated your housing costs since you moved to graduate school? If you were able to reduce your spending on housing, what would you do with your extra cash flow?

The Best Kind of Frugality for a Busy Grad Student

March 8, 2017 by Emily

When you live on a stipend, frugality is a way of life. You know you can’t live a freewheeling lifestyle on your grad student income, at least not without racking up massive debt. But the approach you take to frugality has an enormous effect on how restrictive you perceive your lifestyle to be and how much time you spend on spending less. When you have a dissertation to write, you don’t want to be spending hours each week scrimping and saving. Effective frugality for a grad student has to be automatic.

The best kind of frugality minimizes spending on what’s least important to you so that you can divert your money to what’s most important to you – without you compromising the time you’re suppose to devote to your studies. And practicing frugality doesn’t mean that you will feel deprived or be living paycheck-to-paycheck. You can use frugality to give yourself a leg up on wealth creation, even during grad school.

What is the best kind of frugality?

First, we recognize that the best kind of frugality is unique to each individual. Frugality is not a one-size-fits-all solution. Yes, there are popular approaches and strategies, but you still get to pick and choose which practices you will adopt. If spending money in a certain category enables you to live your values – and cutting back in that area would impede that – keep spending there. Move your search on to another category for potential cuts. Of course, the reality of living on a stipend may force you to revisit your valued category, but it should be last on the list for cutbacks.

Second, the best, most effective frugality preferentially targets your largest expenses. Third, once you do the work to reduce those expenses one time, your frugality keeps the expenses low in perpetuity, either because they are fixed expenses or because the frugal practice has become habit (ideally, an effortless habit).

Think of frugality as an 80/20 problem. You can get 80% of your total reduction in spending from 20% of your expenses, if those expenses are the largest ones in your budget. You can eliminate 10 small expenses that won’t add up to as much as one partial cut to a large expense.

Target your largest expenses first

When you’re searching for places to cut back in your spending, start at the top. Using your budget, any past spending data you have, or your memory, rank your expense categories from largest to smallest. Your largest categories likely include rent/mortgage, transportation, and groceries, and other possibilities are eating out/alcohol, entertainment, travel, utilities, childcare, and shopping.

Once you have your ranked list, process each spending category from largest to smallest, brainstorming ways you could reduce your spending in that area. Use resources like our Frugal Practices or frugality websites to target each spending category. Seriously evaluate if you can implement one of your ideas in each category.

Sometimes the prospect of reducing your spending on a very large expense is quite daunting. You may have contracts in place that limit your ability to change the expense for up to a year. Often, reducing a large expense will take quite a bit of work. People tend to be very psychologically resistant to change as well. But you have to focus on how much your quality of life can be improved in other areas by taking those steps.

There may be quite a delay from the day that you decide to reduce your spending on a large expense to the day that you accomplish it. Deciding to reduce this kind of expense isn’t as immediately rewarding as implementing a frugal strategy that you can benefit from immediately. But don’t let that deter you from planning and following through on your idea. While you wait out the contract or research the decision, keep track every month of how much money will be freed up by the change and imagine what you could be doing with it.

Reduce your fixed expenses

The best kind of frugality happens in the background of your life without you having to pay any attention to it whatsoever. When you reduce a large fixed expense, you practice that frugality without even noticing it. (The corollary is that fixed spending is easy to let inflate, as well, since it’s not an active decision.) If it was difficult to reduce that expense in the first place, like getting out of a contract, it’s pretty difficult to reverse the measure, too.

This is unlike any strategy that takes willpower or time to enact. In a tough or busy moment, you could easily forgo that strategy and return to your higher-spending ways. Reducing a fixed expense locks in that lower rate, at least for a period.

Make a habit of reducing your variable expenses

Some of your larger expense that are ripe for reduction are variable expenses, so you lose the benefit of locking in the lower rate like with a fixed expense, but they are still worth pursuing when you’re looking to reduce your spending.

The key to reducing a variable expense is to make your frugal strategy a habit. After establishing the strategy, you should automatically follow it unconsciously and without having to use willpower. Until you reach that point, you should use whatever prompting strategies work for you to remind you to follow the strategy. It won’t feel natural at first, but keep at it.

However, if you continue to chafe against the habit after weeks or months of trying it out, it’s probably not for you. Don’t use your limited time and energy forcing a frugal strategy that refuses to become a habit or takes up too much time or energy.

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Experiment

The best traits to cultivate with respect to your frugality are creativity and daring. Especially with respect to your variable expenses, ask yourself what you really have to lose by trying something new. If possible, give each frugal strategy a one-month trial. That should be enough time to get over your resistance to change, evaluate the strategy, and possibly create a new habit. If it doesn’t work out – and if you get really creative, not everything will – you can go back to your old ways. Of course, if a strategy requires becoming locked in or an up-front cost, do you research before leaping.

A PhD is a long haul in grad school. If you adopt the attitude toward frugality outlined above, think how many different frugal strategies you can try out over the years. Even if you only made habits of 20% of them, that could impact your spending enormously. One of the great benefits of living on a stipend is figuring out what is important for you to spend on and what isn’t. If you maintain the comfortable but low lifestyle you fine-tune in grad school after you start earning more from your real jobs – probably with a few judicious upgrades! – you can start making huge strides in increasing your net worth.

What fixed expenses have you reduced during grad school? What frugal strategy did you try out that eventually became a habit?

What Grad Students Can Learn from the FIRE Community

February 20, 2017 by Emily

At first blush, graduate students and the FIRE community don’t have much in common. FIRE stands for Financial Independence/Retiring Early; it is a movement to retire or reach financial independence (working becomes optional) very early in life, often by age 30 or 40. FIRE aspirants usually have high-paying jobs that they wish to stay in for only a handful of years, whereas graduate students are taking a large (theoretical) pay cut to acquire training that will set them up for long, productive, not necessarily high-paying careers.

Further Reading: Early Retirement Isn’t for Us

However, I think there is a great deal that graduate students can learn from the FIRE community (and vice versa), financially and otherwise, even if they do not have the same goals.

1) They have a clear vision of what their future will hold.

FIRE people regularly fantasize about what they will do in retirement/upon reaching financial independence. They do so in detail. They have a plan for where they will live and travel, how they will fill their days, what skills they will use or learn, who they will spend time with, and how they will serve their communities. This detailed picture steels them for the sacrifices they are making in the present and motivates them to reach their goal on schedule.

Unfortunately, it’s fairly common for graduate students to apply because graduate school is the next step in their educational progression or because they haven’t been exposed to careers outside academia. Even those who matriculate with a career in mind (usually research and/or teaching) decide against pursuing it in the course of their training. This lack or loss of career focus usually results in students languishing during their training or wasting effort on projects or skill acquisition that won’t serve them later on – not to mention the time not spent on appropriate networking. The clearer the career goal, both for students pursuing academia and those pursuing alternative careers, the more effective the student’s training can be.

2) They have a roadmap to their goal and obsessively track their progress.

Another lesson along the same lines is that FIRE people have a detailed plan for how and when they will reach financial independence. They know exactly how much more money they need to earn, into what vehicles they will save and invest, and how they are going to maintain their lifestyles in the meantime. They track their financial progress on detailed graphs and spreadsheets.

Grad students do create, from time to time, plans for their research progress, but then the plan always seem to go awry or get delayed. That is the nature of research. But the more closely a grad student can stick to a detailed plan, checking off experiments or sources one by one, the better off she will be in terms of keeping her motivation and productivity high. There should be an increasingly clear picture of what the end point will be as time goes by.

3) They work their tails off.

FIRE people tend to be super hard workers. They often have demanding primary jobs, on top of which they might add one or more side income streams to get to financial independence even faster. FIRE bloggers additionally document their experience online.

There is no doubt that grad students can work hard, but many fall into a pattern of working in fits and starts, such as in advance of deadlines. The uncertainty of the progression through grad school exacerbates this tendency. It’s very difficult to push yourself to work hard when you’re not sure where the hard work is leading (see points above).

4) They are uber frugal.

When I jonined the financial blogging community and started reading about other people trying out frugal strategies and challenging themselves to no-spend weeks and months, I wasn’t very impressed. That version of frugality was just my normal life living on a stipend!

But FIRE people really know what they are doing when it comes to frugality – they are an extreme breed. The bar for frugality was set early on by Jacob from Early Retirement Extreme (a PhD scientist!), who lived in an RV for a time. While not many FIRE people go that far, they have become masters of lifestyle cost minimization in a variety of creative ways. Grad students looking for ways to cut their lifestyles further can take some pointers from other FIRE bloggers like Mr. Money Mustache and the Frugalwoods.

5) They save like mad.

There is no doubt that FIRE people understand the power of compound interest. They have taken it completely to heart. They are mad for investing and building up a large portfolio quickly so they can utilize the 4% rule to fund their lifestyles in perpetuity. Certainly many graduate students understand the power of compound interest as well. But some grad students I talk with just haven’t gotten around to starting to invest yet. Some think it’s not really worth getting started because they could only invest a small sum or a small stream. But the fantastic thing about compound interest is that, given enough time and a decent rate of return, it can turn even small sums into staggering ones. A FIRE person knows that putting away an extra $10, 50, 200 or whatever amount really does make an impact. Your savings rate is the most important factor in determining your ultimate portfolio balance, not the rate of return that you get on your investments.

Further reading: The 4% Rule and the Search for a Safe Withdrawal Rate; How Important Is Your Rate of Return?; Starting Down the Road to Financial Independence? Don’t Obsess Over Investment Returns, but You MUST Obsess Over This.

Graduate students really have stepped off the beaten path when it comes to education and career, even though it doesn’t feel like it inside academia. Sometimes it’s worthwhile to take a look at other unusual but highly successful communities to adopt their best practices. Grad students would certainly benefit from taking a few pages out of the FIRE community’s book, even if their objective is not financial independence and early retirement.

Circuit Board Designer

January 23, 2017 by Emily

Today’s post is by a PhD student who learned an important lesson about setting boundaries as a contractor with an employer.

Name: Mark

University: University of Illinois

Department: Mechanical Engineering

1) What was your side or temporary job?

PCB circuit board design for a small local company. Designed and tested a small electronic device. Then I sent out for a PCB to be made, and I personally assembled and QA checked the devices. Finally, I provided product support for when the prototype devices were field tested.

2) How much did you earn?

$25/hr, ~0-12 hrs a month, sporadic hours typically on weekends.

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3) How did you balance your job with your graduate work?

This work began as I was getting near to finishing up my graduate work, but before a timetable had been set for my preliminary exams. I made clear that my education was my first priority with limited number of hours/week, that at times I would be unavailable due to school, and that during school hours (regular work hours where I had a TA/RA position) I was generally unavailable. There were no cases where my education was hindered by the side job, since it always had priority. However, the limited availability for working on the side job did cause some friction. These are very restrictive conditions for an employer, and do not work well with time sensitive work such as providing product support.

Make a clear boundary between when you are working at school vs working on the side job. Likewise, though I used my apartment to do work for my side job, I chose to maintain boundaries by never meeting my employer at my apartment, instead booking meeting rooms or choosing a public place. While the limited hours worked well for the research and development phase, some issues arose in product field testing. When the company was testing devices while I was at school, they occasionally had issues that required immediate responses. This is difficult to do while maintaining separation between graduate and side jobs, and would be better served by a full time employee.

Despite the limited involvement of my advisor, his friendly relationship to the CEO of the company meant that it was possible at times for a conflict of interest to arise. Ideas from the CEO could make it to my advisor who would then want independent (but ultimately related) work for graduate research. This did not occur for me, but did for a lab-mate who was also working in a similar capacity.

4) Did your job complement your graduate work or advance your career?

There was no direct correlation to my graduate work. However, it added real-world project experience in a related field. Although the money was nice, I was mainly pursuing it because I was interested in the project and because I wanted the experience. Most importantly, as the primary engineer on the device I learned the value in extensive QA of the design and assembly.

5) How did you get started with your job?

The position started through a one-time introduction by my advisor. His involvement in the project was limited to the introduction to avoid a serious conflict of interest.

6) Is there anything else you would like to share about your experience?

Ultimately what my employer wanted was a full time professional, but for the cost of an undergraduate intern. While a professional engineer could probably have completed this project quickly compared to the average intern, the cost was considered too much. I possessed a masters degree even at the start of the work, but in mechanical engineering instead of electrical engineering. I requested to be paid at a discount to the going rate for an experienced electrical engineer due to my inexperience, but was unwilling to accept undergraduate intern level pay. As mentioned above, I was interested in the experience more than the extra money. In some instances, I refused work different aspects of the project because I was unqualified for it, suggesting he find a more qualified person.

Finally, make clear at the start what the scope of your work is and whether you are acting as an employee or contractor. Get it in writing, along with what your compensation will be. As an employee, you are working under the direction of your boss to fulfill work needed by the company. As a contractor, you negotiate what services you are providing before doing the work, leading to well defined deliverables. I would suggest acting as a contractor if possible, though in my case I ended up acting as an employee due to my inexperience; I was unsure as to how to appropriately estimate the extent of the work required and I didn’t want to seriously underestimate number of hours needed.