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How to Prioritize Financial Goals When You Can’t Do It All

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As graduate students, we can be overwhelmed easily by everything our stipends are ‘supposed to’ accomplish for us. If you read any personal finance material (including mine!), you will see that your income should go toward saving for retirement, paying off your debt, saving an emergency fund, saving for your short-term goals… oh, and feeding, clothing, and housing you, too! It can seem impossible to make any financial progress when faced with all these demands. Instead of trying to do everything at once, prioritize the various financial goals you might set based on both the math behind them and your personal disposition toward saving, investing, and debt.

prioritize financial goals

A version of this post originally appeared on GradHacker.

In my opinion the first two goals you should accomplish with your stipend are obvious, and after that you’ll have leeway to choose among competing valid goals.

Goal 1: Pay for Your Basics

The primary purpose your stipend should serve each month is to pay for the basic expenses in your life, such as housing, utilities, food, and transportation. If that’s all your stipend can manage, it has served its purpose: providing you with enough money that you can fully devote yourself to your studies. Increasing your short- and long-term financial security will have to wait until after graduation.

However, keep in mind that it’s very possible for these basic expenses to inflate from “need” into “want” territory. “Want” aspects of these basic expenses include living alone, housing amenities (access to pool, gym, social spaces), a car/a car that’s worth a significant fraction of your yearly income, eating out, bar tabs, etc. That’s not to say that you shouldn’t spend money on those above-basic aspects of these expenses, but just be aware that you can’t justify that portion of the spending as “needs.” It’s easy for your large, fixed expenses such as housing and transportation to get away from you, so spending your stipend on the “want” aspects of your basics should be weighed against using it for your other possible financial goals (more on that later).

Goal 2: Save an Emergency Fund

Everyone should have an emergency fund, even if it’s small. An emergency fund is cash reserved only for emergencies. It’s basically money that will prevent you from going into debt when something unexpected happens. A full emergency fund is on the order of 3-6 months of expenses, but that shouldn’t necessarily be your first goal. A small emergency fund of $1,000 is a great start when you have other pressing financial goals, such as debt repayment. It’s not prudent to delay repaying high-interest-rate debt to save a larger emergency fund the purpose of which is to prevent you from going into high-interest-rate debt.

Start with a $1,000 emergency fund as your second financial goal, but after that let the math of your other choices and your gut help you decide whether to keep building the emergency fund or move on to another goal.

Accumulating Cash vs. Growing Wealth Mid/Long-Term

Cash savings has great utility. If your expenses are quite uncertain over the next year (such as when you near graduation), it makes sense to save up to be able to pay for the most costly scenario in cash. It’s also a good idea to keep cash on hand for irregular expenses, such as in a system of targeted savings accounts. As just discussed, a larger emergency fund can bring great peace of mind to certain people.

But you should limit your cash savings to the amount that you may well need in the short term (1-2 years plus any mid-term goal expenses like a house down payment or wedding). To increase your net worth in the long term and ultimately become financially independent, you need to invest for the long-term and pay off debt. As soon as you have sufficient cash on hand (by your estimation), you should start investing or paying off debt, but deciding when you have enough cash is largely about your comfort level.

It’s also fine to simultaneously invest/pay down debt and save additional cash, as long as you can accept that your progress toward each goal will be slower. For example, if you decide to save 20 percent of your income, 10 percent can go toward investing/debt repayment and 10 percent can go toward cash savings.

Investing vs. Debt Repayment

The earlier you get compound interest working in your favor, the better. You can accomplish that by investing or paying off debt. Deciding between investing and debt repayment is again a balance of math and personal disposition.

First, do the math. Put numbers on your various possible investing and debt repayment goals. Your debt repayment “rate of return” is the interest rate of the debt in question. The long-term average rate of return on your investments is estimated from your asset allocation. For example, a grad student invested 100 percent in large-capitalization US stocks could anticipate a 9-10 percent long-term average rate of return (before adjusting for inflation). Other asset allocations will have different expected long-term average rates of return. Mid-term investments should be more conservative, with a lower expected average rate of return but more muted peaks and valleys.

Compare your investing and debt repayment expected rates of return, giving a handicap to the debt repayment side of the equation because there is no risk associated with debt repayment as there is with investing. Given a certain expected rate of return for your investments, the math would argue that debt below a certain interest rate will be a lower priority. For example, if you expect an 8 percent long-term average rate of return on investing, any debt below about 5 or 6 percent might become low-priority.

Second, evaluate your personal disposition. If you feel passionate about one type of goal over another, that should have some influence on your decision. I believe that your passion for a financial goal positively correlates with the amount of effort (i.e., money) you will put toward achieving it. For example, if you hate your debt, you should pay it off, even if the math favors investing. If you are very excited to start investing, perhaps you could reduce the debt repayment handicap in your math to only 1 percent. Just don’t justify keeping high-interest-rate credit card debt because you want to start investing!

The one caveat I’ll make to allowing your personal disposition to hold sway over the math is for a very risk-averse person: you will have to start investing eventually, even conservatively, if you want to reach financial independence. You will automatically pay your installment debt off in time even if you just make the minimum payments, whereas there is no mechanism to force you to start investing. So it is acceptable to prioritize (non-mortgage) debt repayment over investing, but when you’re done paying the debt, be sure that you hold yourself accountable to take the next step to start investing.

Know that More Goals Means Slower Progress

The more financial goals or purposes for your money that you have, the slower your progress will be toward each of them. If you feel strongly about working on multiple goals at once, accept this knowing that you are making some progress in all the areas that are important to you. But if you are frustrated by slow progress to the point that you end up not devoting money to any goals, working on one or a small number of goals at a time is a better fit for you. In this case, set concrete dollar-amount goals that you can achieve within months or a small number of years and work toward them intensely. For example, set $4,000 as your goal emergency fund size, but once you achieve it, move on to something else. Paying off one debt entirely could be another concrete goal.

Living Your Life

Since our income is limited (unless we have a side income), any money that you put toward the above types of financial goals is money that won’t be used for your everyday comforts and living expenses. By no means do I suggest that you suffer through a Spartan lifestyle while you put every penny possible toward your long-term future. Everything must be in balance for you. A guideline like the Balanced Money Formula may help you work through what percentage of your income to use today and what percentage to put away for tomorrow.

My Choices During Grad School

When I was in grad school, the financial goal that most excited me was investing. Therefore, after ensuring that I could live within my means and establishing a $1,000 emergency fund, I started investing 10 percent of my gross income into my Roth IRA. Over time, I built up cash savings in my targeted savings accounts and also increased the fraction of my income that I saved for retirement. To devote more money to these goals, I reduced my living expenses by developing frugal practices. Paying off my remaining student loans was my lowest priority as they were subsidized during deferment. I’m happy with these choices given my personal disposition (not risk-averse), but if I were to do it over again I would have beefed up my emergency fund earlier, delaying increasing my investing percentage for a short time.

Bring Savings to Grad School

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Even if you are earning a stipend during graduate school, it’s essential to have some savings already when you start graduate school. In all likelihood, you are going to wait several weeks before you receive your first paycheck or fellowship disbursement, and those particular weeks are going to be unusually expensive ones.

Why Does It Take So Long to Get Paid?

Processing payroll takes time, and you probably won’t even start setting it up until after you arrive on campus.

If you are working for your university (receiving compensatory pay as an RA, TA, or GA), you will have to perform some work before you are paid. It is most typical for graduate students receiving compensatory pay to be paid monthly, so your first paycheck will arrive near the end of your first or second month after starting grad school. While you may be required by your program to be on campus for orientation, unless you are concurrently starting your RA or TA duties, you may not be paid for that time.

If you are receiving a fellowship stipend, you may be paid monthly or in lump sums. Either way, the disbursement from your funding source has to be processed by your university before it is sent to you, so you will also be paid after the start of the school year.

Unfortunately, while your pay won’t arrive until some weeks after you start grad school, your start incurring your expenses well before.

Further reading: Why I’m Voting Yes

What Will My Expenses Be Before I Am Paid?

Not only do you have to sustain yourself normally before you are paid (food, housing, transportation), you have additional start-up expenses associated with the beginning of graduate school.

1) Normal Expenses

If you’ve never tracked your spending before, you may be surprised by all the different expenses you have each month. Your basic needs are food, housing, transportation, clothing, and insurance. On top of those, you may have some discretionary expenses such as restaurants and bars, entertainment, and shopping.

2) Moving Expenses

Many if not most graduate students move to their university towns prior to starting graduate school. Your costs to move may be as low as only gas money or as high as flights and shipping, depending on the distance moved and the amount of possessions being moved.

3) Housing Start-Up Expenses

You should expect to pay your rent for each month up front (e.g., pay for September’s rent by the end of August), so at a minimum you will pay for some housing expenses before your first paycheck. On top of first month’s rent, you may be required to put down a security deposit and possibly pay last month’s rent as well; policies vary by location. Some rental companies in college towns offer discounts on these types of expenses.

After you get into your new home, you will need to furnish it to some degree (either you will pay to move furniture or you will buy furniture in your new town) and stock your fridge/pantry. You should also purchase renter’s insurance, possibly paying for the whole first year at once.

Further reading: My Beloved Air Mattress: An Anti-Debt Story

If you have chosen to buy a home prior to starting graduate school, of course you will have much higher housing start-up expenses.

4) Transportation Start-Up Expenses

If you will own and use a car during graduate school, you will have to register the car in your new location and update your insurance policy. Buying a car for graduate school will involve either paying for the car up front or taking out a loan, possibly with a down payment.

5) University Expenses

You are likely taking classes in your first year of graduate school, and your courses may require you to use certain textbooks. You might also be responsible for paying some fees or even partial tuition near the start of the school year.

What Are My Options for Paying My Expenses Before I Am Paid?

First, minimize your expenses to the greatest extent that you can by using frugal strategies. Some tips that are relevant to the start of the school year are:

  • accept as much free food as you can
  • borrow your textbooks from the library or older graduate students
  • delay buying non-essential furniture to spread out the cost and buy used
  • try living car-free if you are not certain that you will need a car

Second, by far the best way to pay for your expenses before you receive your first paycheck is to use savings. It would be ideal to have a least a couple if not several thousand dollars on hand for your transition to grad school.

If you don’t have the cash available, you’ll likely have to take out debt of some kind. Some graduate programs offer short-term loans to their students to help them through these kinds of transitions. Another option might be a personal bank loan. Accruing credit card debt should be a last resort; not only will you have to use your first paychecks to play catch-up, your debt will almost certainly generate a lot of interest charges in the meantime.

How Should I Build Up My Savings In Advance?

If you are already saving money for other purposes, divert some of it to a special transition-to-grad-school fund. If you do not currently have the excess cash flow to save money, you need to either increase your income or decrease your expenses to create some. Check out our side hustle series for ideas for increasing your income and our frugal practices for ideas for decreasing your expenses.

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