Personal Finance for PhDs

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What Is Net Worth?

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Your net worth is a single number that describes how (monetarily) wealthy you are at one point in time. It is calculated by subtracting the sum of your liabilities (debt) from the sum of your assets (also known as a balance sheet). In other words, your net worth is what you own minus what you owe. As a graduate student, your net worth might be negative, close to zero, or positive.

Your net worth is only a snapshot in time, so it is useful to track how your net worth changes with time – both the direction and rate of change. If you are taking out student loans to fund your graduate education and/or living expenses, your net worth is likely decreasing. If your stipend barely covers your living expenses, your net worth is likely fairly static. If you are currently saving money, paying off debt, and/or your investments are increasing in value, your net worth is likely increasing.

To build your wealth over time and to eventually become financially independent or retire, your objective is to increase your net worth by increasing your assets, decreasing your liabilities, or both. Due to the power of compound interest, as your total invested assets increase, your net worth on average also tends to grow even faster.

Further reading: What is Net Worth?, What Does Your Net Worth Really Mean?

While it is useful to know your net worth, do not allow its absolute value or even its direction and rate of change to impact your emotional self-worth. Your net worth is not a reflection of your value as a person. While achieving (or being given) a positive and/or increasing net worth during graduate school gives you a nice start in life, it alone does not determine your continued financial success. Likewise, having a negative or decreasing net worth in graduate school does not doom you. As a graduate student, you are just starting your career, which ideally will be long and financially prosperous. If you are taking out student loans during graduate school, the liability side of your balance sheet is growing, but the asset side does not take into account the knowledge, skills, experience, and network that you are currently gaining that will help you greatly increase your income and net worth in the future.

Data Science Consultant

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Today’s post is by a PhD student whose side job perfectly complements his graduate work and career goals – and pays him incredibly well, too boot!

KimName: Edward Kim

University: Massachusetts Institute of Technology

Department: Materials Science and Engineering

1) What is your side or temporary job?

Data science and machine learning consulting (freelancing, remote-based).

2) How much do you earn?

Between $100-200 / hr; it pays much, much better than a grad student stipend, so that’s nice.

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

I keep my consulting hours at ~10hr/wk, and I don’t do research on weekends or evenings unless it’s an emergency. I generally try to keep a pretty relaxed attitude regarding grad school, so keeping a balance isn’t too much trouble.

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

It’s directly related, since I plan to work in an industry position doing machine learning (or something related) after I graduate. I’m also interested in remote work and entrepreneurship, and so this ties in nicely with both of those goals too.

5) How did you get started with your job?

Surprisingly, I just posted on one of the Reddit job boards and got a reply from a manager at a company who wanted some consulting services. I didn’t think that it would be so straightforward, but I guess I got lucky.

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

I think that if you market your skills carefully, then even as a grad student, you can offer a lot of value to a company. The trick is in having a sense of what kinds of business problems you might be able to solve.

Brokerage and IRA Account Minimums

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A very common issue for graduate students, postdocs, and PhDs just starting out in their Real Jobs who are ready to start investing is that they have only a small amount of savings to contribute to their investment accounts or they have no savings but have identified some monthly cash flow. While some brokerage firms have minimum account balances of one or a few thousand dollars, others have no minimum or waive the minimum if a monthly deposit is initiated. This post outlines the minimum amounts of money needed to open accounts at various brokerage firms. This information was last updated on 1/17/2018.

Brokerage Firm IRA Minimum Taxable Account Minimum
Vanguard $1,000 or $3,000 for mutual funds; ETF price for ETFs (~$50+) $1,000 or $3,000 for mutual funds; ETF price for ETFs (~$50+)
Fidelity  $0 to open, but perhaps more to buy $2,500
Charles Schwab $1,000, possibly waived with ongoing contribution $1,000 or none with $100/mo ongoing contribution
T. Rowe Price $1,000 $2,500
TD Ameritrade none none

If you don’t have enough existing savings to open an investment account (at your brokerage firm of choice), you should just continue to gradually build up their savings balance until it reaches the minimum or the minimum decreases. You can do so either in cash-equivalents (a checking or savings account) or at another less desirable brokerage firm with no minimum or a lower minimum that you can meet.

What Is a 1098-T?

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The purpose of a 1098-T is to allow students and the parents of dependents students to take an education-related tax deduction or credit. The 1098-T form (p. 4) states:

You, or the person who can claim you as a dependent, may be able to claim an education credit on Form 1040 or Form 1040A. This statement has been furnished to you by an eligible educational institution in which you are enrolled, or by an insurer who makes reimbursements or refunds of qualified tuition and related expenses to you. This statement is required to support any claim for an education credit.

While some universities use the 1098-T to report fellowship stipend income, not all do. Once a student’s non-compensatory (fellowship and scholarship) income exceeds his qualified education expenses (as is the case for many funded graduate students), the university has three choices: 1) generate a 1098-T that reflects all of the fellowship stipend and scholarship income, 2) generate a 1098-T the reflects the scholarship but not fellowship stipend income, or 3) not generate a 1098-T.

Universities do not have to report (net) non-compensatory taxable scholarship and fellowship pay to the IRS, either on a 1098-T or a 1099-MISC, though some choose to. The instructions for the 1098-T (p. 2) state:

File Form 1098-T, Tuition Statement, if you are an eligible educational institution that received payments for qualified tuition and related expenses from a student. You must file for each student you enroll and for whom a reportable transaction is made… Exceptions. You do not have to file Form 1098-T or furnish a statement for:… Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships.

These instructions reinforce the idea that the purpose of the 1098-T is to claim an education tax benefit, and when an education tax benefit is not available, the 1098-T becomes optional.

Therefore, if you receive a 1098-T, you can reference it for the total amounts of scholarship income and qualified education expenses processed by your student account. Double-check the amounts reported in Box 2 and Box 5 of the 1098-T against the transactions in your student account to verify their accuracy. If you do not receive a 1098-T, likewise you will need to access your student account and your own bank records (or the courtesy letter or 1099-MISC sent to you) to tally all the fellowship and scholarship income you received as well as all the qualified education expenses. Please take note that the definition of qualified education expenses changes depending on the type of education tax benefit you are claiming, so what your university deems qualified education expenses for the 1098-T may not match what you decide to claim.

Parent article: Think about Your Grad Student Income and Assess the Tax Forms Your University Generated

We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.

 

What Are Qualified Education Expenses?

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Qualified education expenses are education-related expenses for which a student or the parent of a dependent student can claim a higher education tax benefit. As grad students have educational expenses associated with their role as students (even if the expenses are paid on their behalf), they can always reduce their tax burden using their qualified education expenses.

This article was most recently updated on 3/19/2024. It does not constitute tax, legal, or financial advice.

The precise definition of what does and does not constitute a qualified education expense varies based on the type of educational tax benefit being claimed. Publication 970 (p. 4) explains:

Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses aren’t necessarily allowed for each benefit.

Please note that each of the following higher education tax breaks have eligibility criteria not listed in this article.

Tax-Free Scholarships and Fellowships

The qualified education expenses that balance against scholarships and fellowships paid to students to make the scholarships and fellowships tax-free are defined on p. 6 of Publication 970:

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:

  • Tuition and 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.

Expenses that don’t qualify. Qualified education expenses don’t include the cost of:

  • Room and board,
  • Travel,
  • Research,
  • Clerical help, or
  • Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.

Lifetime Learning Credit

The qualified education expenses that qualify for the Lifetime Learning Credit are defined on p. 24 and 28 of Publication 970:

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

Qualified education expenses don’t include amounts paid for:

  • Insurance;
  • Medical expenses (including student health fees);
  • Room and board;
  • Transportation; or
  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

American Opportunity Tax Credit

The qualified education expenses that qualify for the American Opportunity Tax Credit are defined on p. 13, 14, and 17 of Publication 970:

For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

Related expenses. Student activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.

Qualified education expenses don’t include amounts paid for:

  • Insurance;
  • Medical expenses (including student health fees);
  • Room and board;
  • Transportation; or
  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

What Is a Courtesy Letter?

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A courtesy letter is not an official tax form. Instead, it is a communication sent to you by your university or funding agency that tells you the amount of fellowship or training grant income they gave you in the course of the previous year. The letter might also include a warning that the sender will not be able to make any comments about your tax liability or how to prepare your tax return.