Personal Finance for PhDs

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Budgeting

How to Financially Navigate an Unfunded Summer

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One of the most frustrating aspects of graduate school is that your income may fluctuate with each term. In some fields and at some universities, you might change roles not just each academic year but perhaps as frequently as each semester or trimester. When each role (fellow, teaching assistant, research assistant, graduate assistant) comes with a different pay rate, the result is a variable or irregular income. It’s even common to go without an income for a term, most typically the summer. This does not mean that you are at loose ends over the summer or free to work any type of other job. Research must go on in order for you to graduate in a timely manner!

An unfunded summer – or even just an income decrease – is not at all financially trivial for a grad student, and the solutions to an irregular income that other people use are not necessarily available or optimal for a grad student because of his low overall income. Of course, the ideal situation is to secure funding over the summer from an RA position or outside grant. If that option is not available, you must consider other avenues. If you see the funding lapse coming or it occurs regularly, you can prepare for it throughout the entire year.

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1) Get Another Job

You can take a job to replace the income you received during the academic year.

It may not be possible (or ethical) to find a regular full-time job since you plan to return to your fellowship or assistantship in the fall. A temporary or seasonable job is a good alternative, whether full-time or part-time.

First, look for a job that would advance your career in some way; it might help you demonstrate an existing skill, learn a new skill, expand your network, or simply look good on a CV. A paid internship is an example of a temporary job that is likely to advance your career.

Second, look for a job that you would enjoy doing, even if it’s not career-advancing. Your university is a great place to start when searching out opportunities, such as a work-study position. Inside or outside your university, there may be opportunities to work with younger students who are also on summer break, such as through camps or tutoring services.

Third, look for a job that pays you the highest available rate while still allowing you some time for your research and/or professional development on the side. If it isn’t advancing your career and you don’t enjoy it, just earn as much as you can per hour so you can minimize your work time.

2) Become Self-Employed

A way to earn an income that is an alternative to a temporary job is to work for yourself. It takes a certain personality and a lot of work to be successfully self-employed, but the advantages are:

  • You choose the type of work and clients,
  • It has the potential to pay a better hourly rate than a job, and
  • Your schedule and workload are under your control.

Try to think of a unique or marketable skill that you have and how you can leverage it to serve clients.

A few generic avenues for self-employment available to many grad students are:

  • Consulting (in your field),
  • Tutoring,
  • Freelance research, writing, and/or editing, and
  • Childcare.

If self-employment appeals to you, you should start pursuing it ASAP, because it often takes time to start generating an income/get paid. You might have to sustain your business year-round, though you could ramp it up or down depending on your academic workload.

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3) Save in Advance

The typical financial advice for dealing with an irregular income or lapse in income is to save up in advance so that you can cover your expenses from your savings instead of your income. This is good advice for someone with an income that far exceeds her expenses. For example, if you will go three months without an income, you should save approximately one-quarter of your income from each month that you are paid to sustain yourself during your unfunded summer. Setting this savings goal ensures that you keep your expenses in check year-round while building up the account you plan to draw from.

But how many graduate students are able to save one-quarter of their net income? And more so, how many of those well-paid graduate students might actually face an unfunded summer?

To the degree possible, you should save from your academic year income (your grad student income as well as side hustle if you have one) to pay expenses during your unfunded period if you don’t know you will earn as much from a different job/side hustle. In the face of short-term uncertainty, especially with respect to income, cash is king. But be honest with yourself from the first regular paycheck you receive about whether this plan is feasible.

4) Reduce/Shift Expenses

In the spirit of living within your means, if you are going to earn less or live off savings during your unfunded summer, you should try to reduce your expenses as well.

As your largest expense is likely housing, that’s where you should look first. If there is nothing physically keeping you at your university over the summer, you can move for the term. Sub-let your academic-year home and rent a less expensive place somewhere else, move in with your parents/relatives, or house-sit.

If any other of your typical expenses become unnecessary over the summer, try to jettison those as well. For example, many cities offer a slate of free activities over the summer, so you may be able to dramatically reduce the amount of money you typically spend on entertainment, eating/drinking out, etc.

Another possibility for making ends meet on a temporarily lower income is to shift any expenses possible to when you have a higher income. This doesn’t necessarily reduce the amount you would spend, but rather makes budgeting easier. Expenses that might be shifted include:

  • Shopping, i.e., for clothes, electronics, household furnishings,
  • Routine medical/dental/vision care,
  • Non-monthly insurance premiums or subscriptions, and
  • Vacation.

5) Take Out Student Loans

Finally, if you are enrolled as a student and taking a sufficient number of credits over the summer, you may be eligible to take out a student loan. (Credits don’t necessarily equal classes, depending on how your university registers graduate students.)

This is in my opinion a method of last resort and should only be used to speed progress toward graduation if a large salary bump is expected. A summer free from teaching or other service obligations can be an incredibly fruitful time for research progress – for some projects, it might be the only time when meaningful work is accomplished – so student debt can be reasonably justified for that purpose.

Do some math on the ROI of taking on the debt (principal and interest) vs. your other income options for an unfunded summer to make sure it’s worth it. You don’t want to end graduate school with an amount of debt that will be onerous to pay back with your post-PhD salary, but you also don’t want to tread water in graduate school and put off earning that post-PhD salary for too long.

Using student loans over the summer isn’t incompatible with any of the other options; use the other approaches to minimize the amount of student loans you need to take out/repay them immediately to the degree that they do not interfere with your research progress. Also, it is preferable to take out student loans than to accrue higher-interest rate debt (e.g., credit card debt) due to poor planning.

If you know your upcoming summer will be un/under-funded or you aren’t sure whether you’ll be able to secure an academic position or grant, start preparing now by:

  1. Reducing your expenses and saving as much as you can.
  2. Searching for temporary/part-time jobs.
  3. Pursuing a self-employment side hustle that ideally both pays well and complements your graduate work.

Even if you find funding for your summer and don’t need the side hustle or saved money, you will have put yourself in a better financial position and set your mind more at ease about the potential for subsequent unfunded summers.

The Power of Percentage-Based Budgeting for a Career-Building PhD

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I would imagine that most workers in the US don’t experience large income jumps after they start working full-time. They will receive periodic raises and perhaps some small jumps if they change career tracks or negotiate well with a new employer, but nothing like increasing their incomes by 50 or 100% at one time. However, those types of jumps are common for PhDs. The income jump from graduate school to a postdoc is roughly 50%, and the jump from a postdoc to a career job is perhaps another 50 to 100% or even more. At least, that’s the expected track! Having that expectation, whether or not it conforms with reality, can bring about some strange attitudes towards money. However, if a PhD(-in-training) adopts percentage-based budgeting, it has the potential to keep her finances in balance even through the income jumps.

percentage budgeting PhD

What Is Percentage-Based Budgeting?

There are many versions of percentage-based budgeting in terms of how it is enacted and the appropriate percentages to assign to various budgeting categories. The foundation of all of them is that your financial goals and expenses should scale with your income according to a consistent percentage.

Retirement Savings Rate

The most common example of percentage-based budgeting is the advice to save a percentage of gross or net income for retirement. It’s not reasonable to say that everyone should max out their 401(k)s ($18,500 in 2018) every year – though I have read that advice time and again in the personal finance blogosphere – not only because not everyone has a job that offers a 401(k) but also because that would be an incredibly high savings rate for someone earning what a graduate student or postdoc does. It’s much more reasonable to assign a percentage for your retirement savings goal, e.g., 5, 10, 15, or 20%.

The big advantage for using percentages instead of absolute numbers for savings rates is that it allows you to create a positive financial habit or even becomes part of your character (“I am a saver; I contribute 10% of my gross income to my retirement account”) at a level that is possible for your income. As your income grows, your absolute contribution to your savings grows as well.

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Other Budget Applications of Percentage-Based Budgeting

Tax

I like to think of income taxes as another type of percentage-based budgeting category, even though individuals don’t have control over the tax rate. If you have income tax withholding set up, you are sending a (more or less) fixed percentage of your gross income to the IRS throughout the year. If your withholding is accurate, this percentage is your effective tax rate. Your marginal tax rate is the tax rate on the income bracket that your income tops out in (e.g., 12%), but your effective tax rate is the amount of tax you actually pay divided by your gross income (e.g. 6%).

Another type of tax, FICA (Social Security and Medicare), is also percentage-based, although students and non-wage earners are exempted and the tax phases out at higher incomes ($127,200 in 2017).

Spending Categories

One of the most well-known percentage-based budgets is the Balanced Money Formula, which is detailed in All Your Worth: The Ultimate Lifetime Money Plan* by Elizabeth Warren and Amelia Warren Tyagi. It is a recommendation of how much of your net income to spend in three areas: 50% on needs, 30% on wants, and 20% on savings and debt repayment. The 50% of net income to needs (defined as housing and transportation; contracted payments; and basic food, clothing, etc.) is emphasized as the category that tends to grow out of control and lead to financial stress in American households.

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Further reading: A Graduate Student’s Balanced Money Formula

Dave Ramsey, a well-known get-out-of-debt financial guru, also makes budget category recommendations for his followers (after they have gotten out of non-mortgage debt). He lists percentage ranges for eight budget categories in addition to saving and giving, e.g., housing should be 25-35% of net income, food should be 10-15%, etc.

Further reading: Starter Percentages for an Every Dollar Budget

These percentage-based budget category suggestions are just that – recommendations based on what that particular expert has observed to work well for most American households. You will, of course, find your own levels of spending that feel comfortable for you. But these kinds of recommendations are great to compare with your current spending from time to time so that you can see if any category seems wildly out of line, especially if it’s a category you can adjust.

The advantage to basing your spending on percentages of your income is that, again, you spend less when you earn less and spend more when you earn more. Your lifestyle scales with your income, and you automatically live within your means.

Using Percentage-Based Budgeting on Only Part of Your Income

Percentage-based budgeting is a useful structure not only on your salary but also on any variable income you might have, such as from a side hustle. If you budget all your basic and regular monthly expenses on your salary, you can use your extra income to fund, in a percentage-based allocation, some extra splurges or savings.

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For example, for every dollar of side income money you earn, you could allocate a percentage for taxes (I use my marginal tax rate plus 15.3%, the self-employment tax rate), a percentage for saving, and the remainder for little luxuries or lifestyle upgrades. That way, you both further your financial goals and reward yourself for a job well done.

Further reading: Side Income (Category), Best Financial Practices for Your PhD Side Hustle

What Are the Pitfalls of Not Using Percentage-Based Budgeting?

For PhD trainees in particular who are anticipating income jumps, it is very tempting to tell yourself that you will work on financial goals such as saving and debt repayment once you are earning more. In fact, you might even allow yourself to live above your means and accumulate some debt in the confidence that you will pay it all off later on.

Further reading: A Low Income Is a Blessing in Disguise

If you’ve ever heard of the permanent income hypothesis, you might be tempted to add its label to the above line of thinking. However, I think rather than a strictly rational calculation, it is simply our natural procrastination and fear of financial sacrifice disguising itself as a reasonable argument. Keeping a lid on your lifestyle is difficult when your income is low. Saving and debt repayment are difficult. We imagine a brighter future when those actions won’t be so challenging, and assume we can make it Future Us’s problem.

Further reading: You Should Spend More and Save Less (Especially Grad Students)

While I certainly hope that you experience the income jumps you anticipate – and don’t forget, there’s no guarantee that they will materialize – it doesn’t really become easier to save with age the way most people think it will. As the decades pass, on average your lifestyle starts to cost more and more. You buy a house. You have some kids. You upgrade your car. You’re pressed for time, so you don’t practice frugality the way you used to. The fact is there is always a reason not to make financial sacrifice today, especially if you’re an optimist. Percentage-based budgeting keeps your lifestyle in line with your current reality and doesn’t allow you to defer accepting responsibility for your financial life.

Where Does Percentage-Based Budgeting Break Down?

Low Incomes

Percentage-based budgeting works well over a range of incomes, but there is a floor to its functionality, and it’s somewhere around the living wage for each local area. At some point, when your income is low enough, you can’t scale your basic needs down to that ideal percentage of your gross income. And unfortunately, a lot of graduate students and some PhDs are living right around that breaking point. Savings/debt repayment will be cut back or eliminated, needs will balloon out of proportion, and there will probably be little spent on wants. You may even find yourself accumulating debt. The best solution to this conundrum is to land a higher-paying position as soon as you can, following graduation if necessary. A side income may help keep you afloat in the meantime, but don’t let it slow down your progress to that better job.

Taxes

Some percentage-based budgeting formulations, like the Balanced Money Formula and Dave Ramsey’s, work off your net (after tax) income. I like to work off my gross income and think of taxes as part of my percentage-based budget, but as I said earlier, your effective tax rate is not a percentage that you as the taxpayer control. As your income increases, all else being equal, your effective tax rate will increase as well, meaning that everything else has to shift to accommodate it, so your percentages cannot stay totally fixed.

My Experience with Percentage-Based Budgeting

I implemented percentage-based budgeting early on in graduate school for my high-level financial goals that are still the same today. I paid my taxes (through quarterly estimated tax, at times!), contributed to my Roth IRA (starting at 10% of gross income, working my way up to 17% by the end of grad school, and 18% today), and tithed. Beyond that, I did check that my spending on needs and wants was more or less in line with the Balanced Money Formula. I found that a 5:3 ratio of spending on needs to wants is quite comfortable.

I’m so glad that I implemented percentage-based budgeting, at least for my high-level goals, during grad school. It has helped my husband and I keep perspective about our finances through the income increases and moves we’ve undergone. We now have one regular income (my husband’s salary) and a few variable income streams (from my business and side hustle), and we practice slightly different forms of percentage-based budgeting with each. We pay taxes (at different rates), contribute to our retirement accounts, and tithe from each income, but we budget all our expenses off my husband’s income and use mine for extra saving (usually for a house down payment).

Probably the thing I like best about percentage-based budgeting is that it’s so flexible; you can make it entirely your own based on your goals and your lifestyle preferences. Yes, there are guidelines out there for you to access if you want to, but the final decision is yours. If you find a comfortable ratio among savings, needs, and wants while your income is low and maintain it as your income grows, you can confidently enjoy the fruits of your success.

The Best First Step to Improve Your Finances

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Sometimes when I meet someone in a social setting and they find out what I do, they ask me for my very best tip to help them improve their finances. I know I only have a few seconds to impart potentially life-changing information at a moment when they are open to it, so I have to keep it simple. I tell them, “The best first step to improve your finances is to start tracking where your money goes. You’ll be amazed at what you find out, and the simple act of tracking will cause behavior change.”

If you’re inclined to take this suggestion right now, stop reading this post and do it! It doesn’t matter how you accomplish this – paper and pencil, a spreadsheet, software like Mint or You Need a Budget – just get started. Even if you don’t act on the information right away, when you’re ready to you’ll have the data ready.

best first step to improve your finances

If you need some more convincing or details, read on.

Actually, it doesn’t matter the setting or how long I have to talk to someone about money. I truly believe that tracking how you use your money, if you’ve never done it before, is the best first step to improve your finances that you can possibly take. It’s even more fundamental and easier than budgeting.

Why to Start Tracking Your Money

There’s an old saying, “Look at a man’s checkbook and you’ll see his values.” I don’t know who keeps a checkbook register any longer, but the principle is this: What you spend money on, you value. Without that transaction log, there is no way to check that what you think you value is actually represented in how you use your money.

1) You almost certainly don’t know where it’s going

Unless you have a superhuman memory, without tracking your spending you simply do not know where your money goes. This may be an acceptable state if you have a high income relative to your expenses, but I don’t think many grad students have that problem. If you desire to use your money to maximize your life satisfaction, you need to know what it’s being spent on now.

2) It will cause behavior change

The personal finance version of the observer effect is this: The act of tracking your spending necessarily changes your spending. Just knowing that your transactions are being recorded and scrutinized (by you!) will cause behavior change. You might forgo a small purchase you would have made unthinkingly before, like buying a drink or paying for parking. You might shop around a little more for a good deal on a purchase you want to make. You might decide to bring your dinner to work instead of visiting a campus dining establishment. While you can never get a clear picture of what your spending was before you started tracking, starting to track will put you on a path to optimizing your use of money.

3) You can analyze the data to use your money better

Once you have tracked your spending for a period of time, such as a month or even a week, you can start to identify patterns. You have your fixed expenses that will be the same every month, your variable expenses that you always have but in different amounts, and your irregular expenses that pop up only once or a few times per year. Ask yourself if you are happy using your money the way you are in light of what else you might do with it. One category might jump out at you as being particularly over- or under-funded or out of proportion in comparison with what you spend on another area.

4) You can catch mistakes

Retailers, banks, and lenders are not perfect; computer glitches and human error happen frequently. While they may or may not be actively malicious, some companies (e.g., cable and mobile phone) and banks (e.g., big banks) make a lot of ‘mistakes’ in their own favor. If you never looked at your tracked spending, you might not notice that you were double-charged for a purchase, a refund didn’t go through, or a bill was higher than your contract stated. With your tracked data, you can keep from being taken advantage of and put money back in your pocket.

5) It’s a great lifetime habit to start now

Eventually, a great tracking system will operate in the background of our life through automation or habit, bringing just enough awareness that we hold ourselves accountable for our spending but not becoming a burden. Even if you go through periods when you aren’t doing much with the tracked information, your future self will thank you when you do want to use the data for budgeting or another purpose. The best time to implement such a system or habit is today! Given that tracking is so low-effort, once you start why would you ever stop?

How to Start Tracking Your Money

How you choose to track where your money goes is really a personal preference. You should use whatever method you’re most likely to maintain and that makes the data available in a useful form.

When I first started tracking my money, I simply set up a spreadsheet with a handful of categories and manually recorded every one of my transactions. I categorized the transactions appropriately or as “miscellaneous” and made notes next to them as needed. It was a very simple system that worked well for me. At the time, I didn’t make a whole lot of transactions and I only had one bank account and one credit card to monitor.

A few years later when my husband and I got married and joined our finances, our financial lives were much more complicated. We had many more checking, saving, and credit accounts open, and my husband was uninterested in manual tracking. So we started using Mint, a web-based tracking tool and app, which linked up with all of our accounts and downloaded and categorized our transactions for us.

The big advantage to manual tracking is that – if you stick to it – it forces you into a high level of awareness of your finances. You have to notice every single transaction, no matter how inconsequential. You can practice manual tracking with pencil and paper, a spreadsheet that you create (or download a template), software, or an app. A few examples of free manual tracking software and apps are EveryDollar (Dave Ramsey’s software), GoodBudget, and Wally.

The big advantage to automatic tracking is that it’s incredibly easy (maybe too easy!). You can link your accounts to the software/app and, if you want, forget about them. The tracking will go on unnoticed by you. That’s great if you’re a busy person with lots of transactions because nothing will slip through the cracks. If you check in on the tracked data at least once a month, that automatic tracking will probably work well for you. But if you never look at it or just take a glance it probably won’t affect your behavior. However, it is useful to have the tracked data if in a few months or a year you decide to start engaging with it. A few examples of free automatic tracking software and apps are Mint, You Need a Budget (one year free with proof of student status), and mvelopes.

What to Do Once Tracking Is in Place

Once you’ve had your tracking system in place for about a month, you can start using the data.

If you want to only take a small step or two, just notice where your spending might be out of alignment with your values and goals. For example, if you can’t seem to save money for a short-term goal like travel, maybe there are a few outsized areas of discretionary spending you can cut back in.

The next larger step that would be useful for any grad student willing to undertake it is to start budgeting. With tracking, you’re looking at what your money did. With budgeting, you’re creating a plan for what your money will do. While a stereotypical budget prompts you to limit your spending in one area or another (always something fun, right?), your budget may or may not serve that purpose. In fact, I found budgeting freeing in a way; after I planned for a certain level of discretionary spending (e.g., clothes shopping), I stopped second-guessing my purchases.

At its most basic, a budget is a spending plan, no more and no less. Tracking your spending is the accountability tool that helps you stick to your budget. While the best first step to improve your finances is tracking, budgeting is the best second step to take. With your budget, you plan how to use your money in the way that brings you the most satisfaction in life.