Personal Finance for PhDs

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Research Analyst for an Investor Relations Firm

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research analyst at investor relations firmToday’s post is by Adam Evertts on the part-time job he took in his last year of grad school that positioned him for his transition into the work force. He also includes a great reminder about the proper place of of side jobs in graduate school.

Name: Adam Evertts

Institution: Princeton University

Department: Molecular Biology

1. What was your side or temporary job?

In my final year I started working hourly at a NYC-based investor relations firm as a research analyst. It was a way for the company to test me out, and for me to test out of the company prior to them offering me a full-time position. For my role I would either write initiation reports or update notes. The initiations are anywhere from 20-50 pages and describe everything a potential investor may want to know about the company. The update notes are smaller documents, 2-6 pages in length that provide short updates on a company’s progress. I would spend a lot of time reading primary literature, company reports, and other materials.

2. How much did you earn?

I earned $25/hour. Not a huge amount of money, but more than I was making as a graduate student. I didn’t work part-time for the financial rewards, but I can say that it was very helpful in the end. Having a few hundred extra dollars around each week allowed me to take a vacation in San Diego after graduation and then immediately move to NYC. It also made me realize how underpaid I was as a grad student.

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

It was a tough balance for me. I don’t think I could have pulled it off earlier in my grad career. I still had a lot of obligations as a student and was working 10-12 hours/day during the work week plus 4+ hours on Saturday. They were intense hours too, no more 2 hour lunch breaks like I did as a 3rd year. The key is that I continued to satisfy my obligations in the lab and graduated on time.

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

This experience was critical for my transition out of graduate school. I ended up getting a full-time offer at the same company after maybe 2 months of hourly work and have been there for almost 2 years now. The best part was that I had an opportunity to try out my job before starting full-time. How else do you know if you want to launch a career in a certain field? I actually thought of my part-time work as a right instead of a privilege. Just my opinion. I don’t think the NIH spends money to educate PhDs without any interest in their future. I may not be doing primary research now, but I still play a role in advancing human health for the country.

5. How did you get started with your job?

I actually found the company using a google search and reached out saying that I wanted some equity research experience and would be happy to work for free. It turned out that someone at the company had just quit and they were short staffed. They also insisted on paying me since it was and still is a profitable business, meaning that they don’t need to exploit free labor. You’d be surprised how many profitable companies love free interns. We also love interns, but we pay them. I tried some other standard paths to getting full-time jobs, but with little success. Applying on websites and through job sites is infinitely less personal and your resume starts to blend in. It can be useful to take a creative path and just reach out to a company and ask for some experience.

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

My personal feeling is that you should have a very clear purpose for working part-time during graduate school. It should never get in the way of producing high quality research or extend your graduation time.

My Realistic Career Earnings Expectations Push Me to Save Aggressively

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This post is by Tiffany, a PhD student at Harvard University.

As an undergraduate, my parents pushed for me to become a pharmacist. They had good reason to: I had good grades and loved biology and chemistry. However, after volunteering in a lab, I decided I wanted to become a scientist. My dad was initially against this decision: he made many “personal finance” arguments against it. He warned me about the long hours and comparatively low pay to other advanced degrees, and shared articles about the current “glut of Ph.D.s”. He was worried I wouldn’t be able to find a stable job. He argued that as a pharmacist, I would have a stable, high paying salary (though this is now disputed as well). My undergraduate adviser gave similar advice, “You will not make much money if you go into science: the job market is also tricky depending on what you want. Take your time to decide what you want to do.” I thought about these arguments throughout undergrad and during my two years as a technician. In the end, I decided to go to graduate school anyways.

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Their arguments have given me a strong motivation to save as much as possible for the future. First, it is uncertain what will happen after I graduate. Most biology PhDs continue on to work as postdocs, but the starting salary for a postdoctoral fellow based on the NIH guidelines is only $42,840/year. I could move into other fields outside of academia; however, unlike academia, there is no clear map on how to get training and experience for these “alternative careers” outside your dissertation work. Second, compounding works better if I start saving earlier. Any money I put into investments now will likely do more for me later on in life. Unfortunately, scientists are at a disadvantage since their earning power does not increase substantially until after graduate school and postdoctoral fellowships. By then, a scientist is likely into their 30s. Unfortunately, many major expenses – such as weddings, cars, homes, and kids – rack up during your 20s and 30s.

Below, I’ve tried to illustrate these points using my brother and me as an example.

My brother graduated is an engineer. He currently makes $58,700/year in Alabama. His after tax take-home pay is $3800/month. He manages to put away ~$1500/month into his investment accounts. I started my PhD in 2012 and get $36,800/year for my stipend in Boston, Massachusetts. My after tax take-home pay is $2300/month. I manage to put away ~$600/month into my investment accounts. Assuming that no major life events happen, we can calculate how much our income, savings, and investment accounts will turn out.

In the below chart, I’ve assumed that:

For the engineer:

  • He will consistently get a 10% raise every 4 years.
  • He will consistently save about $1500*12/$58700 ~ 30% of his salary.
  • All of these savings will compound at 7% annually, using the formula FV = P(1 + r)y, where y = # of years it compounds, P = the amount saved that year, and r = rate (7%), and FV = future value at age 65.

For the tenure track scientist:

  • I am using my graduate stipend as the PhD student’s salary.
  • Savings as a graduate student and postdoc will be roughly $600*12/$37,000 ~ 20% of her salary, which is what I try to save now.
  • Once the scientist reaches assistant/associated/tenure professorship, she will save ~30% of her salary.
  • All of these savings will compound at 7% annually.

Please note that these numbers are based off myself and my brother. They also do not take into account major life events or raises or changes in investment portfolio. Please also note that I am NOT a financial adviser and that you should seek a professional for financial advice. This article is based purely on my personal experience and hypothetical projections.

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Looking at the charts above, you can see that the scientist makes about 1 million dollars less in a lifetime, but by saving aggressively, only saves $350,000 less. Still, the largest difference is in the amount compounded by age 65. The $1500/month that the engineer puts away in the first 4 years of his career can potentially become over $1 million by age 65 if the annual rate of return is 7%. Although the engineer consistently saves 30% of income, the amounts saved later in life do not yield as much. In contrast, the scientist cannot put away $1500/month until she is 32, after she has finished her postdoctoral fellowship. Her salary grows much more slowly than the engineer’s: she cannot afford to put more away until later. This results in this difference: although the engineer and the scientist have only a $350,000 in total savings, they have a $2.4 million dollar difference in what is compounded. It’s this point that makes me want to save as much as possible now!

Seonwoo, Georgia Tech, electrical and computer engineering – Moving credit card due dates

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I have eleven credit cards. I also maintain about 45 active accounts in You Need a Budget (great budgeting software you should check out – it’s free for students!), so I’m no stranger to managing multiple accounts. But even though I can manage all of those accounts without undue burden on myself, even I would drive myself crazy if I didn’t consolidate my credit card due dates to be on or around the same day, and in all likelihood I’d probably miss a payment. It makes your cash flow management easier when you have one consolidated outflow. Some banks let you change this online, but most of them will require a phone call. Typically you end up with one longer statement cycle when you do this, as opposed to one normal length cycle and one short cycle.

Buying a Home

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Some graduate students may have the option of buying a home instead of renting. A graduate student in this position must weigh all the typical factors that any prospective homeowner would, plus additional considerations due to her student status.

All prospective homeowners must assess how long they plan to stay in the home, whether the property is intended for living or for investment, and whether they can afford the down payment, mortgage, and maintenance.

Further reading: Can You Afford to Buy a House Right Now?

On top of the typical concerns of someone considering buying a home, graduate students must ask themselves an additional set of questions because of their unique life circumstances.

Not many graduate students are logistically and financially prepared to become homeowners without outside help due to their low income, typical lack of liquid savings, and plans to leave their cities within a few years. However, some graduate students are capable of buying homes on their own, and others will receive mortgage payment or down payment assistance from a family member (spouse, parent).

For those students who can buy in a financially responsible manner and are a bit lucky, their homes could be great financial boons by the end of grad school if they have built equity or at least kept ahead of renting costs. In particular, graduate students who rent to roommates may have quite low ongoing housing costs, though they will have capital tied up in the property and must keep a large emergency fund for maintenance and vacancy.

Further reading: 5 Reasons Why Home Ownership Can Be a Financial Disaster

Should I Buy a Home During Grad School?

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

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

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

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

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

Further reading: Rent vs. Buy Calculator

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

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

Will my housing needs change in the next few years?

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

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

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

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

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

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

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

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

Am I prepared to care for a home?

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

Can I afford to furnish the home?

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

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

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

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

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

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