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The Simple Way to Invest as an International Grad Student or Postdoc

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In this episode, Emily interviews Hui-Chin Chen, a Certified Financial Planner specializing in advising globally mobile professionals. Hui-Chin is a managing partner and financial advisor with Jade & Cowry, and she is a repeat podcast guest. Her first interview from 2019 is required listening for international graduate students and postdocs prior to starting this episode. Hui-Chin gives us a bird’s-eye view of a simple investing strategy for nonresidents in the US if using a tax-advantaged retirement account proves too complex. Hui-Chin and Emily review the IRA eligibility criteria for nonresidents with respect to fellowship income and married filing separately. They discuss whether and when someone moving out of the US should engage a tax advisor. Finally, Hui-Chin answers one investing and one tax question submitted by subscribers to the Personal Finance for PhDs mailing list.

Links mentioned in the Episode

The Simple Way to Invest as an International Grad Student or Postdoc

Teaser

Hui-chin (00:00): Probably a lot of people have that decision fatigue and just, I don’t know what the first step should be. So if you’ve been thinking about this for a year plus and you haven’t taken action, I would say just take that action and that would you know your future self will thank you.

Introduction

Emily (00:25): Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

Emily (00:55): This is Season 22, Episode 1, and today my guest is Hui-Chin Chen, a Certified Financial Planner specializing in advising globally mobile professionals. Hui-Chin is a managing partner and financial advisor with Jade & Cowry, and she is a repeat podcast guest. Her first interview from 2019 is required listening for international graduate students and postdocs prior to starting this episode. Hui-Chin gives us a bird’s-eye view of a simple investing strategy for nonresidents in the US if using a tax-advantaged retirement account proves too complex. Hui-Chin and I review the IRA eligibility criteria for nonresidents with respect to fellowship income and married filing separately. We discuss whether and when someone moving out of the US should engage a tax advisor. Finally, Hui-Chin answers one investing and one tax question submitted by subscribers to the Personal Finance for PhDs mailing list.

Emily (02:00): Let’s talk fellowship taxes for a minute here. These action items are for you if you recently switched or will soon switch onto non-W-2 fellowship income as a grad student, postdoc, or postbac; you are a US citizen, resident, or resident for tax purposes; and you are not having income tax withheld from your stipend or salary. Action item #1: Fill out the Estimated Tax Worksheet on page 8 of IRS Form 1040-ES. This worksheet will estimate how much income tax you will owe in 2025 and tell you whether you are required to make manual tax payments on a quarterly basis. The next quarterly estimated tax due date is September 15, 2025. Action item #2: Whether you are required to make estimated tax payments or pay a lump sum at time tax, open a separate, named savings account for your future tax payments. Calculate the fraction of each paycheck that will ultimately go toward tax and set up an automated recurring transfer from your checking account to your tax savings account to prepare for that bill. This is what I call a system of self-withholding, and I suggest putting it in place starting with your very first fellowship paycheck so that you don’t get into a financial bind when the payment deadline arrives.

Emily (03:25): If you need some help with the Estimated Tax Worksheet or want to ask me a question, please consider joining my workshop, Quarterly Estimated Tax for Fellowship Recipients. It explains every line of the worksheet and answers the common questions that PhD trainees have about estimated tax. The workshop includes 1.75 hours of video content, a spreadsheet, and invitations to at least one live Q&A call each quarter this tax year. The next Q&A call is on Thursday, September 4, 2025. If you want to purchase this workshop as an individual, go to PF for PhDs dot com slash Q E tax. You can find the show notes for this episode at PFforPhDs.com/s22e1/. Without further ado, here’s my interview with Hui-Chin Chen.

Will You Please Introduce Yourself Further?

Emily (04:30): I have a real treat for us today. I have a returning guest, Hui-chin Chen, who is the managing partner and financial planner at Jade and Cowry. Hui-Chin was first on the podcast in season four, episode 17, and by all accounts, this is one of the most popular episodes of this podcast, if not the number one most popular. And it is definitely the episode that I get the most thanks and compliments about. So I want to thank and compliment Hui-chin for the excellent interview that she gave last time, and for the listener we are going to build on that interview. We are not gonna go back and rehash all the points that we made in the first one, and I would say it is a must listen if you are an international graduate student or postdoc or worker or similar in the us, go back and listen to that episode, then listen to this one because we are building on top of it. Um, we are, we’re not going back and asking all the same questions. So Hui-chin, thank you so much for agreeing to come back on the podcast. Thank you for your previous contribution and the contribution you’re about to make. Um, is there any, is there any further introduction you would like to make to give us background on what you do and who you are?

Hui-chin (05:39): Uh, sure, uh, of course. Thank you Emily for inviting me back and thank you for all the compliments, <laugh> from, from you and the listeners. I definitely heard from some of your listeners reaching out, uh, in the past. So in addition to my work at Jade and Cowry, so I’m a cross-border financial planner. Uh, I work mainly with globally mobile professionals and multinational families, which a lot of you are. I also started a, a professional network called the CIGA Network. It’s for, uh, cross border financial planners from a lot of different jurisdictions outside the US so we can collaborate on work for clients better to provide cross-border financial planning better. So, um, so for, for those of you who are not planning to stay in the US or have, uh, plans to go around the world in the future, um, that could be a resource as well.

Investing While Living in the US as an International Grad Student or Postdoc

Emily (06:28): I know both of us reviewed that prior episode, which is published back in 2019 before jumping into this one, and you observed that we approached that interview, we got very quick into the tactics, how do I do this? Where do I do that? And I know you want to take a little bit of a step back and give us kind of a bigger picture about investing while living in the US as an international graduate student, postdoc, et cetera. Can you give us that perspective?

Hui-chin (06:56): Of course. Um, so now I have I, I guess five or six years more experience working with more people from walk all walks of life. All the commonality is that they have some kind of international background coming from different countries. We’re going to different countries. You realize that there are a wide range of possible tax situation, wide range of what people want from their life wide range of family situations, wide range of how many nationalities are in the household. Eventually, those are like Emily, like you said, and those are important considerations when you go down to the weeds. But if you’re new to investing, take a step back. The question if you’re asking, should I be investing while I’m studying in the US or I’m working in the us? I don’t answer a lot of questions with a hundred percent yes, but that’s probably a question I would give you a hundred percent yes, <laugh>, um, just do it.

Hui-chin (07:53): If you’re considering, um, you know, I have extra money, I have saved up my emergency fund. I want to prepare for my future. Should I be investing in an account in the US which I can right now open with no problem. And I say, yes, go ahead and do that. Don’t worry too much about, um, the future tax situation yet. Um, of course then there’s the, okay, if my situation’s a little bit more complicated, I want to know what kind of accounts to use. We’ll talk about that later. Um, but the big picture is investing for your future is important. If Emily hasn’t told you that, you know, in the past, I’m sure she, I’m pretty sure she has, and she probably repeat that over and over. And that’s one thing we really want to drill in. Don’t get bogged down down into your particular situation and just not do anything because you don’t know what the best way to invest is in terms of accounts. Just, you know, open the most simple accounts, uh, taxable brokerage accounts and start investing

Emily (08:55): Could not agree more. And I think that is actually a really good kind of summary of the highest level takeaway from that previous episode, which is, if you are financially ready to start investing, you have the emergency fund and so forth, as you mentioned, do not let your status in the US hold you back from engaging in this process if it’s right for your finances at this time. And the way that I’ve heard this phrase before, maybe from the US perspective, is like, don’t let the tax tail wag the financial decision dog, right? So like the taxes can be worked out <laugh>, there’s nothing to work out if you don’t just start investing, right? You just need to start, you know, if you’re ready. So thank you so much for that like high level, and I really, I’m glad that you added, Hey, if, if the account situation is so complicated and, and you don’t know if you wanna use a tax advantage retirement account and all of that, hey, a brokerage account is available to you, a simple taxable brokerage account, normal kind of account that you could open at a brokerage firm that is always available to you. Again, there may be tax implications, but it’s the simplest level. And so that is an appropriate way to get started investing. If that’s all you wanna do at that time, that that’s perfectly fine. Am I hearing that right?

Hui-chin (10:07): Correct. I, I know probably a lot of people have that decision fatigue and just, I don’t know what the first step should be. So if you’ve been thinking about this for a year plus and you haven’t taken action, I would say just take that action and that would, you know, your future self will thank you.

Taxable Compensation and IRA Eligibility for Non-Residents

Emily (10:25): Absolutely. Just get off the starting line, just do something. I I tell the same thing to, um, the people who I teach as well. It’s like you have a lifetime of investing ahead of you and it’s a long journey and you can expect that you will make mistakes or at least have to take steps that you’re not a hundred percent sure of along the way. And that’s okay. You have time to course correct, you have time to fix things later on. Getting started is the most important step here and then you can make some adjustments as you go along. Now I’ve gotta take us into the weeds. Okay. We got a lot of weeds questions. I had some weeds questions. I asked for questions from my mailing list. They submitted some down in the weeds questions. So, okay, we’re gonna go there. Now that we’ve gotten the high level, let’s assume that someone is ready to invest, uh, while they’re in the US and, and they have those questions about what kind of account should I use. Okay, I wanna go beyond the taxable brokerage account. So when we last spoke, um, it was right before the secure act passed and we did discuss the change that was coming in the secure act. So as a review for the listener, um, it used to be that income from fellowships, so like non-employee type positions, but given inside academic, you know, graduate student and postdoc positions, um, this was initially not eligible to be contributed to an IRA, an individual retirement arrangement. Um, the secure act changed that for graduate students and postdocs. So now even if you have fellowship income, not from an employee position, but you are a grad student or a postdoc, that income became eligible in terms of it being compensation from this term taxable compensation. But what we talked about is, okay, well is it taxable? Because that is what someone who’s a non-resident in the US needs to consider. Okay, yeah. If you’re a US citizen or resident, it’s gonna be taxable, we know this, but if you’re a non-resident, well, we have the questions about what is the tax treaty that applies and so forth. So can you elaborate on that anymore? How can someone who’s a non-resident in the US tell whether they have taxable compensation, whether they have income that is eligible to be contributed to an IRA?

Hui-chin (12:30): That’s a question I, I don’t know. I have a hundred percent answer to that. Obviously the, the original distinction be before like there was a confu, not the confusion, but before secure act, the distinction is if it’s W2 reported on W2 versus the income that you’re getting either from school or organization, that’s non W2, right? So that’s the fellowship income and things like that. Now it’s clarified or added in the legislation that those non W2 income that may, may be reported as miscellaneous income on 1099, those can be counted as fellowship income, but those supposedly would be reported, uh, taxable. Meaning when you file your tax return in the us it’ll be added depending on um, your tax, whether you’re already a resident past your exempted uh, uh period, or if you have, um, that the tax treaty like you mentioned so that you know not fall into the normal exempt period.

Hui-chin (13:37): My take is if it’s not listed on your tax return when you report as a taxable income, then you cannot use it to contribute to, uh, an IRA or Roth IRA or 401k for that matter. Of course, if you don’t have, uh, W2 income is unlikely, it’s 401k, it’s most likely your own IRA or Roth IRA. But the idea is that taxable means not, doesn’t mean that you didn’t pay tax on it because you have the standard deduction, you have potential other things to reduce how much become taxable income, but that income must be listed on your tax return to begin with for it to count as taxable compensation.

Emily (14:22): Yeah, I like that you pointed out that that’s a very clear resource that one can go to after you’ve filed one type of tax return. Um, in the US like a non-resident can see, okay, I had taxable, potentially taxable income, and then I have maybe some income over here that’s listed as tax exempt. You can see they’re in different, they’re different boxes, different sections. So did I have any in this taxable column? Um, then okay, then that’s taxable compensation. Um, and I like that you pointed out that just because income is taxable doesn’t mean it ends up getting taxed, but it has to be eligible to be taxed. Yes. So I think that makes total sense.

Married Filing Separately as a Non-Resident: Implications for Roth and Traditional IRA Eligibility

Emily (15:06): This next question comes from me actually because as I’ve been learning more about non-resident taxes, I realize that it’s pretty common for non-residents to file married filing separately. Can you explain why or in what circumstances non-residents would file married filing separately and then what implications that has for their Roth IRA or traditional IRA eligibility?

Hui-chin (15:29): Well, to clarify, there is no married filing jointly on 1040NR <laugh>. So you’re either single or you’re married, you know, and each filing as an individual. So I know a lot of countries like that in the world, like they don’t have filing joint option anyway, so you might feel like, oh yeah, it’s normal. But in the US the default when you’re married as a resident is filing jointly and they usually get better tax treatment than if you do married filing separately.

Emily (15:59): And this is one of those examples, is this Roth IRA eligibility? So if someone does is married and they’re filing separately as a non-resident, then what happens to their IRA eligibility?

Hui-chin (16:11): Yeah, so for the Roth, IRA, um, there is a income, uh, limit. Obviously if you are doing the normal single or married filing jointly, the income limit is much higher. But the married filing separately, because it’s not a, um, I should not comment, but it’s a, a specific thing that when they put in their legislation, they don’t want the people with married filed separately to have the same benefit as married filing jointly. So they set that limit very low at $10,000, I believe. And um, and that’s the one that doesn’t index by inflation. All the other are indexed by inflation. So right now, if you’re married filing jointly, the income limit would be like 200 something thousand. Yeah. And it, it changes every year. So I always, whenever I tell people, you just Google <laugh>, you know, Roth, uh, Roth IRA contribution can limit that year, like this year 2025 will show you a chart that clearly laid it out.

Emily (17:11): And then I also read something about there’s a difference if you never lived with your spouse during the course of the year

Hui-chin (17:17): For international student. Yes, I can see if you come here on your own and your spouse is not even here yet. I think that’s just this, the, the married filing separately distinguished between if you’re truly, you have basically you’re truly two households, right? So that they set that limit to be the same as what if you’re single.

Emily (17:35): Okay. So let’s take a couple scenarios here. So one, you’re a married non-resident and you and your spouse are living in the us you’re living together then for a Roth IRA, your income ceiling to be able to contribute is $10,000 and that’s the taxable in the US $10,000, right? Okay. Um, then let’s say you are married and you and your spouse live separately. Maybe you are going to two different universities for your graduate degrees. You do not occupy the same household, then the eligibility is is if you were single, is that what you’re saying?

Hui-chin (18:08): Correct, because the, the two uh, different sections are single head of a household or married felling separately as the, the same category. And you did not live with your spouse at any time. So the, I the basically the distinction is that if you’re clearly married, living in the same household, they want to kind of, I shouldn’t call it penalize you. They don’t want to afford you the same benefit of why not you could marry filing jointly, but obviously if you’re non resident then you cannot, so it’s not an option. Um, but for just because this, uh, specific rule applies to residents and non-residents. So the idea is that if you’re truly just, you know, even you’re married, you are in two different households, like you’re single, so they give you that same limit as if you’re single.

Emily (18:58): And same kind of logic if your spouse is in another country, not even living in the us correct?

Hui-chin (19:03): Yeah. So you would still have to file married filing separately unless you want to tell the world that you are single <laugh>. Again, the, the idea is that we’re into the weeds. If you are contributing so little and you just want to make sure you’re investing, don’t worry about Roth IRA, you know, traditional non-deductible, IRA, open a normal account, invest the same amount, that’s totally fine too.

Emily (19:30): Hmm. I’m glad you took us back there. I was gonna do the same thing. <laugh>. Um, if this is all getting too complicated, if you have question, like if you’re listening to us talk about the married filing separately stuff and you’re like, I’m just confused, I don’t know what my eligibility is anymore, don’t worry about it. You don’t have to use that type of account. You can just use a regular taxable brokerage account and that’s perfectly okay. <laugh> for the time being.

Building an Investment Portfolio as an International Postdoc Residing in the US

Emily (19:54): Now I received this question actually, uh, from someone who was at, I gave a webinar recently for the National Postdoctoral Association, um, overall, and then someone who, uh, is an international postdoc asked me this question as a follow up and I said, submit this to my upcoming interview because I’m gonna be asking question these questions. Okay. So her question was, given the high mobility rates of postdocs and balancing long-term investment with liquidation of assets, what are medium risk investments that international postdocs residing in the US can take advantage of?

Hui-chin (20:30): It’s a good question, but also, um, a question I think needs a little bit more, um, explanation from the person we’re asking what that means, right? So first of all, I wouldn’t say there’s one investment you can find is just medium risk, right? The idea is that when we’re talking about risk spectrum, so this is going back to investing 101, like how do we build a portfolio that’s appropriate for your risk tolerance and risk capability? Meaning a lot of times I deal with how long you can invest. This usually is come from a portfolio construction of different investments, and that’s what diversification is. It’s not just, oh, I’m buying a hundred percent stock, but you know, a hundred stocks in my a hundred percent stock portfolio. That’s diversified, that’s diversified within your stock, but your portfolio is not diversified across risk spectrum, right? So without going into, you know, like going into inve investment philosophy and basics, the idea I would say is looking at the asset allocation of, of your portfolio, are you, um, investing across stock and bonds, which is the two main building blocks of, um, the publicly traded portfolio.

Hui-chin (21:49): Usually if you go look at, um, for example, target date funds or, um, some other kind of life strategy funds, so like target date funds is based on risk capability. So how long you have to invest. So if you say, see a target date fund of 2050, that means they don’t expect you to need the money until you are in 2050. But if you get one that’s 2025, that means, oh, I need the money now. So you can see how those two funds have different stock versus bonds asset allocation, and that gives you an indication for your time horizon, right? So when you’re talking about you’re globally mobile and you know, you wanna balance liquidity, it sounds like in your mind there’s a chance you might need to take the money with you, you don’t wanna keep it here, but then, um, it doesn’t necessarily mean that’s your investment timeframe, right? If there’s an account, you can leave it there forever, you might. So again, like your balancing act might be different from other people’s balancing act. So you might in your mind, decided what my investment timeframe is, and that’s your, um, sort of risk that you are able to take. So I would suggest that without going into, you know, looking at everybody’s risk tolerance and how to build the proper portfolios, a starting point, when you’re looking, you, you can go look at, you know, Vanguard, fidelity, all of those companies, target date fund, and see how they have the different asset allocation and pick the date that matches yours. It doesn’t mean that you have to buy that exact fund because a lot of them are mutual funds. So for, um, non-residents, you can’t buy them <laugh>. And for people who are residents, uh, but you might eventually leave, but want to keep the account open. Um, mutual funds not the best option. So I don’t re recall if we discussed that in the last episode. So you might want to see, okay, how can I replicate this asset allocation with this kind of investment timeframe, um, by buying the ETFs myself. So for example, Vanguard, if you go to their target date fund, they will tell you exactly how, what other individual Vanguard funds or ETFs they use to build that target date fund, so you can replicate that strategy yourself.

Emily (24:15): Thank you so much for that explanation. And this is news to me about the mutual fund. So we’re gonna put a pin in that and come back to it in a minute. When I was conversing with this person who, who posed this question, I was asking her, what is your actual timeline on your investments? And not necessarily how long you think they’re going to stay in the us but overall do you think you’re going to be investing from now until you’re in retirement, you know, many decades from now? And so I, I think even someone, you can correct me if I’m wrong, but I think even someone who is planning on moving their money, let’s say in the next decade to a different country, they still may have a very long investment horizon and their choice of investments, how much risk to take on would probably still reflect that total view, not just the time period that they plan on keeping the money in a US type account. Is that correct?

Hui-chin (25:08): I think the main issue is, um, if they need to move the investments overseas, most of the time if you’re buying a US domiciled, um, investment, it may not be possible for them to move, move the investment in kind, meaning not sell them, right? If you need to sell your investments, then that’s what your investment timeframe is.

Emily (25:29): But wouldn’t, couldn’t you just sell and rebuy something similar?

Hui-chin (25:34): Correct. But the, the risk of your selling at a loss is the, is the same. So is the, so technically you’re right. If you like, they can come a hundred percent replicate their existing strategy and rebuy in a different jurisdiction. It’s kind of like when we’re talking about tax loss, harvesting <laugh> type situation where you can sell and rebuy and technically you are not losing out. But when you’re talking about transition, usually there’s a slightly longer timeframe. So I would say you are, you’re correct in that too. Like if you can, if you know that your likely will be able to create a strategy after it’s just a brief time outta the market to transition into that, you might take a loss, kind of like non-deductible loss or something. But the idea is when you repurchase the investment, it’s still at the low point, so you’re not really taking a full loss

Emily (26:34): So it could go either way. It depends on where you think you’re gonna move the money to the investment options that are there. So there’s again, a lot of considerations. We, it’s hard to simplify it down super, uh, super a lot. So as ever, it’s gonna depend on the specifics.

Commercial

Emily (26:52): Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, budgeting, investing, and goal-setting, each tailored specifically for graduate students and postdocs? I offer workshops on these topics and more in a variety of formats, and I’m now booking for the 2025-2026 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/financial-education/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutes enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Investing as a Non-Resident: Mutual Fund Restrictions and ETF Options

Emily (28:12): I just learned that non-residents can’t buy mutual funds, but they can buy ETFs. Did I hear that? Can you expound on that a little bit more?

Hui-chin (28:21): Yeah, so in essence, mutual funds and ETFs are two different financial products. Mutual funds are when you are buying the shares, you’re buying directly from the mutual fund companies. So once they get your money, they go out there and buy more stocks and bonds that represent part of their funds. The ETFs are in a sense also a mutual fund, but the shares are traded on the exchange. So when you’re buying a share, you’re most likely buying from another investor from the fund. And because it’s treated on an exchange like a stock, um, there’s no restrictions on who you can, uh, who who can own those shares versus mutual funds. Because the us um, regulations or the compliance situation, they do not let non US resident tax resident, um, become a shareholder in that mutual fund company. So that’s the, the main difference. So a lot of times it’s, it’s not always like you cannot hold them. Like for example, I know, um, Vanguard in the past would let, um, if you say, oh, I no longer live in the us, they would just say, okay, we won’t sell it, but you can’t buy anymore. So the only, the only thing you can do is to take it, to sell it eventually. But there are some mutual funds that would say, we just don’t, we cannot have non-US tax resident as, um, a shareholder. So they would, um, ask you to sell.

Emily (29:57): Okay. So is it then up to the policy of the firm that you’re working with, whether they would allow you to buy and it’s just a widespread com common policy that you wouldn’t be able to buy mutual funds? Is, is that what I’m hearing?

Hui-chin (30:10): Correct, that’s on the custodian side. If you started your account as non-resident, most likely you’re not having access to mutual funds. You would just buy ETFs. If you started as a tax resident and you have mutual funds, when you change, um, your tax residency, they may ask you to sell all of your mutual funds, but technically it’s a mutual fund site, uh, decision, not the custodian decision.

Emily (30:37): All of this is, again, we’re getting down into the tiny little weeds there because in terms of investor strategy and behavior and so forth, mutual funds, index funds, ETFs, they can be very interchangeable in a sense. There, there are differences, but the differences are not super material for a basic investor, right? So it’s perfectly fine hearing this go ahead and buy an ETF that reflects, you know, the index fund that you wanna be in or the set of index funds. That’s all good, right?

Hui-chin (31:04): Correct. And Mutual fund has a benefit of, normally all you do is you send the money and you say, I want to put my $3,000 on Vanguard Total index mutual fund Admiral Shares, right? They would just take it, okay, you don’t even need to think about it in order to buy the same ETF class, you need to do it when the market is open and then, you know, between nine 30 and four eastern time, and then you go to the custodian and say, I wanna buy this number of shares. So it, it is a calculation <laugh>, it’s a change of mindset and I, I know a lot of people, you know, who start started investing previously when it’s more like a mutual fund, you know, uh, time before ETF’s prevalent, it’s used to like, I’m just throwing this money into mutual fund, I don’t have to do the actual purchase, right? It’s just saying, I’m giving you $3,000, I own the share, versus I need to actually go on the exchange. Meaning the market has to be open and to decide how many shares to buy. Like you would decide how many shares of Apple you want to buy, and then you own the shares. So it’s a, it is just a different, uh, type of investment process, but once you’ve done it, you’ll be more familiar with it.

Emily (32:24): Yeah, so slightly different buying process, but presumably we’re buying and holding <laugh>, so you just need to buy once per month or whatever your, you know, dollar cost averaging frequency is and then just hold it from that point. Uh, beautiful. Thank you so much. I’m glad I learned <laugh> something. Well, several things so far from this interview. Thank you.

Leaving the US After Investing as a Non-Resident

Okay. Let’s say we have a, uh, international grad student postdoc or other kind of worker in the US and they’ve been investing while they’re in the US and then they decide they’re gonna be moving to another country and they don’t know yet should they leave the money in the US in the US funds, should they, uh, be moving it at the time that they move. Is it appropriate to engage some kind of financial or tax professional with this decision perhaps about making the decision and perhaps about executing the decision?

Hui-chin (33:15): Correct. Um, I would say both. Um, it depends on what, um, at what point of decision you are, you are at, right? It’s usually a series of decision. I’ve worked with clients in like, uh, from, from the very beginning or they only engage me when, you know, we’ve decided we’re moving to this country because we get a job and we’re definitely going there at this date. So just tell me what do I need to do before I leave? Right? So that happens. And there’s also the, hey, I got three job offers in three different countries with three different packages. Which one should I choose? Right? Then that’s more at the beginning of the process. So depending on where you are or what you need, like a financial planner, cross border financial planner or people at least uh, familiar with international planning aspects should be able to do that kind of strategizing with you. Like if your decision is upfront or if your decision is just, okay, I have money, I have like, I have investments, I’m definitely going there at this time, what do I need to do? Gimme a checklist, that kind of thing. And we, we’ve also, you know, done that. So I would say definitely talk to someone before you move because there are are quite a few things that’s just easier, like most from a process perspective and also from sometimes tax savings, um, perspective because you, depending on whether you’re moving to a higher co, higher tax or lower tax jurisdiction, um, sometimes the jurisdiction has, you know, some exemption period upfront. So you want to, um, for example, we know that when, when you’re a true non-resident from US perspective, you can sell without paying taxes on your capital gain. So a lot of people plan to do that right when they leave, so they can cut off any US tax, but depending on where you move to, you might be paying the higher tax in the other jurisdiction anyway. So that’s one consideration. But if you’re moving to somewhere where they don’t tax foreign income, then that’s a perfect time to consolidate, uh, to, to sell. Then there’s also the, or there are countries where there’s exemption period or you know, the exemption period can be only six months or it can be four years, right? So it’s helpful to know in advance so you can, um, do the things, the right sequence and timing.

Emily (35:40): Okay. So let’s say we have someone who is planning that move, but it hasn’t happened yet and they engage someone like you to for help with this, are, are they gonna be able to know and do everything that they need by engaging someone, let’s say from the US side or do they also need to hire someone in the country that they’re moving to perhaps, or, or would you for example, be able to handle things on both ends

Hui-chin (36:07): Depending on the kind of structure that you’re working with the advisor. Some advisor, they specifically are cross country of those we call it um, country, country payer advisors. So they only deal with US Canada for example, or US UK. So they know everything they, you need to know <laugh> about those two countries. You can engage in one of them and then they can help you on both sides technically in terms of knowledge, right? So not all of them are registered to practice on both sides, like having their company on in two countries that requires, you know, heavier capital investments obviously. So some companies do they, they are just like two, like they have both US branch and UK branch, so they can like take you over. Um, but also there are just people who are deal who who are used to deal with the situation in a cross country, uh, sense. Uh, so they can do the planning part and they have people they can work with after you’re on the other side to um, do the implementation if needed. Um, but not necessarily have to redo your entire planning part. So it depends on, um, the type of professional you engage with, obviously there’s, you know, Canada and UK is the two most common places, you know, us uh, residents go for international students you can like that. It opens up the range quite bit. Um, especially I know a lot of, uh, people, um, come back to Asia where I am at right now. So for my company, what we do is, that’s why I started the CIGA network where there are people who p practice in different jurisdictions that can pull into, do a collaborative, um, type of consultation or um, project. So that’s kind of a short way of saying, you know, well maybe not too short <laugh>, you know, a a sort of a generalized way of saying like there are different options. So you can do find, try to find one person can do both or you can find one person who knows the scene that can collaborate with other people. But either way, um, make sure you’ve talked to someone who knows at least about the exit or the inbound because people who are only dealing with US tax residents, they don’t even know what you need to look out for when you leave. ’cause they’re not expecting to work with people who are ever, you know, renounce their US citizenship for example. So they don’t know what the exit entails. That’s the one big, um, drawback of working with someone who’s never dealt with exit or inbound.

Emily (39:01): For sure. And the CIGA network, which I believe you said you started, um, is that something that advisors use to find each other or is that something individuals could use to find an, an advisor or an advisor pair?

Hui-chin (39:14): So it’s sort of like how, it’s not like a technically a client facing thing, although we have our advisors listed. Um, it’s more for advisors to kind of collaborate with each other.

Emily (39:28): So then how does an individual go about finding someone to help them with this?

Hui-chin (39:34): Um, you can find our members on the website so that you can tell like what countries they have worked, um, listed has worked before, uh, the situation. So you don’t all have to come to me for me to do, make a referral. Like they, they are listed, um, but obviously it’s, if you’re thinking about a more complex situation, it takes a little bit digging. It won’t be able to say, oh, this, if you’re talking to talking, um, with me, then I can probably give you some solutions like who you can talk to. But it’s diff i, I understand it is difficult for someone who doesn’t know the playing field and try to find the right person to, to answer a question, especially when a lot of them do still work with high net worth individuals.

Emily (40:24): Hmm. Yes. Yeah, I was actually just going to ask, so I think the reason this question comes up is because graduate students especially, and also postdocs have been low income for so long that the idea of hiring a financial professional might be kind of daunting. Um, but I, I think what you said earlier emphasizes that it’s really necessary, um, because it’s, it’s, it’s an investment <laugh> like so that you don’t lose out on a bunch of, you know, tax advantages. You could have, you could have used had you known about them. So it sounds like a worthwhile cost.

Hui-chin (40:57): Correct. And also it has to do with how much, um, general income or asset you are thinking, thinking about planning for, right? So if you have only made one contribution to your account and you’re leaving, so it’s a very small amount in your account and you just want to know what to do with it, it might be slightly higher cost <laugh> than if that’s your only question and you need to find someone to answer that question, it might feel to you that, you know, the cost is more than the benefit that you’re gonna get from it. So listen to Emily <laugh> and whatever, you know, information you can get and make a decision if you don’t think the cost is worth it. I think for everything it is a cost benefit, but obviously for people who’ve lived here for 10 years, you accumulate it enough, you might even have a home, you might have to sell your home. All of those things have implication whether you’re a resident or non-resident before you do it. So definitely talk to, even if it’s not a investment advisor, if you feel like, oh, I know my investment, I just want tax help. Um, find a person who understands, um, the tax transition from resident to non-resident and do a consultation with them.

Managing the Fear of Making Mistakes on Your Taxes as a Non-Resident

Emily (42:18): Mm, very good. And going back to what we talked about at the top of the episode, hey, just start investing <laugh> right when you get here if you can. So you’ll have a lot of, uh, years of, of contributing behind you and hopefully it’s a significant sum that you’re then, um, getting some advice on. Okay, down to our last question, also submitted by a subscriber. This person says, I’m terrified of messing something up with my taxes. How do I make sure that I do everything correctly? I don’t wanna have mistakes on my record. How would you respond to this person?

Hui-chin (42:51): It’s a common fear, unfortunately for even for us tax residents or people who grew up here and need to file their own tax returns, it’s the US tax return is complex. It’s how, how it’s, you know, laid out for taxpayers. It just feels like it’s a form that people shouldn’t know how to fill out. That if you need to read through all the instructions, but I would say be like, I, I can understand being an immigrant myself, you feel like anything you messed up will become something that mess up your chance of saying or, you know, have other implications. So beyond talking, like beyond working with someone who knows what they’re doing, um, I don’t have like a really good, um, solution for that. But I would say, and I i, given the current political climate, I don’t wanna come out and say, oh, you don’t have to be afraid. You know, it’s a simple mistake and you know, it cannot be used to, you know, in other aspects of life, I cannot feel, I, I feel like I cannot say that ’cause I don’t know what the future will bring, but the, the main thing is make a good effort of understanding your tax return. Even if you, after you hire someone to do it, don’t just assume that, oh, I hire someone they know what they’re doing and just sign whatever giv- they give in front of you. If you, if it is the first time or the first few years you’re doing your tax return, um, it should be fairly simple. Like there should be like three, four lines with actual numbers, right? Like on your tax return, make sure you understand why they’re reporting. Make sure you, it matches whatever tax form you have gotten before. Whether it is W2, 1099, you know, I’ve seen people, you know, like professional tax preparers enter the wrong number because, just because, um, so I would say the only thing to combat the fear is actually knowing, um, not just thinking about it as, oh, I will never understand it. I’m just afraid it will get messed up and there’s no solution. It will, I think the, the, the more it get, the more events you are like into your career and things like that, the tax return will only become more complicated. So start from the very beginning, understand when it was really easy <laugh>, right? Like when you only have one W2, like, oh, this is what it does and oh, like at the first year you become a tax resident. Oh, I need to report all my foreign accounts. You know, I hope everybody already know at this point. If you’re reporting as a tax resident or the foreign accounts or the foreign income interest dividend from your bank account from when you were a child overseas starting the day, you become tax residents. You need to start reporting them. So make sure like that, that first year you really know what you’re reporting and if you feel like you don’t want to take on the burden of doing it alone, obviously then you hire someone. But kind of being a partner with that, someone to make sure everything is correct.

Emily (46:16): I I agree with you, no surprise there. I don’t think this person should be terrified. Um, like you said, just make that good faith effort to either prepare the return. Most people are using software, right? They’re using sprintax or something similar. Um, make the good faith effort to prepare it accurately to understand everything, to double check it. Like you said, if you’re working with someone else or software, double check it. Don’t assume they did everything perfectly because sometimes there are errors in communication and so forth. Um, not to be too self-promotional, but I do have a workshop called, um, how to complete your PhD trainee tax return and understand it too. Emphasis on that part. It’s like a big explainer, not just about getting through the process, but about, um, understanding what, what everything means and, and verifying and checking that that it’s, it’s done properly. It makes sense. Um, maybe you can corroborate this, but I know on, at least on the citizen resident side, our obligation is to faithfully report our income. And if you don’t take every single deduction you are eligible for or don’t take every single credit, they’re not too worried about that. What you really need to report is your income accurately. Is that the same on the non-resident side?

Hui-chin (47:27): Correct. So if you report all of your income and you don’t report deduction and you pay more tax, the government would be, you know, unhappy about you wanting to pay more tax, right? But from my experience, there are like simple checks, even though IRS system is still a bit arcane, there are checks that they do automatically. For example, the first year I did my own, um, when I had my first paycheck W2 paycheck and as a US resident tax resident, I didn’t take the correct personal exemption when there was still a personal exemption when before they were taken out. Um, I remember, uh, getting a kind of like IRS notice saying, oh, you didn’t take the exemption, we adjusted it, we’re giving you a refund. So that happens too, right? As long as you put all your income on there, um, and tax at whatever the ordinary tax rate, right? So don’t put your dividend, ordinary dividend into capital gains, right? Then that’s, you know, you’re trying to avoid tax. So as long as you’re putting all the income in the correct category, then it should yeah, be good.

Emily (48:39): I too have made mistakes on my tax returns over the years, some of which the IRS caught right away, some of which they didn’t. But like you said there, there are very simple checks that are automatically done. And so I’ve done the same as you. I’ve messed something up both in my favor and the IRS’s favor. It’s happened both ways and they’ve caught it both ways. <laugh>. So, you know, do your best. <laugh> is all we’re saying. Please don’t panic about this. 

Hui-chin (49:01): Yeah, and the, I think a lot, a lot of the, the thing is people may not a hundred percent understand what is income. I encounter people, a lot of people asking can I, you know, my, my mom’s giving me this gift $5,000. Do I have to report it on a tax return? Right? So that’s a, that, that is a gift that is not income. So when in doubt, I’m not saying just put the 5,000 gift as income so you can pay more taxes. But if you feel like, okay, it’s, I don’t know whether this is income or not, that’s when you need to talk to a tax professional.

Best Financial Advice for Another Early-Career PhD

Emily (49:42): Yeah. That’s really great. Hui-chin, thank you so much for another fantastic interview. I wanna leave with the question that I ask all of my guests, which is, what is your best financial advice for an early career PhD? A grad student, a postdoc, someone who’s recently finished their PhD training. Um, can you give us any insight there?

Hui-chin (50:00): I think we’ll, um, come back to the first point we made, um, in this podcast is just, um, decision fatigue is real. And I think in the academia especially, people are used to doing research. So even when the personal finance side, we, we tend to want to do it, you know, understand everything and we’re just talking about you need to understand your tax return, right? So we all have the research mindset of like really understand what we’re doing doing, but at some point you need to, you know, make a decision and not just a decision. You need to actually carry out your decision. So if you’ve been thinking about investing, coming back to the same point, if you think about investing for a year and you’ve met your, you know, emergency fund, you’ve met your cash cushion, you’ve met all your other goals, you know, you need to invest for the long term now and you are just getting bogged down on, I don’t know which account to open <laugh>, I don’t know which investment to buy. You know, just use a normal taxable brokerage account that you can open and then look up the most common target date fund, see like Vanguard ones and see how they’re breaking down their stock and you know, bond allocation based on your risk tolerance and just buy it,

Emily (51:15): Buy a couple of ETFs and you’re good to go. You’re on your way. Um, Hui-chin, thank you again for coming on the podcast. It’s been a pleasure to have you back.

Hui-chin (51:25): You are welcome. Thank you for having me.

Outro

Emily (51:37): Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! Nothing you hear on this podcast should be taken as financial, tax, or legal advice for any individual. The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by me and show notes creation by Dr. Jill Hoffman.

Investing 101 for Your Post-PhD Job

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In this episode, Emily interviews Dr. Scott Grissom, a full professor of computer science at Grand Valley State University and Certified Financial Planner with Socrates Financial Planning. Scott and Emily talk through the health insurance and retirement benefits options that may be available to PhDs in their first post-PhD jobs. Scott explains the tax benefits of investing via an HSA and/or a 401(k) or 403(b) and the factors that affect the choice of a Roth or traditional option. He also helps the listener overcome potential analysis paralysis by detailing the benefits of a target date retirement account.

Links mentioned in the Episode

Investing 101 for Your Post-PhD Job

Teaser

Scott (00:00): From day one. Let’s get that match and figure everything else around that. ‘Cause otherwise, as we know, we’re gonna be, have some inertia put in place and we say, I’ll do it later. I’ll do it next year. You probably won’t. So day one, do whatever you can to get that match would be what I recommend.

Introduction

Emily (00:27): Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

Emily (00:57): This is Season 19, Episode 1, and today my guest is Dr. Scott Grissom, a full professor of computer science at Grand Valley State University and Certified Financial Planner with Socrates Financial Planning. Scott and I talk through the health insurance and retirement benefits options that may be available to PhDs in their first post-PhD jobs. Scott explains the tax benefits of investing via an HSA and/or a 401(k) or 403(b) and the factors that affect the choice of a Roth or traditional option. He will also help you overcome potential analysis paralysis by detailing the benefits of a target date retirement account.

Emily (01:37): My colleague, Dr. Toyin Alli, recently launched a new community called GRADBOSS. Toyin is an expert teacher of grad school productivity and time management through The Academic Society in addition to being a lecturer at an R1 university, so she knows of which she speaks! I’m honored that Toyin has invited me to facilitate a workshop within the community this month! Join the GRADBOSS community to attend my workshop Your Financial Orientation to Graduate School on Tuesday, August 27, 2024 at 4 PM PT as well as access all the other incredible resources! Go to theacademicsociety.com/gradboss/ to learn more and join the community. I hope to see you tomorrow at the workshop! You can find the show notes for this episode at PFforPhDs.com/s19e1/. Without further ado, here’s my interview with Dr. Scott Grissom of Socrates Financial Planning.

Will You Please Introduce Yourself Further?

Emily (02:48): I am delighted have joining me on the podcast today, Dr. Scott Grissom, who is at a really interesting point in his career where he has two jobs right now. He’s a full professor at Grand Valley State University and also a CFP with Socrates Financial Planning, his financial planning firm. So we’re gonna talk all things investing today, which is really exciting. So Scott, thank you so much for volunteering to come on the podcast, and would you please introduce yourself a little bit further?

Scott (03:11): Sure. Excited to be here. Um, so Scott Grissom, a little academic background for the PhD folks, if that’s okay. So, for my whole life, I wanted to be an architect. So I went to college at Texas a and m University, all set to be an architect and be the next Frank Lloyd Wright. And by the junior year or so, I had, uh, discovered two things. One is that I didn’t like architecture as much as I thought I did, and two is I discovered these new things at the time called computers. So I got enamored with computers and one of the professors that I admired a lot, I had taken several courses from him. I still remember where I was standing at the time. He says, Scott, have you ever considered graduate school? I’ve seen the way that you work with your fellow students and you tutor them and you help them, I think you’d be really good as a professor. Well, I had not considered that at all until that moment, but the light switch went off, changed my career path, went to graduate school for computer science with the sole purpose of getting a job as a professor. And 32 years later, I am still a professor. So it, it’s been a great choice. Highly recommend being a professor for the rest of your life, if, if that’s an option for you.

Emily (04:25): And yet you’ve decided to embark on an, an encore career. And so can you tell us how personal finance, how money became a passion for you alongside of your career as a, as a professor in computer science?

Scott (04:41): Yeah, so as long as I can remember, I’ve been interested in my own personal finances, whether it be investing and reading books. When I was in college myself, uh, I used to get this thing called a magazine in the mail each month on this physical piece of Paper magazine, uh, called Kiplinger’s. And I would read the, I would be so excited every month waiting to see what information they would have about saving and investing and all sorts of stuff. And one, one week there was this article about this designation called the Certified Financial Planner Planner, CFP. Ooh, that would be fun, at least for my own self education. I would like to take those two years of courses and see where that leads. So that was around 2005. And after taking classes for two years and then passing a pretty exhaustive exam, uh, I earned the CFP designation mainly as a hobby. Didn’t really, really know where that would go, but then I started helping friends and family with their financial questions and then started to work occasionally with some small financial planning firms. But, and that passion sort of peaked and valleyed through my, my 25 year career as a professor. And now I’m to the point where I’m ready to move on. I’ve enjoyed being a professor, but for the next x years of my life, I’m ready to transition to probably just part-time, uh, helping, educating others much like you do in terms of, of their finances and especially as they get close to retirement, uh, what changes do they need to make? What adjustments, what questions do they have? So I’ve got another year as a professor, and then I’ll be transitioning to this firm that I just created about, uh, six months ago called Socrates Financial Planning, Socrates building on the way that I like to teach in the classroom using the Socratic method. So I thought that was a fun, playful, uh, name for me.

Finance Related Employee Benefits

Emily (06:31): Yes, very eye-catching as well. I love it. Um, so we have a real, um, treat today, which is to employ your teaching skills in the subject of investing. And even though you just said that, you know, your typical financial planning client would be closer to retirement, you know, when we were prepping for this episode, we talked about how, um, the typical listener for this podcast is gonna be very early on in their career, maybe currently in graduate school, currently a postdoc, uh, maybe in in their first job post PhD. And so we were thinking it would be really great for them to have some insight into how to set up those initial investments with their new employer when they finally get that 401k or the 4 0 3 B or similar type of retirement account, um, access. So let’s go into it. So very good for that newly hired employee. Looking at the benefits package for the first time, it can be overwhelming. What are they probably looking at in terms of potential benefits related to their finances?

Scott (07:26): Yeah, so probably the, the biggest benefit most people have to struggle with initially is the health insurance. Now that applies to us because if they have an option for what’s called a high deductible plan, which mostly they do nowadays, uh, that will have an important financial option available for you called a health savings account. So maybe we’ll come back to that a moment. And then the second one is what kind of retirement account do you have? And in the private workplace, that’s generally called a 401k, uh, in the public space, whether it’s hospitals or my case a, a university, they’re called 4 0 3 Bs, pretty interchangeable. Uh, and then just personally you might have a thing called an IRA. So all three of these retirement accounts are virtually the same. They’re a place for you to invest for the future, and there are generally some tax advantages to each of those, depending on what choices you’re trying to make.

High Deductible Health Insurance Plans

Emily (08:19): Okay, let’s dive into that a little bit more. Let’s start with the health insurance component of it. Who is a good candidate for choosing a high deductible health plan versus like a PPO is probably gonna be their other option, I would imagine. Um, and, and for also using that HSA if it can come with that H-H-D-H-P

Scott (08:38): <laugh>. Yeah. So hard to de- describe o- over, over this broadcast on, on what makes the best choice. Uh, just recognize with a high deductible plan, depending on whether you’re single or a part of a family, you’re agreeing to pay the first $2,000 of your medical care, maybe the first 4,000 thousand that’s called the deductible. So you need to have, uh, an emergency fund I guess, or enough, uh, fees also depends on your, um, your health. So if you’re somebody that’s pretty healthy and don’t anticipate seeing the doctor much, therefore you don’t need to worry about paying that deductible, that might be a good rationale, justification for getting the high deductible plan. Uh, and then it also just depends on locally and you, if you’re moving to a new city, you may not know, but picking what, uh, doctor option doctor networks that you have sometimes make a difference. So there, I would say talk with your, uh, human resources department or a colleague that you’re about to work with or a supervisor to see what choices they’ve made and why.

Emily (09:38): Yeah. So the trade off there for those who don’t know is gonna be a, a premium difference. So the monthly premium that you pay for like a PPO plan, for example, is gonna be higher or at least let’s say the overall portion. We don’t know, uh, how much the employer is paying versus the employee in, in, you know, general. But that overall premium is gonna be higher for like a PPO. It’s gonna be lower for that high deductible health plan. But like you said, you have to be prepared to pay out of pocket for a higher deductible, $2,000, $4,000 versus maybe the PPO is 500 or a thousand, something lower than that. Um, and so you have to have some savings available to, uh, to do that in your own finances, should you need to access medical care. And that’s kind of where the idea of the HSA comes in. It, it sort of, um, nudges you in the direction of, oh, you have that high deductible health plan, well you better be saving in this HSA. But tell us more about how the HSA works.

Scott (10:26): Yeah, so it’s, it’s one of, it’s a very unique, um, savings plan in terms of what the federal government allows for you. So it allows you to save money going into the account, uh, tax free going in, but it’s also tax free coming out, which is highly unusual. So that doesn’t apply to the 4 0 1 Ks and the IRAs or even the Roths. So I really like the HSAs, the potential advantage, advantage that you have to save on your taxes from day one in your career. And so what that means is for every dollar that you put into this account, and it’s earmarked to be used for medical, so for healthcare to be spent this year or next year or 10 years from now, but all of that money is tax deductible off of your current income. And as we know, every dollar that you can shave off of your current income is gonna reduce your taxes. So that’s great for now, which is the way a lot of the retirement accounts work. But then later on, when you start to pull money out to pay for those qualified medical expenses, it’s not taxed there either. And that’s what’s different about the HSA. So HSA saves you now, it saves you later. It’s just a, a win win win when it comes to taxes at least. And as you said, there is this sort of incentive to put that money into this account because you know you’re going to have to spend it at some point this year, next year, five years from now on those deductible expenses. And so that’s why the federal government requires you to tie together. You first have to have this high deductible plan and then that allows you, it’s optional, but I would strongly encourage it to create this health savings account.

Emily (12:02): I’ve not had the, uh, reasonable option of signing up for a high deductible health plan with an HSA ever. So I’m, I’m sort of excited about this in a theoretical way. But, uh, my understanding is that if this comes through your employer, um, you actually save, not only on income tax going in, but also your, your FICA taxes, your payroll taxes, which is like, there’s like almost no other way you can reduce your payroll taxes. So that’s like really exciting as well. Um, in terms of more money in your pocket, more money in that account.

Scott (12:29): Yep. Once again. And you’re saving now and never taxed again on it, assuming you pull it out for medical expenses and it rolls over each year. So there, there’s another kind of a medical account called a flexible savings or flexible spending account that you might have options for. They’re probably a little antiquated now, but the potential concern with them used to be you had to spend it or lose it at the end of the year. So back in, in December then people started getting dental care and eye care and so forth to try to, to spend that money. But the HSA, you can literally, it let it run for 30 years. And so that’s why some financial advisors think of this as sort of a third retirement plan. ’cause we’re always going to have healthcare expenses. And so the longer you can invest it and let that build tax free, the more money in your pocket.

Emily (13:20): Yeah, I wanna kind of underline that point that you just made about the potential for the money inside the health savings account being invested for the long term, because that’s not something that I think people really did maybe 10 years ago with those flexible spending accounts that wasn’t an option. This is unique to the HSA, um, and so elaborate on that a little bit more, the power of of that option.

Scott (13:40): Yeah, and it’s something that I suspect a lot of people don’t take advantage of. So generally by default, you’re gonna put this into an HSA and it’s gonna be treated like a savings account or a checking account and probably not pay you much at all if, if even 1% and for money that you’re gonna spend three months from now, that makes perfect sense. You wouldn’t want to invest it because with investing, and let’s just generally talk about investing in stocks, there’s the concern that that money’s gonna go down in the short term. So, but if you are investing for the longer term, 4, 5, 8 years down the road, you’re convinced that you don’t really need that money out of the HSA that you can pay for these, these medical expenses out of pocket, then the longer horizon that you have, the more options it gives you. And then you can now invest in stocks and mutual funds in your HSA, just like you would in these other accounts such as the 4 0 3 B and 401k.

Emily (14:40): Yeah, it’s really like, I think you mentioned this earlier, like a supercharged form of an IRA, like an even better form of an IRA. But you have to be prepared to pay for those medical expenses and save it to the HSA on top of that. So it’s really a personal finance and budgeting kind of challenge, but a very, very powerful tool if you can harness it,

Scott (15:00): Right? So at the very least you would want to contribute enough for your deductible each year. So even if you don’t wanna invest in the future and your little leery of building a large account of 15, 20, $30,000 in this HSA, if nothing else, remember that very first dollar that you save is saving you permanently on taxes. So if you’ve got a, a deductible of $2,000 and you’re pretty predictable that you’re probably gonna spend about $2,000 this year on healthcare, then at least put that much into your HSA and if it hovers above and around close to zero because you’re putting money in it and taking money out, you’re still getting a great tax advantage from that.

Traditional Retirement Savings Vehicles: 401Ks and 403Bs

Emily (15:41): Yeah, I love it. Well let’s talk about those more traditional retirement savings vehicles, the 401k, the 4 0 3 B. Can you tell us generally like what’s the advantage of investing for your retirement through your employer? And then we’ll talk a little more about traditional versus Roth.

Scott (15:57): Okay. Uh, so as I said, 4 0 1 Ks are just the names generally for private companies and 4 0 3 Bs for public companies slash universities and healthcare. Uh, historically they’ve been what we call pre-tax. So I put money in and I get to remove that from my salary this year, which is gonna save on taxes this particular year. So let’s suppose I’m in the 20% tax bracket and I put in a thousand dollars. Well that’s gonna save me $200 this year on taxes, but eventually I’m gonna take that money out presumably during retirement and then it will be taxed then. So that’s one of the, the advantages is the tax advantage is that we’re going to have a tax advantage this year. It’s gonna build tax deferred and then eventually we pay our taxes. But one of the new features that these companies now are allowed to provide somewhat new is a Roth component to this 401k. And now we have the option of do we pay taxes now and put that into what’s called a Roth account or a 401k Roth, but it’s never taxed again, much like the HSA, so you can let that ride for the next 30 years and hopefully make lots and lots of money off of your investments and then they come out tax free. So that’s one of the choices you’re just gonna have to make is if I have a Roth option for my 401k, do I put my money in there now or do I use the more traditional approach? The second key I think, um, question is, is your employer providing a match or not? And they often do, uh, and it’s often tied to how much you put in. So they might say, we’re gonna match the first 2%. If you put in 2%, we’ll put in 2% or we’ll put in 50% of how much ever you put in of the first 6,000. So either way, whether you’re gonna put 2000 in on your behalf or 3000 or 8,000, you really wanna take advantage of that ’cause that’s in the business we call that free money. And then you’re going to invest that going forward. You’re not paying taxes on it now. Um, the employer’s putting the money in so it’s not coming outta your paycheck. So if your employer does provide a match, be aware of, put as much money as you can in that affects that match.

Emily (18:17): I have also noticed sometimes with these employer provided plans that have a match or maybe not even a match, but a baseline amount that they’ll put in for you. Sometimes universities do that sort of thing. Um, they’ll have like a vesting schedule. Can you explain how people should understand the vesting schedule?

Scott (18:33): Yeah, so normally what that means and, and it’s case of as you said, it’s the employer putting money in on your behalf less so of the money that you put in. And they’re going to as a way to try to keep you employed there as long as possible. Say we’re gonna put $10,000 in each year for you, but you can’t pull all that money out if you were to leave employment. So over the next four or five, six years, uh, on a sort of degrading uh, feature, we’re gonna decide how much of that money do you get. So you’ll have employers say, this year I’m vested. Well that means that this year if I were to leave or get fired or whatnot, then I would at least get all the money that’s in my account. Up until that point it might look like I’ve got $50,000, but 20,000 of that might not leave with me if I choose to leave. And general, as you said, it’s generally the what, the money that the employer puts in any money that you put in is generally what we would say 100% vested immediately.

Should You Ever Pass Up On The Employer Match?

Emily (19:34): Okay. And so I’m thinking about a person who is just starting out and they’re looking at this benefits package and they see that they have a match available to them, so exciting. Um, but maybe their personal finances are not totally in great shape yet. When should they pass up that free money and work on other areas of their finances? Is there ever a situation where that, where you would advise that?

Scott (19:57): I wouldn’t think so. I mean, so let’s suppose you’ve gotta put in 4% of your brand new paycheck that you’re excited to get and that’s going to entitle you to matching and you’re leery to say, but could I use that 4% for something else paying off student loans or paying off credit card debt? Well that might be an appropriate use of it, but I would be more inclined from the psychological perspective is let’s just commit to that 4% and then learn how to carve out additional savings from our new paycheck to pay for that other debt. I mean, debt would be the only reason. I could see why you wouldn’t want to get that initial match. And even then I would really encourage you to, from day one, let’s get that match and figure everything else around that. ’cause otherwise, as we know we’re gonna be have some inertia put in place and we say, I’ll do it later, I’ll do it next year, you probably won’t. So day one, do whatever you can to get that match would be what I recommend.

Emily (20:52): Yeah, I really like that advice. A great point about the inertia, like when are you really going to make that change if you don’t make it right from day one? Um, and if you are really excited about getting that match and you’re really hating, let’s say the credit card debt that you’re in, maybe because of your move to your new job or whatever the case is, um, just use all those, uh, well, they’re probably negative feelings, but use them to energize you <laugh> to get that debt paid off while you’re still contributing to that retirement account and getting the match. And hey, then once the debt is paid off, you can increase that retirement contribution rate above the match level, let’s say

Scott (21:26): After celebrating and going out to dinner or, or something that you paid off your debt. So

Roth Vs. Traditional Retirement Accounts

Emily (21:31): Yeah, that’s awesome. Okay, still thinking about that new post PhD employee, um, let’s say they have a Roth option and a traditional option within their retirement accounts, what are the factors that go into making that decision? Which way to go?

Scott (21:46): So it generally comes down to taxes. And so as we said that traditional, um, contributions to 401k are tax, um, deducted this year. So you save on taxes this year, let’s suppose 20%, whereas the Roth contribution, you don’t save on taxes this year, but it goes in and you never pay taxes again. So the question becomes do I wanna save on taxes this year, maybe saving 20% depending on where my income is or at the, when I start to retire and I pull money out, do I want to pay taxes then do I have any insight 30 years from now that I’m gonna be paying less or more tax rates than I am now? And we don’t have a crystal ball, so we don’t know that for sure. But the general understanding is that the lower your tax rate is now probably a pretty good chances 30 years from now when you start pulling money out, your tax rate’s gonna be higher. So that puts you in favor of using a Roth. Now, uh, it’s less like, it’s less helpful to you to save 15% on taxes now, which is the Roth scenario, rather than to wait 30 years from now and pay 2020 5% coming out, which is the 401k option or the traditional 401k option. So I would say, what’s the general recommendation when you’re starting off, that’s generally the best time to do a Roth because you’re generally making less income than you will in the future. And it also give you a much longer runway the next 30, 40 years to invest that money and have it accrue, uh, tax free, which is a, a really great option.

Commercial

Emily (23:24): Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, budgeting, investing, and goal-setting, each tailored specifically for graduate students and postdocs? I offer workshops on these topics and more in a variety of formats, and I’m now booking for the 2024-2025 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/financial-education/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutes enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Roth Vs. Traditional Retirement Accounts

Emily (24:42): Let’s project forward a few years, maybe 10 years. So this person is no longer a fresh new PhD graduate in their first job, but they have increased their income somewhat over time. Is there a tipping point that you would say or is it just for every individual? Where do you see your income potential going?

Scott (24:58): Yeah, that’s a much trickier. Um, but let, let’s play that, that scenario. So some, some of my colleagues will say, um, if collectively, because we’re talking about, I’ve been saying federal tax rates, but it also applies to state income tax, if that’s indeed, um, it, it, uh, applies to your state. So in my state of Michigan I pay about 4% and if I’m in the 24% tax right rate for a federal plus the four is 28% combined. That’s where I’m wondering am I gonna pay more or less than that when I retire 20 years now or 30 years from now? And so I hear people talk about this magic, not magic number, but just sort of rule of thumb about 30%, anything less than 30% taxes. Now it’s probably a pretty good bet that when you’re pulling money out later, you’re gonna end up paying more than that. So somewhere in that range, 25 to 30% is, is sort of this borderline category. Anything more than 30%. So if you’re very high income earner right now, you probably want to take advantage of saving taxes now because you might be in the, the 34% tax bracket or even higher and you’ll likely be taxed less than that 30 years from now. But we don’t know for sure. So all these choices, it just sort of depends. You make the best decision you can at the time and then don’t look back, don’t worry, you made your decision, it’s over and what happens, happens.

Emily (26:22): Yeah, definitely don’t use the uncertainty around where will my tax rate be in retirement as a reason to not get started, right? Like just jump in with whatever option you think is best at the moment. That’s okay, keep going at that. And my philosophy around it is kind of to want to get to retirement with a mix of Roth and traditional so that I can do some tax optimization on the backend. So as long as I have big pools of money in both of those types of accounts, by that point I’ll be pretty happy. I’ll add in one other anecdote, um, sort of about how I made this decision earlier on in my career when I could see, um, where my tax rates were going. So I post PhD was living in the state of Washington, which has no state income tax, but I knew that I aspired to move to California, which has could be a high state income tax rate. And so I used that view into my own personal aspirations in my future to say, okay, when I’m living in Washington, that’s a great time to use the Roth. And when I move to California, that’s a great time to switch to traditional assuming no other changes in my, you know, overall income.

Scott (27:22): Very good, good idea. Now let’s talk about those, that bucket that you mentioned. So when people retire, it’s nice to have options and so there’s considered, there’s sometimes considered three buckets of Roth, which has already been taxed, 4 0 1 Ks which have not yet been taxed. And then there’s a third category that we haven’t talked about. We call that a taxable account. And that’s just where you’re doing extra savings. So out aside from these retirement accounts, and if you have sizable amounts in all three of these buckets, they’re probably not gonna be equal and nor should you necessarily aspire to that. But if, if you’ve got some money in each of those, as you start to pull money out during retirement, as you said, that gives you some flexibility, uh, to control your tax rates so you can start pulling some money out of a Roth because it’s not gonna be taxed at all, some money out of your 401k ’cause it is gonna be taxed and then have some money in your taxable. So how do you manage that? How do you end up with three buckets? Well, we’ve talked about early on maybe you start with a Roth for retirement and then throughout your career maybe you start to transition it, there’s gonna be perhaps some tipping point, maybe not, maybe you just wanna do Roth all in and that’s perfectly fine as well. But in that mid category, that 15 years that we were talking about, you could get to the point where you put half in Roth and half in a 401k, so there is no right or wrong or it’s not a binary decision. And that would allow you to con uh, to continue to build in all three of those buckets.

What Exactly Should I Invest In?

Emily (28:49): Perfect. Let’s talk about another decision that has to be made when you’re contributing to that 401k or 4 0 3 B, which is what should I actually be invested in <laugh>? Because the 401k or the 4 0 3 B is not synonymous with the investments that could be inside of it, there’s gonna be some choice about what exactly you wanna be invested in. So help that you know, fresh PhD with that first job, help them think through that choice of what exactly should they be invested in.

Scott (29:17): Uh, well still first and foremost when we come to talk about investing, uh, the golden rule is called, um, diversification. So we don’t wanna put all of our eggs in one basket. So although it’d be really tempting to, to buy as much apple stock as you possibly could or as much Nvidia stock as you possibly could, uh, because that’s currently what’s hot, you want the risk of losing a lot as well. So how do we do diversification is we mainly, or most of us buy things called mutual funds, which are collections hundreds if not thousands of individual stocks for different companies. So that provides you that diversification and that’s what you will generally be given as an option. So for your 401k, normally you’re given a limited collection of choices for yourself. Those are often gonna be what we call mutual funds. And so you still have to make choices. So maybe it’s a choice outta 10 or it’s a choice out of 50, that can be pretty overwhelming. Uh, so my approach is to pick mutual funds that buy a little bit of everything. So these are called index funds and I know Emily, you’re, you’re a fan of passive investing as well. And so look for, uh, titles of these mutual funds that perhaps include index in the name, probably don’t call it passive, but they might say index. Uh, one of the keys when you’re picking out mutual funds is the expenses that they cost. So most people don’t realize, but you invest money in a mutual fund and each and every year the uh, management company takes a little bit out of that. Maybe it’s 1%, which would be super high or maybe it’s 0.1%, which would be pretty low. Sounds like pretty sounds like the same thing to most of us. 0.1% and 1%. What’s the difference? Well, it turns out 30 years from now, those build on themselves a lot. So when we’re given a choice of mutual funds, back to the original question is I wanna look for something that is an index slash called passive investing. And those generally have lower fees, which might be 0.1% or even less, uh, which is more money in your pocket, less money in their pocket, more money in your pocket. And that’s the win-win. So first choice, pick mutual funds that are indexes and then you might have to choose between, uh, do you want to buy stocks or do you wanna buy fixed income, which is, which is often called bonds. That’s probably a whole nother podcast. But, but the quick answer is most of us now have an option called a target date fund. And a target fund. Target date fund is perfect for somebody just getting started ’cause they don’t need to worry about the ins and outs of picking what percentage of stocks and what percentage of bonds someone else is doing that for you generally at a low cost. So if you have an option for a target date fund, they’re gonna have names associated with the year that you plan to retire. Now there’s nothing magical about it and nothing significant about it, but if you’re just getting into your career now and you’ve got at least another 30 years to work, 35 years to work, so adding that to 2025. So 2060 would be the name of a target fund that you might look for. Vanguard has these fidelity, uh, Schwab has all of these and all that tells you is somebody has decided what percentage of stocks and bonds. So I just looked up Vanguard’s 2060 target date fund and 90% is in stocks and 10% is in bonds. The longer that you have to invest the, uh, more volatility or the more ups and downs you might be able to stomach mentally stomach. So if you recognize, yeah, the stock market went down this year, it’s gonna go down. I can guarantee you that. I don’t know if it’s this year, I don’t know if it’s next year, but at some point the stock market’s gonna go down again. And if you’re okay with that, if you’re mentally prepared to say, I knew that was gonna happen, I’m gonna keep letting it ride, then because you have the luxury of going for the next 30 years, then it’s okay to have 90% in stocks. But as you get closer, uh, and this is what those target date funds do for you, is they start to reduce the stocks and increase the fixed income so that as you get closer to closer it might be a 60 40 split. So long-winded answer, sorry my professor is coming out on me, but what are your choices as a new employee? If you’ve got a target date fund, generally pick that.

“Safe” Investing Options

Emily (33:40): So sometimes I get questions when I teach about investing where the questionnaire says I want to start investing and I wanna use something safe. If one of your clients said that to you, I I’m nervous about the stock market, I wanna pick something safe, how, how would you coach them?

Scott (34:01): So safe generally means, um, lower return. So whether you’re buying bonds or treasury bonds, so safe means less likely to lose money, which is something that none of us want to do, but also less likely that you’re going to make much money. So over the next 10, 15, 30 years. Question is, can you afford to be conservative? Maybe you can, but I think there’s a bigger risk, a long term risk that if you’re too conservative, you put all your money. I mean the extreme would be you put all your money in a savings account making 0.1% and that’s gonna make you feel very safe. But 20 years from now, you’re gonna regret that because your money has not even kept up with inflation. So if inflation’s rising, if 3% every year, so it’s really a mental game, I understand that the concern about potentially losing money, but hopefully you overcome that and recognize that over the next 15, 20, 30 years you’re likely not going to lose money and you’re going to stay ahead of the game by investing in more what we would call more aggressive, not completely aggressive, but more aggressive investments as as, um, you pointed out.

Different Fee Structures of Financial Advisors

Emily (35:14): So something that I learned in our prep for this interview, um, is in your financial planning practice, how your fee structure works, which I really appreciated, but I want you to explain it, um, and explain why you think it’s advantageous both for you and for your clients.

Scott (35:30): Okay, well let’s back up and recognize that there are hundreds of thousands of people that call themselves financial advisors in the us. Uh, that’s not a regulated term. And so almost anybody can call themselves a financial advisor and they generally make money from three ways. Now we all need to make money so there’s no harm in that. Uh, one of them is that they make commissions. So they sell you products whether they be what are called annuities or insurance or stock plans and they make a commission off of that, whether that be 2% or 3% or 10%, perfectly fine, assuming that they disclose that to you and they’re recognizing, you know, I’m gonna make 10% off of you buying this $100,000 investment, but I think it’s best for you and that very well may be best for you. Then there’s a category called called fee only advisors. So they wanna avoid commissions with the potential of there being a conflict or at least the perception that there might be a conflict. And they’re generally gonna charge you for ongoing what we call asset management. And so the going rate is generally 1%. Now these are people that already have established accounts, maybe a million dollars. And so they’re going to pay their, um, fee only advisor 1% of that each and every year to manage their money and give them good advice and, and keep them on the straight and narrow. And then there’s a relatively new category that we call flat fee planning where we’re not interested in managing the money for that client, but we want to just give them some objective solid education advice and then the person can go back on their own for the next 2, 3, 5 years and then maybe come back for a refresher and say, how am I doing? What advice do you have me now? So I’m in that category, it’s called flat fee. So for a particular fee I offer a financial plan to clients that says if they’re starting out and or getting close to retirement and says, let’s take a look at all your finances, not just your investments, but let’s take a look at your insurance and your estate planning documents and a variety of other aspects. Let’s take a look at your goals and just do an assessment and objective assessment to see if you’re on track or not. So, so flat fee advising or flat fee expenses is the way I model my business useful for people especially just getting into investing because they don’t have a lot of money yet. And so the fee only advisors that charge 1% probably aren’t going to see you anyways. So that would be an advantage.

Emily (38:06): Hmm, yeah, especially if, um, you may have zero in assets under management to offer if you only have your 401k plan, for example, if you don’t even have an IRA that, that an advisor could even work with. So I really appreciate that flat fee, um, model. It’s actually when I sought out financial advising a few years ago, that’s the model that I went with for the advisor that I chose. So, um, I’m a believer in it now. It’s a little harder to stomach maybe upfront because you have to come up with hundreds or a couple thousand dollars maybe, depending on the advisor and the type of, um, package that you’re getting versus going to someone who makes money off commissions. Well, it seems like it’s free, but it’s really not free. And so just to recognize as you said that everybody in this industry is getting paid in some way or another, as long as you’re upfront about it, fine, then the client can choose how they want to pay for the service that they’re getting and their advantages and disadvantages to each of those models. But I really appreciate the model that you’ve chosen, so it’s great.

Socrates Financial Planning

Emily (39:01): And if someone listening, um, really likes your style, likes how you’ve taught us through this episode, wants to work with you or maybe wants to recommend you to someone else, how would they get in contact with you?

Scott (39:12): Yeah, so the name of the company is Socrates Financial Planning. So Socrates, because that’s the way I always taught in the classroom using the Socratic method. So Socrates financial planning, socratesfp.com is the website address and from there you can get an email or schedule a call with me or, or find more information about me, but socratesfp.com is the place to go.

Best Financial Advice for Another Early-Career PhD

Emily (39:36): Well thank you so much Scott, and I wanna conclude by asking you the question that I ask of all of my guests, which is, what is your best financial advice for an early career PhD? And that could be something that we’ve touched on already in the interview or it could be something completely new.

Scott (39:50): Yeah, I would come back to that notion of day one, start contributing to whatever plan you have, whether it’s the Roth or or the, the traditional plan certainly to, um, achieve that employer match that we talked about. 10% might sound like a lot to start saving right away, but I would recommend you, you strive for that if not higher, set that up from day one so that you just learn to get by on 90% of your salary. And that’s gonna do such wonders for you. 30 years from now, you will be so glad looking back that that was the best decision you ever made.

Emily (40:26): Well, Thank you so much Scott for volunteering to come on the podcast. It’s been a pleasure speaking with you.

Scott (40:31): Very good. Thank you very much.

Outtro

Emily (40:41): Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! Nothing you hear on this podcast should be taken as financial, tax, or legal advice for any individual. The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Dr. Lourdes Bobbio and show notes creation by Dr. Jill Hoffman.

Is Fellowship Income Eligible to Be Contributed to an IRA?

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Update 2/22/2022: Great news! The point of this article has been fulfilled because the IRS re-revised Publication 970 for tax year 2021 to reflect the current tax code, which permits taxable graduate student and postdoc income, whether reported on a Form W-2 or not, to be contributed to an IRA.

Publication 970 p. 5 NOW states: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. A scholarship or fellowship grant is generally taxable compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. These include amounts paid to you to aid you in the pursuit of graduate or postdoctoral study and included in your gross income under the rules discussed in this chapter. Taxable amounts not reported to you on Form W-2 are generally included in gross income as discussed later under Reporting Scholarships and Fellowship Grants.”

The rest of this article is unchanged from its original publication date on 2/6/2022.

Believe it or not, I look forward to the release of each new version of the IRS’s Publication 970, which covers how fellowship and scholarship income is taxed. I read it thoroughly and make sure that what I teach is in line with it. However, when I opened up the new 2021 version a few days ago, I was disappointed to read on p. 5: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive “taxable compensation” (formerly “earned income”). Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement.” Disappointed doesn’t really touch the depths of my feelings… I was momentarily devastated! I’ve been telling you for over two years now that fellowship income is eligible to be contributed to an IRA regardless of how it is reported or not reported at tax time. Was I wrong? Let’s explore the relevant texts. I have great respect for the IRS publications and find them very useful, but they are not the final word on tax law… the tax code is.

Further reading/listening:

Pre-2020 Status

You must have “taxable compensation” to contribute to an IRA in a given tax year. You can contribute up to the cap for that year ($6,000 in 2019-2022) or your amount of taxable compensation, whichever is lower.

Through tax year 2019, with respect to PhD trainee income, only income reported on a Form W-2 was considered “taxable compensation.”

The text from the 2019 version of Publication 970, Tax Benefits
for Education, reads on p. 5: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. For more information about IRAs, see Pub. 590-A and Pub. 590-B.”

Similarly, the text from the 2019 version of Publication 590A, Contributions to Individual Retirement Arrangements (IRAs), reads on p. 6: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.”

This text is very clear and reflects the widely held understanding of eligibility for IRA contributions. It was very disappointing for many members of the PhD community; winning a fellowship often comes with a pay raise and therefore an enhanced ability to save for retirement, yet those recipients were barred from making IRA contributions. Keep in mind, these fellowships were taxable as ordinary income, just not considered taxable compensation for IRA contribution purposes. I didn’t like this rule, but I taught it as part of my personal finance material.

The Graduate Student Savings Act

Somehow, the plight of graduate students and postdocs who received fellowship income was heard! The Graduate Student Savings Act proposed to change the definition of taxable compensation. It was put before Congress as a bill in 2016, 2017, and 2019.

An excerpt of the fact sheet for the Graduate Student Savings Act of 2019 reads: “While fellowship or stipend income is taxed by federal and state governments, it doesn’t qualify as “compensation,” meaning that none of a student’s fellowship funds can be saved in an IRA… Many postdoctoral fellows… also receive taxable fellowship income, yet these fellows are also barred from using their fellowship income to contribute to tax-preferred retirement accounts. The Graduate Students Savings Act of 2019 would ensure that any graduate student or postdoctoral fellow who is
paid for their work or their studies can save a portion of their stipend in an IRA.”

While not using super specific or technical language, this excerpt makes clear the intent of the bill: to allow “any graduate student or postdoctoral fellow who is paid for their work or their studies” to contribute to an IRA, i.e., change the definition of taxable compensation.

Graduate Student Savings Act was not successful in being passed as an independent bill in any of those years. Then, in 2019, it was included in the SECURE Act.

The SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is described by Investopedia as a “far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.” It was signed into law on December 20, 2019.

The Graduate Student Savings Act was included in the SECURE Act. Here is the relevant text from the bill:

“SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES.

“(a) In General.—Paragraph (1) of section 219(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”.

“(b) Effective Date.—The amendment made by this section shall apply to taxable years beginning after December 31, 2019.”

This expands the definition of taxable compensation for the purposes of contributing to an IRA beyond what is reported on a Form W-2. To me, this definition clearly includes taxable fellowship and training grant income paid as stipends and salaries not reported on a Form W-2.

The Tax Code (2021)

From the current Internal Revenue Code section 219 on Retirement Savings, section (f)(1) reads:

“(1) Compensation For purposes of this section, the term “compensation” includes earned income (as defined in section 401(c)(2)). The term “compensation” does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. For purposes of this paragraph, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6). The term “compensation” includes any differential wage payment (as defined in section 3401(h)(2)). The term “compensation” shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

Again, I read this as any type of grad student and postdoc salary or stipend with no clauses about being reported on a Form W-2. The language is very similar to how IRS Publication 970 describes fellowship income on p. 5: “A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.”

The Internal Revenue Code does seem, to me, to reflect the intent of the Graduate Student Savings Act of expanding the definition of taxable compensation with respect to graduate student and postdoc income beyond what is reported on a Form W-2.

The 2021 Publications

Publication 970

As I stated at the start of this article, Publication 970 disappointingly has not changed its tune on the definition of taxable compensation. It says the same thing in 2021 that it did in 2019 as if the Graduate Student Savings Act had never passed.

Publication 590-A

Publication 590-A, to its credit, now has some mixed language regarding taxable compensation and fellowship stipends and salaries. I’ll compare the 2018 and 2021 versions of this publication.

The 2018 version of Publication 590-A contains exactly one reference to fellowship income on p. 6 in the section titled What Is Compensation?: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.”

The 2021 version of Publication 590-A contains this language on p. 6 in the section titled What Is Compensation?: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.” So no change there.

However, further down in the same section it says: “Graduate or postdoctoral study. Compensation includes any income paid to you to aid you in the pursuit of graduate or postdoctoral study.”

Are they trying to draw a distinction between “any income paid to you to aid you in the pursuit of graduate or postdoctoral study” and “scholarship and fellowship payments”? What could “any” income mean if not, at least in part, fellowship payments?

To further muddy these waters, Publication 590-A includes Table 1-1, Compensation for Purposes of an IRA. The 2018 version of this table doesn’t mention either fellowship income or graduate or postdoctoral study. The 2021 version lists “taxable non-tuition fellowship and stipend payments” as included in the definition of taxable compensation.

This language in the table is consistent with both employee and non-employee graduate student and postdoc income, again, with no mention of a Form W-2 reporting requirement.

Furthermore, the 2021 version of Publication 590-A says under the Reminders section on p. 2: “Certain taxable non-tuition fellowship and stipend payments. For tax years beginning after 2019, certain taxable non-tuition fellowship and stipend payments are treated as compensation for the purpose of IRA contributions. Compensation will include any amount included in your gross income and paid to aid in your pursuit of graduate or postdoctoral study.”

I am not sure what “certain” means in this paragraph. “Non-tuition fellowship and stipend payments” reads to me as stipend or salary as long as your tuition is being paid by another source of funding. “Any amount included in your gross income and paid to aid in your pursuit of graduate or postdoctoral study” reads to me as both your employee income (reported on a Form W-2) such as from a graduate assistantship position or postdoctoral employee position and taxable non-employee (not reported on a Form W-2), often sourced from a fellowship or training grant.

My Conclusion

My conclusion is that the very clear language in Publication 970 and Publication 590-A excluding taxable fellowship and scholarship income from the definition of taxable compensation unless it is reported on a Form W-2 is not consistent with the spirit of the Graduate Student Savings Act or the current tax code. The changes made by the SECURE Act to the tax code included in the definition of taxable compensation “any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.” To me, this means that if you receive a taxable stipend or salary as a graduate student or postdoc, even if it is not reported on a Form W-2, it is taxable compensation for the purpose of contributing to an IRA.

What Do You Think?

I am really struggling with this and I honestly want to know: Do you see a flaw in my reasoning? Is there some difference between “fellowship” and “any income paid… in the pursuit of graduate and postdoctoral study”? Leave a comment here or email me ([email protected]). I am open to the idea that there is something I don’t see or understand. Or let me know if you agree with me.

What Can We Do?

If my argument is valid and the text in IRS Publication 970 and Publication 590A (in part) is incorrect, what can be done? Hit me with your ideas for getting this text updated.

My initial idea is to write to the offices of the Senators (Elizabeth Warren, Mike Lee, Ron Wyden, and Tim Scott) who sponsored the Graduate Student Savings Act to see if they can clarify why the IRS’s language in these publications doesn’t reflect the change the Act brought about. Do you have any other ideas?

The big win for our community was getting the Graduate Student Savings Act passed. The follow-through on that win is making sure that people (and tax software/preparers) know about the change so that graduate students and postdocs can functionally contribute to IRAs.

How This PhD Invests According to Her Personality

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In this episode, Emily interviews Dr. Natalia Bielczyk, a PhD-turned-solopreneur who helps researchers step into fulfilling careers outside of academia. Natalia started investing in a variety of sectors during her PhD training, finding success in some areas and disaster in others. She shares her hard-won lessons into how to invest according to your individual personality and not be influenced by marketers and trends. Natalia emphasizes the importance of building financial stability prior to starting to apply for jobs and presents a unique framework for choosing among post-PhD career and financial priorities.

Links Mentioned in the Episode

How This PhD Invests According to Her Personality

Teaser

00:00 Natalia: As long as I was on the safe side and I was investing in real estate and the stock exchange, so more traditional markets, I was doing very well and I was always beating the market. But once I went to these speculative markets like crypto, like I kind of fell into this trap where, you know, your lizard brain takes over and then your intelligence and your like knowledge about people in the world doesn’t matter anymore. Because you go with your greed and fear and this kind of takes over you. And you start making really stupid decisions.

Introduction

00:39 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts. This is Season 10, Episode 11, and today my guest is Dr. Natalia Bielczyk, a PhD-turned-solopreneur who helps researchers step into fulfilling careers outside of academia. Natalia started investing in a variety of sectors during her PhD training, finding success in some areas and disaster in others. She shares her hard-won lessons into how to invest according to your individual personality and not be influenced by marketers and trends. Natalia emphasizes the importance of building financial stability prior to starting to apply for jobs and presents a unique framework for choosing among post-PhD career and financial priorities. Earlier, on the day I’m recording this, I was interviewed for the Vitamin PhD podcast. That interview will be published in January 2022, approximately. It reminded me how much I love working with other podcasters and creating this kind of content not just on my own feed. I would love to connect with other podcasters in the academic space, particularly ones with U.S. audiences. You most likely listen to such podcasts. Can you recommend any podcasts to me or even introduce me to another host as a potential guest? Please hit me up over email at [email protected] or on Twitter @PFforPhDs. By the way, no need to connect me with Dear Grad Student as we already have an interview swap in the works! But any other recommendations would be excellent. Thank you so much!

Will You Please Introduce Yourself Further?

02:23 Emily: I’m so excited to share with you today an interview with Dr. Natalia Bielczyk. She is a PhD-turned-solopreneur who helps other PhDs and researchers transition into careers that are a great fit for them. And she has had a lot of really interesting sort of financial experiences, especially regarding mindset, both when she was in academia and now as an entrepreneur. And we’re just going to get a lot out of this conversation today. So I’m really excited to introduce Natalia. Will you please tell the audience a little bit more about yourself?

02:53 Natalia: Thank you so much, Emily, for your kind invitation and for the great introduction. Thank you so much. And what can I say? Indeed, I finished a PhD in computational neuroscience, and since a few years I’m helping indeed researchers in finding a new way in their lives and it’s a very exciting career path, I have to say, and very rewarding as well. In the meantime, I wrote a book entitled, “What is out there for me? The landscape of post-PhD career tracks”. I think the title is self-explanatory. And I also recently created an aptitude test called the Odyssey test, or the Ontology of ValueTM, and it’s meant to help professionals, PhDs, but not only, in finding the right working environment for them, for themselves, and also the right role to play, given their personality, values, and natural working style.

03:47 Natalia: And I’m very bullish on this test because it’s working really well. And it’s a result of two two full years of work. And I’m very excited for this premiere that actually happened like a few weeks ago. And other than that, I indeed have a lot of interest in personal finances and I find it a very important aspect. You cannot really tell these areas of life apart. Like when you talk about career, it’s hard not to talk about finances because it conditions your decisions. And that’s also what I would like to talk about today a little bit, because it’s hard to also give good career advice to someone who is desperate to get a job because they have an empty account. And I always talk about it in the courses and also in the talks I’m doing for PhDs, because this is a very important aspect of career building. So I’m very excited that I can be here today and talk a little bit about that.

Financial Experiences Overview

04:43 Emily: Yes, we’re so excited to dive more into that. Before we get into these more sort of specific thoughts that you wanted to share, can you give us a bit of a background or an overview of what your financial experiences have been, both while you were pursuing the PhD and since, so that we know some topical areas that will come up later on?

05:01 Natalia: Yes, actually indeed I come from a family where finances were not topics that were often discussed. I think both my parents are more idealistic and they believe in creating value by virtue of like using your own hands and actually working hard rather than saving and investing money which is a pity, I think. But indeed when I came to the university as an undergrad, I fully focused on my studies initially. And then, only then, in my mid-twenties, I realized that, you know, it’s better like in the long run to think about your savings and to invest them. And I actually have to say that I had some beginner’s luck because when I first got to investing in the stock exchange, I think I made a few really good bets.

05:57 Natalia: And my strategy initially was to look into, by the way, I’m not a financial advisor, just a little disclaimer. So my initial bet was just looking into companies that have good value that have like rather luxurious products. And I personally believe that these products are good. I use them, myself. Like good clothing brands, and video games. Everything that I could trust myself as a client. And I had quite good shots there. And then, so I initially thought, well, I have to be good at this because every single time I’m out beating the market. So for a few years in a row, like I was making 60, 80, a hundred percent per year. And I was like, oh, I’m a genius, apparently. But then, you know, I also realized that, really, it’s not that I am overly like a talented investor.

Real Estate Investment

06:53 Natalia: It’s more that I kind of personally fit that type of investment. I found these few companies that I was absolutely sure about at the right moment. And I had a little bit of luck. And in fact in the long run, investing is so much more than that. But in my grad school, I also have to say that I was one of the few people in my environment that spotted the opportunity when the housing market was recovering in 2014, 2015. And back then, it was still not very popular, especially among PhD students, to buy their own properties. But I have to say that I was one of the first who must have noticed the opportunity, because the mortgage capability was going up, the interest rates were going down at this point. So I saw the window of opportunity to get my own property when I was still a second-year PhD student.

07:45 Natalia: So that was a great opportunity. And back then, I was thinking of myself as a future professor in neuroscience, and I wanted to live here next to the university. So I had a very clear picture of where I want to live and where I want to buy property. And I have to say that I hacked the system because this area was not the cheapest, but I figured out how to avoid bidding against other other candidates for houses. So I basically determined where I want to buy property, and then I distributed leaflets with information that I am this nice person who studies neuroscience and I want to do great research in this house and I really need some calm place to live where I can do my awesome research on human brain. And I have to say that I spent a month distributing these leaflets in mailboxes around the quarter, and about 10 people contacted me and they were willing to sell me the house, like, you know like by a handshake.

08:48 Natalia: So without bidding, without competition, I could buy quite a few good houses this way. So I was also the only person who kind of figured out that it’s possible this way, and that allowed me to buy a house way below the market value and avoid the bidding, avoid the competition. And that was also, yeah, I’m still proud of it because yeah, at that time, I could not afford to do it in like a usual way by competing with other bidders. So this was my only chance and it worked and I have this house until this day, it’s great. And I also have some passive income from it. I have some rental room. So that also helped me, like in more difficult times after my contract expired, it was a source of passive income.

The Dangers of Speculative Markets

09:37 Natalia: So I have to say that this was one of the best decisions I ever made. And then after my contract expired, I also had some bad decisions because I went into much more speculative markets. So as long as I was on the safe side and I was investing in real estate and the stock exchange, so more traditional markets, I was doing very well, and I was always beating the market. But once I went to these speculative markets like crypto, like I kind of fell into this trap where, you know, your lizard brain takes over. And then your intelligence and your like knowledge about people in the world doesn’t matter anymore because you kind of go with your greed and fear. And this kind of takes over you, and you start making really stupid decisions.

10:29 Natalia: And also, I have to say that I was quite naive after my PhD, because I was not used to the environment where people can tell you, like they have vile intentions. Like they will tell you things that they never intend to do, because honestly, researchers, you know, some of them might have difficult personalities, but at the end of the day, they have good intentions. And I was always surrounded by honest people who have pure intentions. And if they commit to something, they will do it. And when I found myself in speculative markets, I lost all my money also because I was trusting the wrong people. I was just very naive. So, it was a really painful lesson for me.

11:15 Natalia: And I have to say that now I know that there is no such thing as a good investor or bad investor. There are so many different ways of investing and you have to figure out who you are, what your strengths are and what types of investments will work best for you. And now when I invest again, I always look into value. And I think in the future I will become more of a value investor. So, it’s definitely, I’m not into trading. I’m very bad at this. I’m too impulsive. And now I know what my weaknesses are. And in the long run, I’ll just orient myself towards the markets and opportunities where I know that I have some grasp on what’s actually going on. So like, I had a lot of painful lessons to take. But also, one thing I learned is that indeed there is no winning strategy. There is no algorithm. Because at the end of the day, everyone’s different. And what works for me might not work for you. So it’s like you have to learn through trial and error, what type of strategy works best for you.

It’s Okay to Make Mistakes

12:23 Emily: So what I took from that story, which was fascinating, is that you were operating in these early years very much off of intuition. And it worked well for you in some areas, and it didn’t work as well for you in other areas. And now that you’ve learned that about yourself, you are sort of shoring yourself up with more research and like systems to make sure that your weaknesses are not going to come through in your investment strategy, the way that it did before. And I think this is really interesting because I actually talk with a lot of people in my audience, and I’m not saying that’s the majority, but people who choose to speak with me, sort of have the opposite. Like they’re so cautious and they don’t want to take any steps because they don’t want to make any mistakes.

13:06 Emily: And so what I love about that overview that you just gave us, and we’ll go a little bit more into the subject shortly is like, it’s okay to make a mistake. Yes, it’s painful. Of course, it’s painful to make a mistake. Of course, you should try to avoid it. But the downside of making a mistake is not so huge that you should miss out on the upside of actually pursuing your investments or pursuing these strategies. So, yeah, we’re going to talk more about that in a moment. I’m so excited about that.

13:29 Natalia: Well, I think at the end of the day, you most regret things you didn’t do, rather than the things that you did.

Negative Views of Money

13:36 Emily: Yeah. I agree. So when we prepared for this conversation, we talked a little bit about how money is viewed in academia, specifically not favorably. And so I wanted to know based on sort of your observations, your personal experience, and I can share mine as well, how that voice in academia saying that, you know, money’s bad, don’t pursue money, blah, blah, blah, how that actually materially affects the personal finances of people who survive academia.

14:07 Natalia: A very good question. I think it’s not only a disease of academia, but of the whole public sector, I believe. And yes, that’s actually another painful observation I had to make in grad school because I was one of the few like misfits who were interested in the economy and personal investments, while most of my friends from grad school were spending evenings on just having, you know, beers like downtown. And they didn’t really understand my interest in reading about the economy and the financial markets. So, yeah, I heard about myself that I was greedy, that I was so materialistic, that I was an aggressive capitalist. Like I heard those things, but I also know what my aims are in the long run and I just didn’t, I’m happy now that I chose to develop myself in this direction. And I would definitely recommend it to anyone, regardless of what you do.

15:09 Natalia: Like money is not a bad thing. Money is a good thing. It gives you opportunities. And indeed the picture of money in academia is quite negative. And I feel this is what they also do to program you to be poor, you know? And when you like read like popular press and go online, like what they always sell you is these negative pictures of successful people and like big entrepreneurs. And it’s like, there is a lot of bad press around success on financial markets, and don’t buy into it. Because at the end of the day, like money will not change you as a person. It will just give you more chances to do what you would do otherwise. So, I’m always trying to fight with this black picture of money in academia. And when I do courses with PhD graduates who are now looking for careers, I always underscore how important it is to have a financial cushion and to take care of your finances, and that it’s actually a good thing. You’re only going to have more chances to do good if you have your finances sorted out.

Negative Impact of Separating Finances from Career

16:18 Emily: Okay. So let’s continue on from this thought about, okay, academia has this low view of money. Let’s say that does impact most people’s finances negatively while they’re in academia. They’re not earning very much. Maybe they’re not, you know, enticed to invest as you were and so forth. How does that then translate into the career space? How does that affect their career search and their job selection, and so forth?

16:39 Natalia: Yes, obviously it does affect your job search because as mentioned before, the separation doesn’t really serve you well. And you don’t have a clear view of the opportunities, once you have this bias that you actually have to find something and you have just less freedom to choose and to wait for the right opportunity. So definitely it does affect, like the lack of money does affect your career in a negative way, of course. So indeed, there’s a correlation there, or even causation between a lack of funds and some problems with developing careers. So at the end of the day, you know, I always tell it to the course participants, you know, you have to, at least manage your expenditures and control them and just control your finances.

17:35 Natalia: Even if you don’t feel like you’re the best investor, at least you can watch your expenditures and make sure that you pay yourself first. That’s at the very minimum. It’s good to put aside like 10% of your income. And don’t tell me that you can do it, because everyone who, at least here in the Netherlands, everyone with a postdoc contract is able to do it. I mean, if someone says, they’re not, they’re not saying the truth to themselves, because there is such a disproportion in salaries between PhD students and postdocs that if you spent everything as a postdoc, that means you inflated your lifestyle way too much. So that means you should take a look at your expenditures. So, if you do it right, then you should always be able to pay yourself and set aside some amount. So you don’t have to be a genius. You don’t have to be another Warren Buffet to be financially safe. You just have to be reasonable with your finances.

Commercial

18:33 Emily: Emily here for a brief interlude. If you are a fan of this podcast, I invite you to check out the Personal Finance for PhDs Community at PFforPhDs.community. The community is for PhDs and people pursuing PhDs who want to take charge of their personal finances by opening and funding an IRA, starting to budget, aggressively paying off debt, financially navigating a life or career transition, maximizing the income from a side hustle, preparing an accurate tax return, and much more. Inside the community, you’ll have access to a library of financial education products, including my recent set of Wealthy PhD Workshops. There is also a discussion forum, monthly live calls with me, and progress journaling for financial goals. Our next live discussion and Q&A call is on Wednesday, October 20th, 2021. Basically, the community exists to help you reach your financial goals, whatever they are. Go to pfforphds.community to find out more. I can’t wait to help propel you to financial success! Now back to the interview.

Make Your Own Decisions

19:41 Emily: So you mentioned earlier a few, you know, negative experiences you’ve had in this investing sphere and about having your crypto stolen and meeting up with bad actors and so forth. Are there any kind of like takeaway messages maybe that you have for the listener, like about how to not fall into these situations that you have?

20:04 Natalia: Right. Well, first of all, you have to make your own decisions. First of all, get informed about possibilities, and try not to follow the crowd. Because at the end of the day, once something’s already, like there is a hype on the media, usually it’s too late already. So usually it’s already a bubble. And if you join at that point, it’s better to just like try to figure out early that something is promising. Some project is promising and it’s just about to take off, and observe closely to see if that crowd sentiment will follow and just jump in just before the crowd, not when it’s already making headlines, because that’s already, usually, too late. And also don’t follow the advice too much. I would say like my best decisions were always my own independent decisions, and all these companies that I found in the stock exchange, like nobody told me to buy into those companies.

21:02 Natalia: I just made my own decisions. I came to my own conclusions, and, they turned out to be good decisions. And so, at the end of the day, it’s all about your knowledge and your gut. And now I can see that, especially since the Corona crisis started, there are so many of these false like financial advisors on YouTube. And they became really popular and they started all these systems to become rich quick, or they legitimately actually became rich because they have some successful company, but then they will tell you, you know, this is how I did it. This is what you should be doing to, you know, to follow my success and become successful. But you have to craft your own way that fits you best, and there is no algorithm.

Assume That Your Mission Matters

21:55 Natalia: So if it works for them, it doesn’t mean it will work for you. And I have to say my own way to get like closer to wealth is very different from any of what these financial advisors are telling you. So like none of the rules that, you know, I tried many pieces of advice that they suggest and the sales techniques, et cetera. And none of them really worked. Like for me, for instance, what worked best was just assuming that like that your mission matters. And when I was buying a house, basically I was just telling people openly what I’m going to do in this house and how I’m going to take care of it. And in the end, I got a very good deal because someone liked my purpose and me as a person.

22:43 Natalia: And this is something that no one will tell you in this, you know, in the space of financial advisory. And now I’m kind of doing the same. So I also work on my personal mission. I have a vision of, if my company becomes really successful, what I want to do with with the money I earn, I would like to build the most beautiful house of all time, somewhere in the woods and host startups and people who want to build their careers there, and have a place where we can find value and develop value in people and projects. And the more I talk about this, the more I also sell my products, because people like the mission. So, and this is something no one will tell you on the internet, you know, that they will tell you, well, you should build a CRM model and you have this like bulletproof system to acquire clients. Nobody will tell you that you actually have to have meaningful purpose, right? So every single time, like, just think for yourself, like, what do you really want? What’re you good at? And also, start with why, right? Why are you doing this for? Like, why do you want to get wealthy? And just have a good purpose. I think that really helps.

23:57 Emily: So much that I wanted to emphasize in what you just said. To play off the last point, I’ve also found in growing my business, I haven’t taken like the mission driven approach that you have, but what I found has been most valuable for me is relationships. Like literally just developing relationships with other human beings. And the podcast is one way that I do that. And that’s been the biggest driver of revenue for me, for sure. And like, again, that’s not something some internet marketer is going to tell you, because it’s an investment, it’s time consuming to develop relationships. But in any case, for my business model, which is not the same as anybody else’s, it pays off, right? So O just want to emphasize, yeah, like you don’t have to follow all the techniques that everybody is trying to teach you in your own finances, in your business, whatever it is that you’re doing.

Understand How They Make Money

24:42 Emily: The other thing that I wanted to add about like how to sort of avoid making mistakes, and like you were saying, like, sort of forging your own path. Once the media is, you know, proclaiming something, it’s already over, the trend’s done. You have to get in early if you’re going to get in, kind of at all. Just to emphasize in there, it’s really important when you’re listening to people, from anywhere, to understand how they make money. Whether it’s directly selling you a product and they’re getting commission off that, that’s at least straightforward. That’s easy to understand their motivation for, you know, pitching you the product. It’s maybe a little bit harder when people are driven by, you know, advertising revenue perhaps, like on YouTube or something. Or it’s also hard if they’re just, they’re not directly making money, but you going into the thing that they’re hyping feeds the bubble and allows their investments to grow.

25:29 Emily: Just ask yourself that question, like, how is this person making money, and does that influence, it doesn’t necessarily, does it influence the message that they have for me? I welcome all of my listeners to ask that about me and about my business and, you know, listening to this podcast. How is it that I make money? And should you be listening to me? And so forth. And I think that my business would stand up to that scrutiny, but it’s up to the individual to do that everywhere that they listen to money, advice, or business advice, or what have you.

25:56 Natalia: Yeah, totally. I absolutely agree. And I can also say that I get entertained by some of these financial channels as well. And, I mean, I would rather choose this over some entertainment shows. And so when I have free time, I would rather listen to good financial advice, but I always choose people who don’t sell you anything, at least, you know, they just say what they know. And yes, they get some revenue from the sense that YouTube pays them. But at least they are not selling you any system. So at least to some extent they are objective. But I agree with you, you always have to look at their business model. And that will tell you a lot about how credible they are.

Time Management in Managing Finances

26:44 Emily: So you mentioned earlier that when you were in graduate school, your friends might be out at the bar having a drink together, and you were at home, you know, learning about more about your investments or something. What have you learned about appropriate time management when it comes to your finances? Have you swung too far to one side of the spectrum or the other? What do you think is like the happy medium in terms of how much attention and time to pay to your finances?

27:07 Natalia: Very good question. I think that also very much depends on the type of investments you do. But I think also, there were periods of time when I was spending way too much time, especially after my PhD contract expired. And I had all the time in the world to do the projects I liked. And at some point I went down the rabbit hole, and for a few months, I was spending time mostly on reading about these speculative markets. And I felt that, the more time I was spending on that, the more I was losing the overall picture. And now I don’t spend as much time. I attend some online groups to discuss the progress in the field, and I try to be there every week, and I read once in a while. But I’m trying to keep this time limited, and I can feel that I’m much better at spotting the valuable projects and valuable concepts that have a future if I look more from the distance.

28:04 Natalia: Because like the closer you get, the more, you know, you’re also influenced by people you’re talking to. For instance, like everyone who is developing a new product, they do it for a reason. That’s why they do it, because they believe that none of the mainstream projects are the future. So like when you talk to them, they will obviously criticize the like mainstream projects, just because otherwise they wouldn’t be doing what they’re doing. So, they are kind of biased, even if they have the best intentions. Then you have to take into account, the more you interact with people in the space, the more biased you get.

Be Like Master Yoda: Everywhere

28:42 Natalia: So now I really am trying to keep a healthy distance, and I’m trying to be like this like Master Yoda that talks to everybody and has some wisdom, has some knowledge, is everywhere, you know–talks to employers, talks to recruiters, talks to professionals who are looking for careers, talks to business developers who are building their own businesses, talks to people who are in financial markets. But I don’t get, like, I always keep some level of distance to everything. And I try to keep my emotions low, be objective, look from perspective, and I’m doing much, much better this way. So I would say like too much time can work against you, as well. At least that’s my experience.

29:25 Emily: Yeah. And I would say to drill that point down even further on like specifically financial management, I would say like, so when I was in graduate school, it’s fair to say I was pretty obsessed with my finances. But not in a way that was super helpful and actually improving like my net worth in a big way. So like, for example, I did not get into entrepreneurship when I was in graduate school. That was after I finished graduate school. And actually earning more money at that time when I was earning very little for a graduate student stipend would have been a bigger ROI than just focusing on frugality, which is a lot of what I thought about. Now, I did good things like, you know, my frugality fueled investments. So that was good and that did increase my net worth. But now that I’m an entrepreneur and maybe you’ve had a similar sort of transition, I think a lot more about how to earn more money, and that’s worth more to my bottom line than spending a lot of time being really frugal.

Do You Have to Go Through a Proving Period?

30:19 Emily: But you know what, I think there’s also some value in, and maybe you agree or not, going through a period of being a little bit obsessed and really learning a lot, learning a lot about yourself, in whatever space you’re in. And then after that point, when you’ve invested a lot of time, you can pull back, like you were just saying and see the bigger picture, like more easily. What do you think about that? Do you have to go through like a proving period of, you know, really, really diving into a subject?

30:44 Natalia: That’s a very good question. I don’t have one clear answer to that. I think again, like just that careers cannot be like treated separately from finances. I think that your finances cannot be treated separately from your personality and who you are. So you have to learn it somehow, like what fits you best. And indeed, you need some knowledge to make educated choices and allocate your assets, which are your future, basically in the right, like baskets. There is some effort, like there is no freelance, so indeed perhaps, yeah, spending time on it and effort is of course necessary. I’m not sure if this is absolutely necessary to spend a period of your life on it, like full-time or maybe it’s sufficient to, let’s say, allocate one evening per week and do it systematically. Maybe that’s healthier. So I don’t have a clear answer to that, but for sure, this is like a compound interest. Like you have to have some space in your life for this, and it’s lik compound interest. If you allocate time for it on a regular basis, you will become a pro in a period of time. So for sure.

How to Contact Natalia

32:01 Emily: Love that answer. Okay. So we’re going to get to your best financial advice in just a moment. But before we do that, I just want you to remind the listener where they can find you, where they can find all the stuff that you’re doing in the career space.

32:12 Natalia: Right. So yes, I think the best way to contact me at the moment is my LinkedIn profile. So you can find me on LinkedIn, I’m open to new contacts. So please contact me and let’s talk. And you can also find me on Twitter. And of course I can recommend my book that also contains one chapter about finances. So I hope you can find some link to the book somewhere here as well. And yeah, I think this is at the moment, the best way to find me. And there is also a YouTube channel. There is my company website with everything I think will be linked below. So, please find me. I’m always, I’m not a financial advisor, but I like talking finances. I think it’s an important area of life. So I’m always happy to talk.

Best Financial Advice for Another Early-Career PhD

33:01 Emily: Yes. We can find all those links in the show notes for the show or in my mailing list, email, which you should get the day this is released, if you’re on my mailing list. Okay. So last question, Natalia, what is your best financial advice for another early-career PhD?

33:17 Natalia: Well, so I would say two pieces of advice. I couldn’t choose, so I will just list two. So first of all, what is also related to the topic of my book. In my book, I talk a lot about like a very important choice you have to make once you get from academia out to the big world. And this is a choice between safety and freedom. So, if you go to public institutions or large corporations, you have to compromise a lot on your freedom. You will have to follow the procedures, follow the local rules, follow your boss, follow expectations. But you will gain a lot of stability. You will get good working benefits and an opportunity to stay for a long time in one place. So, you’ll sleep well at night, but you will have some limited freedom. Versus if you go the opposite way and you start your own business, or you continue in academia, or you go like work in a startup in some speculative markets, then you will experience much more stress because your future will be much more uncertain.

34:25 Natalia: But you will also gain a lot of freedom. So it’s always a compromise. You either go for one or the other. The only exception, the only group of people who can afford to be free and to be safe at the same time are those who are wealthy. So money is a measure of safety, and it’s a measure of freedom. And this is your only chance. So in fact, most people who get wealthy, they don’t do it because they want to have a lambourghini in their garage. They just want to be free, and they want to be safe. And that’s how you should treat it. And if you treat the money like this, I think it’s a really good mindset to start with.

35:06 Emily: I just, I hope you don’t mind. I want to add onto that point because I love the way you articulated that. It’s not something I’ve thought about before. So I’m so glad that you brought that up. For my own life, personally, obviously I’m an entrepreneur. Longtime listeners may know that my husband, who’s also a PhD, works at a startup. And so we both, pretty much immediately after we finished our PhDs, went down this freedom, less safety route, although certainly his is more safe than mine because he has an actual job. So we went down this like freedom over safety route that you were just articulating. However, we radically reduced risk of undertaking those job choices because of the financial wherewithal that we had built up during graduate school, because we had savings, because we had investments, because we paid off almost all of our debt. That risk was much, much less to us, as you were just saying. So we were able to shift that, you know, get more freedom, feel like we were providing our own safety, even in these like unsafe careers, basically. So love the way you articulated that. So brilliant. Thank you. What was your next piece of advice?

Think About Your Mission

36:05 Natalia: My last piece of advice would be referring to what I said before. Think about your mission. And this is like, again a bit counter-intuitive, but there are at least two good reasons to think about your mission. First of all, if you have a goal that you can think of every time you negotiate, you become a better negotiator, because you see a purpose. You see like a big picture of why you want to negotiate a better salary, better honorarium for your work. That also helped me because that was initially my problem as an entrepreneur, that I couldn’t really value my work properly. And I was doing a lot of work for free. And I was just afraid to ask for money for my career services at first. And I was always feeling guilty.

36:49 Natalia: But once I started thinking, okay, this is my big picture. This is what I want to get. I need to start valuing my work, because otherwise I’ll never get there. So, that helped me. That gave me courage. And now I’m standing my ground much better when it comes to negotiation. So that helped a lot. And the second reason is because people will make it easier for you. People like helping individuals who have vision. And people are good. If they see that you have a good purpose, they will make it easy for you. You can even get donations. You should have big dreams, and should articulate them. Because most people, they keep their dreams to themselves. They believe that nobody cares or that, you know, people will only make it harder for you. They will either laugh, or they will put locks on your feet. But it’s not true. It’s the opposite. If you have a good cause, just articulate it. Say it loud, and you will see that wealth will come to you much faster.

37:55 Emily: I love that. I need to take that one to heart. Natalia, this was a wonderful interview. Thank you so much for giving it. I hope that the interested listeners will reach out and connect with you. And just thank you so much again.

38:05 Natalia: Thank you! Thank you so much for your invitation. It was great.

Postscript

38:09 Emily: Emily here, with a quick postscript. When we conducted our interview, Natalia was in the middle of a rebranding. Her business is now officially named the Ontology of Value and can be found at ontologyofvalue.com. In the interview, Natalia described the Odyssey test, or the Ontology of ValueTM test. If you would like to take this test to learn how you most naturally create value in the world, and which professional and employment sectors fit your value proposition, please register through my affiliate link, PFforPhDs.com/ontology. That’s P F F O R P H D S.com/O N T O L O G Y.

Outtro

38:56 Emily: Listeners, thank you for joining me for this episode! pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast. I’d love for you to check it out and get more involved! If you’ve been enjoying the podcast, here are 4 ways you can help it grow: 1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. 2. Share an episode you found particularly valuable on social media, with an email list-serv, or as a link from your website. 3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and effective budgeting. I also license pre-recorded workshops on taxes. 4. Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

This Grad Student Is Riding the Meme Stocks and Crypto Roller Coasters

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In this episode, Emily interviews Cara Davidson, a graduate student at Western University. Cara has a “tumultuous” income from assistantships, scholarships, and freelance writing, and she built up a considerable nest egg thanks to diligently tracking her spending. She started investing in January 2021 in mutual funds and also meme stocks and crypto. Cara details her investing motivation, philosophy, and sources, shares how much mental bandwidth she devotes to her positions, and gives great advice for anyone already invested in or considering investing in meme stocks and crypto.

Links Mentioned in this Episode

grad student meme stocks and crypto

Teaser

00:00 Cara: Do your research. Just because it’s a meme stock, that doesn’t mean that there shouldn’t be some kind of data behind it. Don’t just do it because the internet says to do it.

Introduction

00:15 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts. This is Season 10, Episode 9, and today my guest is Cara Davidson, a graduate student at Western University. Cara has a “tumultuous” income from assistantships, scholarships, and freelance writing, and she built up a considerable nest egg thanks to diligently tracking her spending. She started investing in January 2021 in mutual funds and also meme stocks and crypto. Cara details her investing motivation, philosophy, and sources, shares how much mental bandwidth she devotes to her positions, and gives great advice for anyone already invested in or considering investing in meme stocks and crypto.

01:06 Emily: I’d like to share with you a personal update now. As I discussed in Season 8 Episode 18, my husband and I purchased our very first home last spring in north San Diego County. It was an area we’d never lived in or near before but we are location independent with respect to work and just got a really good feeling from the city. We’ve been living in our house for about five months now and are settled into a pretty pleasant routine. Our older daughter started kindergarten in August, and our younger daughter is in preschool. After a year and a half of either no childcare or grandparent childcare, it’s amazing to have our children back in a school setting. It’s great for them to be among peers, and it’s great for us to have quiet, uninterrupted work time. We also enrolled the kids in introductory sports classes, which is quite hilarious to watch.

01:58 Emily: We’ve made friends with a few of our neighbors, and I’ve organized a once-per-month social gathering in our neighborhood park. We have a goal to explore one new-to-us point of interest each weekend, so we’ve been to numerous beaches, parks, tourist attractions, etc. It definitely isn’t considered hip, but my husband and I both really wanted this quiet, suburban, family-oriented lifestyle, and I think we’ve made a good start at cultivating it after so many years of putting down only shallow roots. COVID has of course made its mark on this process and has dampened the in-personal socializing that I would otherwise have hoped for. I am really thankful to live in an area where it’s pleasant to be outdoors year-round. That was one of the main reasons we moved away from Seattle in summer 2020. We are here for the long-term, though, so I hope with time and vaccine availability for the younger children, we will eventually develop a robust network of local friends. So I just wanted to let you all know that things are going well following our move, and even though buying a house in a place we’ve never lived before was an odd thing to do, it seems to be working out. Without further ado, here’s my interview with Cara Davidson.

Will You Please Introduce Yourself Further?

03:12 Emily: I’m really excited to have joining me on the podcast today, Cara Davidson. She is just finishing up her master’s now, starting a PhD program in the fall. We are recording this by the way in June, 2021. Cara has been on an investing journey, specifically regarding meme stocks and crypto and other kinds of investing. And I’m so excited to have her because I haven’t had a conversation about this yet. Obviously it’s been in the news and on a lot of people’s minds, and I know there are so many people in my audience who are interested in this kind of investing because it’s garnered so much attention and it’s so exciting. And I’ve been getting questions in my seminars actually about how do I pay capital gains tax on this money that I made from, you know, this kind of investing? So super excited to have Cara on. Cara, would you please tell the audience a little bit more about yourself?

03:58 Cara: Yeah, absolutely. So, as you mentioned, I’m finishing up my master’s and then launching my PhD in the fall. I’m specializing in mixed methods research involving intimate partner violence and looking at how that can affect breast cancer. So I’m really excited for that, but I’ve yet to defend. So that’s kind of the bane of my existence right now. And yeah, in terms of investing, I got into that in January. It’s brand new to me still, I guess that was like the height of the meme stocks. And I got in just in time and I’ve been riding the wave ever since. It’s been a lot of fun for me. And then I’ve also been dabbling in cryptos, which I also find really interesting, especially just because of the volatility of the market, which I know is a huge disincentive for many people. But for me, it’s a lot of fun because you can make a lot of money really quick, but I guess you can also lose it all pretty fast too. So I’m looking forward to discussing all of that.

04:55 Emily: Yeah. We’ll get into that in a moment. And can you tell us what university you attend?

05:01 Cara: Yes. So I attend Western University in London, Ontario but I’m doing so remotely right now. So I’m at home in Ottawa at the moment.

Balance Sheet: Cashflow and Side Hustle Income

05:08 Emily: Okay, great. So first question is, let us know what your balance sheet looks like right now. And actually it’d be helpful to talk about cashflow too. Like what’s your stipend? What basically are, you know, you spending on living expenses, and how much are you able to save, and how much have you accumulated in what?

05:25 Cara: So, I’m a freelance writer, so I’m going to say that first because when I was doing my research on my own finances for this interview, I was a bit surprised at how much it really does fluctuate. So like I’ve made as little as $1,700 in a month and I’ve made as much as over $8,000 in a month. So, I really like month-to-month don’t know what’s going to come my way. It can be really lucrative and it can be tight. And in a year also, like, I wouldn’t say I even have an annual salary because I’m so dependent on grad funding, like scholarships that I’m applying to, GRA positions if I’m fortunate enough to get one, teaching assistantships. So even putting like a dollar amount on my annual income is difficult just because like, I really don’t know what I’m going to earn until it happens.

06:18 Emily: Okay. So you have the freelance writing side hustle, but I assume it brings in more than your main hustle, right? Being a graduate student, but it sounds like even that aspect of it is not, it’s not fixed or steady, right? Your income as a graduate student is fluctuating.

06:33 Cara: No, not at all. So like, as I mentioned before, like that about like one and a half to $8,000 range, that can come in freelance, I’ve made like 200 bucks in a month and I’ve also made $3,000 in a month and that’s just doing it like part-time, as I can, as a grad student. I was fortunate enough to get the Ontario Graduate Scholarship for last year, or I guess technically this year, which was $15,000. And then the Canada Graduate Scholarship for next year which is 17 and a half thousand dollars. But those kind of aren’t ideal because they go to tuition first. So like, you’re like, yay, $15K. And then immediately like $8,000 gets taken from you. So that’s not ideal. And then depending on whether or not I get the research assistantships and I get the TA ships, I’m making, the research assistantship’s like one to $2,000 a month. And then the teaching assistantship is about $5,000 a month, but I mean, it’s so variable. And then I got another scholarship for $1500. I don’t know if that’s coming again in the PhD, like they don’t tell you until it happens. And then one other source of income that I’ve recently gotten into is flipping things on Kijiji. So like buying like old wood furniture and sprucing it up. I really enjoy that. But then again, like that’s $0 some months and like $500 next, so.

07:53 Emily: Wow.

07:54 Cara: My finances are tumultuous, to say the least.

07:58 Emily: Yeah. That’s definitely, that’s a great word to describe it. Is at least the freelance writing, like anti-correlated with your graduate student income? Like, are you able to, if you know, you have slow months coming up for like scholarship-wise you can ramp it up, or is it also just not really under your control? Just like whatever work comes your way.

08:17 Cara: So right now I’m fortunate that I have clients that just show up in my inbox and they’re like, “Hey, I need something from you.” Just because I’ve been working with them for a long time. So that part, I don’t have much control over, but if I do have a slow month, I can go to my platforms and like apply to things and likely get jobs. So I have a lot of peace of mind from that, that like, no matter what happens, like let’s say I don’t get a scholarship next year or whatnot. Like I can still rely on that and I will be able to support myself.

Balance Sheet: Savings and Investments

08:48 Emily: Yeah. I feel like this could be a whole podcast interview in itself just on the freelance writing, which is really exciting. But also on dealing with the irregular income aspect of it. However, this is not the subject that we propose to talk about today. So I am curious though, I asked about your balance sheet. So like are you in debt for example, or how much of your assets are devoted to maybe cash savings to help you buffer these irregular months? And how much do you actually have working for you in terms of investments?

09:17 Cara: Yeah, so right now in my bank I have about $7,000 and I like to keep it normally around like three to 4,000. So I’m looking for something to do with that extra cash, just because I had a busy freelance month. In terms of debt, I am very lucky that I don’t have any. So in my undergrad, I was so lucky that my parents would pay my rent and all I had to do is worry about like tuition, books, and food. So that kept me out of debt for sure. And now getting the scholarships, like I’m able to pay off the tuition right away, because that would be my biggest expense. So, and then my partner and I just paid off his car that I now use. So I helped with like the remaining payments. That’s gone.

09:58 Cara: So I really don’t have any debt. In terms of credit cards, like I use one as a debit card. I heard that’s good for your credit score. So I do that. But I pay that off like every two weeks so that I don’t really consider that a debt. And then in terms of investments, I’m pretty busy in that front. So I have a TFSA that I’m able to use. I forget their official title, they’re a professional investment manager. And I maxed out my TFSA, which was good, which is about, I gave them like $34,000 at the beginning of the year and now it’s become $36,000. So that was exciting for me, that was like my first foray into investing and it worked out. But that’s a long-term hold. Like I’m not going to touch that money like in my mind ever. It’s just going to be there forever until I really need it.

10:46 Cara: I opened an RRSP which was fun. I’m doing that through Wealthsimple. That’s where I do my like traditional investing. And I’ve managed to make a couple hundred dollars on that as well. It’s sitting at about like $5,000, I think. And then I also have a personal account. So before I opened the RRSP, I was dabbling in Wealthsimple. And that’s just like, like I will get taxed on it, which is the sad part for me, but that’s okay. And that’s where I’m holding my meme stocks, which was not smart on my part. So like, let’s say those do really take off, then I’ll be paying the price for that, but that’s okay. I believe in taxes. It’s fine. And then I have a couple of different crypto wallets where I hold things.

11:31 Cara: So I’ve got like $4,000 in cryptos, I’d say. And so I really liked Celsius. So Celsius is a wallet where you can hold your cryptos, but you also earn interest on those cryptos. So like I’m buying tokens that I would hold anyways, but I’m earning like up to 14% interest on those year over year. So that’s been fun for me as well. And then just holding in various wallets, like my long-term things that like, I’m hoping in five years we’ll be up enough that I can cash out and make a profit.

12:02 Emily: Yeah. So, it definitely sounds like you’re not all in on any one thing, right? You have a variety of different strategies and places going on for our American listeners. I think the RRSP and TFSA equivalents would be like our IRAs or other tax-advantaged types of, you know, supposed to be for retirement type accounts. Versus just holding things in like a taxable brokerage account, which you also have. Yes. Wonderful. So yeah, you, you only started in January, but it sounds like you had a fast start because you had savings to devote to it already, right?

12:34 Cara: Yes. Absolutely. So like I worked through high school and I didn’t spend a dime and that’s why I was able to have that cushion. And it was just sitting in my cash account and I kept thinking like, I should do something, even if it’s only 5% interest like that matters for inflation and whatnot. So I was able to have a nice little nest egg to devote.

Strategies and Mindset for Building Savings

12:51 Emily: Yeah. So let’s talk for a moment. Were there any other strategies that you use to build up the savings that you were then able to invest and also your current level of savings? So you’ve already mentioned the freelance writing career, of course, finding funding as a graduate student. Anything else that you practice or related to your mindset that helped you build up the savings?

13:09 Cara: Absolutely. I track everything. I’ve been tracking everything since I was in high school. I have like my own Excel sheet where I put in all of my expenses every month. Like absolutely everything. And that’s helped keep me accountable a lot. So like I was exploring those food kits that will get delivered to your door, but they end up being so expensive. So I was looking at my grocery bill, and as soon as it hit over like $300 a month, I was like, nah, I can’t do that. Like I’d much rather put the money towards something else. So I’ve definitely dialed back on that. But if I wasn’t tracking like that, I wouldn’t see these things that crop up. And like, I find you forget in a month what you’ve actually spent things on. So like, I have a puppy and I would love to spend all my money on her. And like, I’ve noticed that, okay, you’ve already spent this much on her. Like maybe you can pass on that special thing for her this month and then get it the next month just to keep a more consistent level of expenses. So I’d say that’s been the biggest thing for me was keeping myself very much accountable in terms of what I am spending and relative to the income coming in that month.

14:18 Emily: Yeah. It sounds like, I mean, that tracking is not at all passive for you. You’re really looking at the data and then making different decisions based on what you’re seeing. So I absolutely love to hear that.

Progression to Crypto/Meme Stocks

14:29 Emily: Okay. So I think you mentioned earlier that you just started with investing in this past January, so like five months ago. And you started with a bang because you had the cash savings to put towards some different things. Of the different investments that you mentioned, was the more like classic type of investing the first thing that you did, or did you start out on these like crypto/meme stocks more? How did that progress?

14:54 Cara: So I started for sure with the TFSA. I had already put a little bit of money in there, like maybe under $10K, but I didn’t really know how to use it. That’s not very clear. So I wanted to max it out. I may as well while I can. And so that’s when I connected with the investment advisor and they were able to actually invest in different stock portfolios for me. And then I was just watching the number for like a few months and I was like, “Meh, like this isn’t doing what I would like. Like I’m young, I can take on some risks.” And I feel really comfortable with the amount that I have in that right now. So why not? Let’s do something more fun in the future and where there’s more risk, but the reward is higher and I can be more engaged with it. Because with the TFSA like, you don’t really touch it unless you need to move around your portfolio, which my advisor would do, and I wouldn’t. So I wanted something more hands-on because I do find it fun. So that’s where I got into the meme stocks and the cryptos

Getting into Meme Stocks

15:56 Emily: Let’s start with meme stocks because that’s been like the newer story. Crypto has been an exciting ride for a number of years now. So with meme stocks, you said you started in January. And when you volunteered to be on the podcast, that was in March, we’re now getting around to actually recording this interview in June. So I know there’s been some developments over that time as well. So, yeah, just tell me like what your experience was through those through these last few months.

16:19 Cara: It has been a wild ride. So I started in January. I got in on the floor of GME at like 40 bucks based on something I read on Reddit. I’ve been a part of that community ever since, but moving around there were problems in the WallStreetBets community, which I guess that happens when there’s money involved. So I’m in another one that’s like a little more secure and they call them like shills. So less people trying to sway your opinion and more of like, here’s the data look at the data, which is fun.

16:52 Emily: Is that also on Reddit?

16:53 Cara: Yeah. So a lot of how I’m involved in the meme stocks. So, I’m in on GME and AMC. Since January I’ve been holding, like they went like way up. I don’t know if you heard around like it was around my birthday and like the end of January, they just went way up and then Robinhood blocked buying. And that was like a massive thing. I was so upset because that just basically like, like cut off the feet of the short squeeze, and I’ve been holding ever since because I’m like, just because they turned off buying doesn’t mean that the short interest is any less. That doesn’t mean that they don’t have to cover. So I’ve been holding since, and then actually this week there has been like crazy developments once again. So AMC really shot up yesterday, like 99%.

17:40 Cara: They’re struggling today, but I have confidence. There’s big meetings coming up. But that actually reminds me, so like we call them meme stocks, and that’s what everybody knows them as, but AMC and GME, the reason why they’re actually successful is because there’s a lot of data behind what we’re doing. And I probably shouldn’t say we, because that sounds like a lawsuit waiting to happen, but based on the data that’s available in the short interest in knowing that anyone who shorted the stock does need to cover, but if we’re all buying and holding these stocks and so many people, so many retail investors do, there’s nothing to buy up. And so when you have that much demand and that little availability that creates a short squeeze and then boom, off we go to the moon. And then I cash out. But I’ve been waiting five, six months for that and it looks like it’s on the horizon again. So we’ll see. We’ll see, stay tuned.

18:35 Emily: Yeah. Well, I would like to hear about the future. So like for you personally, do you have a plan for when you’re going to exit this position or partially exit it?

18:44 Cara: Certainly. I don’t have a dollar amount, but I do want to see indicators. Like yes, we are indeed in the short squeeze. Like, a short squeeze does not happen in a day, and it doesn’t shoot up a stock by a hundred percent. Like, it’s pretty exponential in terms of how that works. In considering who’s involved in shorting the stock, and like basically when you short a stock, like you’re betting that the company is going to go under, go bankrupt, et cetera. I’m not a huge fan of Wall Street and how they’re playing this. Like, there are a lot of shady things going on. So like, even if it goes to like a thousand dollars a share, I’m not selling. Like that’s not worth it for me. I would really like to stick it to the people who are manipulating the economy and running these like innocent businesses under. So in that regard, I need to see that the short squeeze is happening. I need to see that Wall Street is scrambling to cover everything. And then I’ll probably hold on a little longer and then sell on the way down. Because I don’t want to miss the peak.

Commercial

19:52 Emily: Emily here for a brief interlude. If you are a fan of this podcast, I invite you to check out the Personal Finance for PhDs Community at PFforPhDs.community. The community is for PhDs and people pursuing PhDs who want to take charge of their personal finances by opening and funding an IRA, starting to budget, aggressively paying off debt, financially navigating a life or career transition, maximizing the income from a side hustle, preparing an accurate tax return, and much more. Inside the community, you’ll have access to a library of financial education products, including my recent set of Wealthy PhD Workshops. There is also a discussion forum, monthly live calls with me, and progress journaling for financial goals. Our next live discussion and Q&A call is on Wednesday, October 20th, 2021. Basically, the community exists to help you reach your financial goals, whatever they are. Go to pfforphds.community to find out more. I can’t wait to help propel you to financial success! Now back to the interview.

Initial Amount of Money Invested in Meme Stocks

21:04 Emily: So when we started talking about your portfolio overall, you mentioned, you know, certain dollar amounts, 30 some thousand that you put towards this and that or the other. You can share whatever you want of this, but I’m wondering how much money you initially invested in these two stocks? Because I want to get an idea of like how big this was. It’s probably big in your world now, but how big was it at the beginning?

21:28 Cara: I’ve been like gung-ho since the beginning, but I also did not trust like the information I was getting totally. Because like I found this on Reddit. Like let’s not go too far here. So let’s see. I think I wrote down what I put in. Did I, did I not? Okay. I think I put $750 in AMC and I’ve got like a $2,500 return now. It’s still not worth it for me. The squeeze hasn’t happened. And then I think GME, I did maybe about 1400, $1,500. So, like that is a lot of money, but for me, like relative to like the TFSA I have to fall back on, like it’s not a big deal for me. If I lose that, I can recoup it based on my freelance. And like the risk for me isn’t, I don’t find it that high. I do believe that like these companies will go up, so I’m not worried about that. And I got in while the floor was still low. Like if you’re buying in now and it’s like 250 bucks and you want to buy a lot of shares, it’s going to be a lot more money for you. So I would hesitate then, maybe. But yeah, I’d certainly put about like 2,500 in total, under $3,000. And just to see like where it took me.

22:46 Emily: I feel like that amount of money is a lot of money, like in a grad student world. We’re talking about, you know, one month stipend, maybe a little bit more, a bit less. That’s a lot of money. But for you, because you had these other sources of income, you had, you know, the good savings going on. As part of your overall portfolio, it wasn’t a big percentage. And that’s something that I, so I’m kind of a dyed in the wool, like passive investor. And so, the advice that I hear from other people who promote passive investing is like, okay, sure. Like if you want to, you know, get into these like exciting trends and be part of it. And like you were saying, maybe you want to make a statement with your money about the policies of Wall Street and so forth, do it, but do it with an amount of money that you can afford to lose that’s not going to hurt you, right? It’s not going to make you lose sleep at night or anything like that. So it sounds like that’s actually what you did. And so it’s been an exciting part of your portfolio, but it’s not anywhere near the majority of your portfolio.

23:43 Cara: No, no. And that would give me stress. To lose it all would hurt my pride and that’s fine, but like, I wouldn’t be putting myself in any danger whatsoever. Like I would be perfectly able to like continue living my life and to recoup that. And like, I would never bet my life savings. I know some people do. It’s all or nothing, but I’m too risk adverse for that. Like, I do have a tolerance, so yeah. I wouldn’t recommend that. This has worked out for me just fine so far. And I’m very comfortable with what I’ve invested and where I’m at.

Time and Energy Spent on Meme Stocks

24:19 Emily: So I think what you said was that you took this initial position in January, and you’ve been holding it since then. So I am wondering about the amount of like attention you’re giving to this, given that you haven’t actually changed anything about your position. At some point you will sell, we think but yeah, like how big is this in terms of your time and your energy?

24:41 Cara: I absolutely adore it. Like I’m checking on it every day. I will take a break if it’s like been a slow week or whatever. I’m like, man nothing’s changed. But like this past week now that things have been going up again and looking promising, like there’s a big shareholders meeting coming up, we’re going to hear Q1 earnings, all of that stuff. I’m like, oh, okay. Let me just keep up with this again. So I will say that I do spend a lot of time. I like reading the DD, the due diligence, on all the forums and just keeping up with what everyone else is talking about. And I’m not sure that I would be devoting the same attention or would be this invested if we weren’t in a pandemic where this is like one of my only hobbies that I can still access. So it’s been nice to belong to a community virtually and you kind of explore this together. So I would say I do devote a good chunk of time to it, but like I see it as just like a fun hobby that I’m doing. I don’t see it as an obligation because, “Oh my God, I’m a shareholder now. And I’m worried about my portfolio,” and all that. That’s not the case.

25:50 Emily: Yeah. It sounds like you’re going about this in a really healthy manner. So I’m really happy to hear that. Anything else you want to add about meme stocks before we talk about crypto?

26:02 Cara: I will say if you’re thinking about going into meme stocks, just be careful now on the forums. Now that we’ve had our moment of glory, there’s a lot of people out there with I would say like nefarious intentions. Like as soon as we had that day where GME hit $450 at the end of January, all of a sudden all of the ads, all of the new accounts that were made and they were all shilling silver, and everyone’s like, who’s investing in silver? Like there’s no, no one’s shorting silver. What’s going on? And a lot of people lost a lot of money on that because it was basically a pump and dump to distract attention from what was happening with GME. And that’s still happening now, especially right now as we’re chatting because we’ve had such a wild week. So do your research. Just because it’s a meme stock, that doesn’t mean that there shouldn’t be some kind of data behind it. Like for example, AMC and GME are based on potential for short squeeze and that’s a proven concept. It happened with Volkswagen way back. So still do your research. Don’t just do it because the internet says to do it.

27:10 Emily: Yeah, that’s great. Well, I think you’re speaking to a receptive audience in that respect of PhDs and PhDs to be.

Experience with Cryptos

27:16 Emily: Okay. Let’s turn the attention to crypto, then. You also started investing at that time. Tell us about your position and what your experience has been.

27:23 Cara: Yeah. So in cryptos, it’s also kind of like the meme stocks where I’m not putting a ton of money in it. I’ve got maybe like $4,000 in there. And I like to just like keep sifting through things and changing out my positions and whatnot. My long-term holds are Nano and anything that I have in Celsius, so that would be MATIC, Ripple, and the Celsius token. And that’s just because I believe that they will continue to go up over time. And I don’t feel the need to like work around the increases and decreases that happen and the fluctuations on like a daily, weekly basis. I’m not in Bitcoin or Ethereum. I’m not a fan of the gas fees. I think that’s ridiculous. That’s why I’m such a big fan of Nano because it’s instant, it’s feeless, it’s green. And so that’s why I think like that will certainly be a strong contender in the future of crypto.

28:19 Cara: I am invested into, I guess, meme cryptos. When I heard that Elon Musk was going on SNL, I got into Dogecoin because I’m like, definitely the exposure is going to drive it up. So I got in like maybe 27 cents or something, and I got to exit about 50 or 60 cents. So that was like a tidy little return and I cleansed my hands and that was good. And then I bought in again, actually once it went back down after just because I don’t know what’s going on with Elon Musk, but like he loves it and he won’t stop talking about it and he wants to integrate it into everything. So I’m like, okay, if you’re going to have anyone behind a crypto that’s going to be actually used daily and whatnot and at least grow as an investment, then I might as well just hold like a couple hundred Dogecoin and see what happens.

29:13 Cara: And then I also invested in, I guess, a Dogecoin copy cat called Shiba Inu. It’s like, you know, like the sheep dog meme. Yeah. So it’s that. Definitely my most irresponsible investment, but it’s like fractions and fractions and fractions of a cent. So I’m like, I just put like a hundred dollars and this thing goes to 1 cent. Like that’s a good return. And I’m happy to just, like, I would spend a hundred dollars on like, I don’t know, maybe like a nice weekend with friends doing something. So I’m like, I might as well just tuck that away. I have nothing else to do right now. We’re locked down. And let’s just check on it in like 10 years and let’s see what happens. I’m happy to wait. So that’s where I’m at.

29:56 Emily: I really like to hear these distinctions that you’re making between what you’re holding long-term, what you are buying because of instincts about where a particular different coin is heading, and then also that last point that you just made about, you’re really explicitly calling that entertainment at that point. Like I could spend 100 dollars on going out. Well, okay. That’s not available to me right now. Okay. A hundred dollars in this position. We’ll just like, it’s money spent. It’s gone. It’s not even like, you’re barely even thinking about it as an investment anymore at that point. Just like you sunk some money to something you’re having a good experience with it. And it doesn’t really matter what the outcome is, right? So I like to hear those distinctions. How are you, like, what are your sources when you’re doing research on these different cryptos?

30:43 Cara: I just think about what I would like as a consumer and someone who would like to use crypto in the future just to make transactions and make everything easier. So that’s, again, why Nano appealed to me. I wanted something that’s instant, like waiting 30 minutes for Bitcoin is ridiculous. And to think that you can pay like really ridiculous amounts of fees as well. Like sometimes I buy things on Binance, like coins and then I go to transfer them out to hold them in a secure wallet and it’s like paying 40 to $80 in fees. And I just don’t think that’s right. I don’t think that makes any sense at all. And then also seeing photos of these massive mining rigs that they have all over the world that are just chugging away, killing the planet. I’m like, as a currency of the future, that doesn’t make sense either. So I do believe the ones that have the most potential for adoption are ones that are green, that are as fast as a normal transaction, and that don’t carry those massive fees. Like nobody wants to pay more money just to use money. That doesn’t make any sense to me. So my long-term holds are ones that support that for the most part.

Resources to Learn About Cryptos

31:55 Emily: Yeah. I understand. I like your thought process on that. I’m actually wondering more, like, how do you find out about Nano, for example, like how did you think about yourself as a consumer and then match that with, oh, this point reflects what I would like?

32:09 Cara: Great. Like a couple of my friends are into it, so sometimes they’ll introduce coins to me and I’ll chat about that with them. I’m involved in a lot of crypto Reddit forums where I read up on new stuff coming out or updates and whatnot. I also, I just go on CoinMarketCap and I see like, who are the gainers? Who are the losers? Why’s that happening? Because they have like a really handy, like, you’ll see like the price action and all that. But if you scroll down, they’ll give you like a two-paragraph succinct explanation of what this coin is and what it’s hoping to achieve. And then normally like there’s blog posts about that coin that I’ll look at if I’m interested that list the pros and cons. And as soon as I see something like gas fees, I’m like, Hmm, Nope. Or long transaction times. Nope. I’m out. So that’s how I would say I find my responsible investments. My irresponsible investments are things that you hear other people talking about, like Dogecoin, where it’s just like a public movement where everyone’s like Dogecoin. That’s so funny. Let me buy some and then you go up and then you can sell. So I would hear about those ones from other people in like online, I guess, conversations. So it depends, I would say.

How Much Attention Are You Giving to Your Cryptos?

33:24 Emily: Yeah. So a similar question to when we were talking about the meme stocks, but like, how much attention are you giving to your crypto positions?

33:32 Cara: I check on Nano every day, because that’s my baby and I love Nano. So I will check on that constantly. I get really excited when there is price action and I obviously have the opposite reaction when it goes down. So I check on Nano every day. As for my other ones, like, I’ll take a look at them. I just like take a gander, like my Celsius wallet I’ll check on to make sure that I got my weekly interest as promised. And then I leave that alone. In terms of Dogecoin and Shiba. Like, I don’t want to hear about those for 10 years and then I will cash out. So, I would say really Nano is the only one that like I’m investing considerable time in. Like I’m in all the forums. I’m keeping up. Like we just had a new version update come out. Because there was like a massive spam attack that was clogging up the network. And obviously that needs to be solved to facilitate like massive adoption. So developers were great and they fixed it. And so like, I wanted to know everything that was going on with that, but I do not get that in depth with like any other crypto because I found my one and I’m sticking to it.

34:38 Emily: Okay. Got it. Yeah. We’ve gotten some, you know, great insights and great advice from this conversation so far. Is there anything else that you want to add about what you’ve learned about investing in meme stocks and or crypto? I’d love to especially hear a little bit more about the psychology of it. If you have any advice for someone who’s thinking about getting into this or who’s already in, but is wondering, what do I do now? I’m already in, now what?

To Do Cryptos, Or Not To Do Cryptos

35:01 Cara: If you’re a really impulsive person, I don’t think that you should do cryptos because you can go to bed at night and you’ll be up like 20% that day. And you’ll wake up in the morning and you’re down 25%. And there’s usually no clear reason as to why that happened. So if you’re the kind of person who’s going to panic and say, oh my God, I just lost a quarter of my investment. My life is over blah, blah, blah. Don’t do it to yourself. Like you will be so stressed. But if you’re a person who is more like me and like you’re happy to buy something and then leave it alone, like indefinitely until you want to use that money or just to see where you’re at out of interest, not out of like obligation and stress, then absolutely go for it.

35:42 Cara: That sounds fine for you. But I would worry if you’re an impulsive person that you’re going to buy high and sell low just constantly and just absolutely wreck your finances. And cause yourself a lot of stress that you don’t need. Like this is supposed to be fun. People aren’t taking most cryptos very seriously. You get kind of a mix with meme stocks, but even still, like I bought in at GME at $40, I held up to $450, and we went all the way back down to like 50, 60 bucks. And it’s been five months where I’ve been sitting here checking it every day to be like, what’s going on? What’s causing this price action? And if that doesn’t sound like fun to you, and I know it doesn’t to some people, just don’t do it. Like you don’t have to do it just because everyone else is, it doesn’t make any sense for you and you won’t enjoy it. And that’s the whole point I would say.

Best Financial Advice for Another Early-Career PhD

36:33 Emily: Great advice. Thank you. And I think I would add onto that, the reason YOU can have that attitude about this is because it’s not a significant part of your portfolio. You’re not drawing any income from this. You have other sources of income that are coming in. Your whole life is not riding on, you know, the performance of these particular investments, right? You have this in balance with a lot of other things. So like, you CAN sleep well at night because you’re not depending on this. So a very, very important point to add on there. Well Cara, thank you so much for this interview. I really enjoyed speaking with you and learning about your experience with meme stocks and crypto. As we sign off, I just want to ask you the same question I ask of all my guests, which is what is your best financial advice for another early-career PhD?

37:15 Cara: Advice in terms of meme stocks and crypto?

37:18 Emily: It could be related to that, or it could be completely something else.

37:22 Cara: I would say, just buy pretty much anything and just hold it. Just hold it and like, forget the password and have a reminder on your phone in five years with that password. Like do not touch your investments unless you know how to day trade. And I don’t think anyone really knows how to day trade consistently. Like it’s very, very hard to achieve. And it’s more dependent on the market than you and most times. So if you buy and you hold, you will be okay. But obviously to do that, make sure that you’re putting in money that you don’t need for five years and you won’t feel tempted to touch it all. So whether that’s like 20 bucks or a couple thousand, whatever that means for you do it and just forget about it. And then it’ll be there and ready for you hopefully in several multiples for you in a few years.

38:11 Emily: Sounds wonderful. Thank you so much, Cara. This was a great conversation. Thank you so much for volunteering.

38:16 Cara: No, thanks for having me. I had a lot of fun. It’s nice to discuss these things outside of my Reddit communities. I really appreciate it.

Outtro

38:30 Emily: Listeners, thank you for joining me for this episode! PFforPhDs.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast. I’d love for you to check it out and get more involved! If you’ve been enjoying the podcast, here are 4 ways you can help it grow: 1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. 2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website. 3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and effective budgeting. I also license pre-recorded workshops on taxes. 4. Subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

Why and How to Increase Your Retirement Account Contribution Room

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In this episode, Emily presents why and how you should increase your retirement account contribution room. She gives a compelling compound interest example calculation that illustrates why you should start investing early in your career and reviews the types of tax-advantaged retirement accounts you might have access to and why you should use them if you can. If you would like to increase your available contribution room in tax-advantaged retirement accounts and you are self-employed, the last part of the episode is for you. You can open a tax-advantaged retirement account through your business, even if your business is new or tiny or unincorporated. Emily compared the three most popular self-employment retirement accounts and evaluated which is most advantageous for a solopreneur side hustler, as so many PhDs are, in a video training she recently added to the Personal Finance for PhDs Community. In this episode, she tells you about the training, what motivated her to create it, and how to avoid making the same mistakes she did with her self-employment retirement account. You can access the training by joining the Personal Finance for PhDs Community at PFforPhDs.community.

Links Mentioned in This Episode

retirement account contribution room

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 7, Episode 9, and today I don’t have a guest but rather am going to tell you why and how to increase your retirement account contribution room.

I’ll give you a compelling compound interest example calculation that illustrates why you should start investing early in your career. I’ll review the types of tax-advantaged retirement accounts you might have access to and why you should use them if you can.

If you would like to increase your available contribution room in tax-advantaged retirement accounts and you are self-employed, the last part of the episode is for you. You may not be aware, but you can actually open a tax-advantaged retirement account through your business, even if your business is new or tiny or unincorporated.

I compared the three most popular self-employment retirement accounts and evaluated which is most advantageous for a solopreneur side hustler, as so many PhDs are, in a video training I recently added to the Personal Finance for PhDs Community.

In this episode, I’ll tell you about the training, what motivated me to create it, and how to avoid making the same mistakes I did with my self-employment retirement account. You can access the training by joining the Personal Finance for PhDs Community at PFforPhDs.community.

I highly recommend going through the training if you are looking for more retirement account contribution room. It might even convince you to start a self-employment side hustle for that express purpose. This episode is specific to the US and is not tax, legal, or financial advice for any individual.

Without further ado, here’s my episode, on why and how to increase your retirement account contribution room.

Why You Should Invest for Retirement Early in Life

To build my case, I need to start by showing you why you should invest for retirement early on in your life.

There is an example I use in my seminars that makes a big impression on at least a few people in the audience.

This is a compound interest calculation, and you can follow along with it and play with some numbers of your own using a compound interest calculator such as the one at Money Chimp, which is linked from the show notes.

Compound interest calculations model the exponential growth of money over time with a given rate of return. It’s a way of modeling the returns you can get in the stock market, for example, though this calculation has a steady rate of return and your rate of return on stock investments would fluctuate quite a lot year to year. It’s a good model if you’re calculating returns over long periods of time.

So here’s the example:

Let’s say you’re able to save and invest $250 per month. That’s 10% of a $30,000 per year stipend or salary. You have no starting balance with your investments, and your money gets an average annual rate of return of 8%. You do this over five years, for example while you’re in grad school or a postdoc.

After five years, you have contributed $15,000 and your money has grown to $18,369. That might not sound too impressive yet but just wait!

Now, let’s take that $18,369 and let it keep growing with an 8% average annual rate of return. You’re not going to add any more money to this particular pot. Let it ride for 50 years this time.

The balance in your investment account has now grown to $990,000. You heard me right! The money you contributed over just five years has, given enough time and a good rate of return, grown to just shy of one million dollars! This is the power of compound interest.

If you’d like to read this example for yourself and dissect it a bit, I’ve linked an article from the show notes about all the assumptions and so forth.

Here’s the takeaway point, though: Don’t discount any amount of money you are able to invest during grad school or your postdoc. Whatever money you manage to invest early in life is going to have an outsized impact on your wealth in your older years. So start early and save at as much as you reasonably can.

Of course, you’re not limited to investing for retirement to an early five-year period of life. I hope that you will continue to invest throughout your career in larger sums than $250 per month. That doesn’t take away from the importance of starting early.

Why You Should Use a Tax-Advantaged Retirement Accounts

That’s the case for investing in general. Now I’m going to tell you why you should use a tax-advantaged retirement account for your very long-term investments.

What do I mean by tax-advantaged retirement account? Basically, the federal government gives a tax break to incentivize people to fund for their own retirements in particular. Money that has been contributed to a tax-advantaged retirement account is shielded from income and capital gains taxes.

These tax-advantaged retirement accounts go by many names, such as Individual Retirement Arrangement or IRA, 401(k), 403(b), 457(b), Thrift Savings Plan or TSP, and there are even more.

If you invested in a regular taxable investment account, you would pay your full income tax on the money you invest, plus every year there might be some small bites taken by income or capital gains tax. How large the tax bites would be depends on what you’re invested in, how long you’ve held the investment, and how high your overall income is.

Instead, with a Roth tax-advantaged retirement account, you pay your full income tax on the money you contribute, and then the money grows tax-free while it’s in the tax-advantaged retirement account and you can withdraw it in retirement without paying any income or capital gains tax.

A traditional tax-advantaged retirement account allows you to deduct your contributions to it from your taxable income in the year you contribute. The money grows tax-free while in the tax-advantaged retirement account, and then you pay ordinary income tax on the withdrawals in retirement.

It is a great strategy to use a tax-advantaged retirement account for money that you’re sure you won’t need access to until your retirement. While in any given year the tax you might pay on investments in a regular account might be fairly small, the cumulative effect on your investment balance over decades of this is a bit like a death by a thousand cuts. Plus, once you are in your peak earning years, it’s quite a valuable tax break to be able to deduct your contributions to a traditional tax-advantaged retirement account.

The tax break on the growth in a tax-advantaged retirement account alone typically amounts to tens or hundreds of thousands of dollars over the course of an investing lifetime. This again demonstrates the power of compound interest, because the biggest part of the difference is not in how much you pay in tax, but in how much that money could compound and grow if you were able to leave it invested instead, which is what a tax-advantaged account does.

Add to your investment balance some hundreds of thousands of dollars more if you are able to use Roth and traditional tax-advantaged retirement accounts to selectively pay ordinary income tax in retirement and/or your lower-earning years instead of in your peak earning years.

What Is Contribution Room?

I hope I have convinced you of the power of investing and specifically inside a tax-advantaged retirement account.

Now, I’ll define a term I’m going to use quite a bit in the remainder of this episode: contribution room.

Contribution room is the maximum amount of money you are permitted to contribute to a tax-advantaged retirement account in a given year.

For example, graduate students and postdocs who are not employees of their universities or institutes are not extended retirement benefits, so their only tax-advantaged retirement account option is an IRA. If you are under age 50, the annual contribution limit to an IRA is $6,000 in 2020.

Graduate students who are employees of their universities or institutes are only very rarely extended retirement benefits; it’s worth checking into but don’t get your hopes up.

If you are an employee in the private sector, it’s typical to have access to a 401(k), perhaps even with a matching program. If you are under age 50, the annual employee contribution limit to a 401(k) is $19,500 in 2020. Your total contribution room between a 401(k) and an IRA is $25,500.

If you are an employee in the non-profit sector, such as at a university, it’s typical to have access to a 403(b), perhaps with a match or a fixed contribution by your employer. If you are under age 50, the annual employee contribution limit to a 403(b) is $19,500 in 2020. You might also have access to a 457(b). If you are under age 50, the annual employee contribution limit to a 457(b) is $19,500 in 2020. Your total contribution room between a 403(b), a 457(b), and an IRA is $45,000.

You can see that the contribution room available to you as a full-time permanent employee is much, much greater than if you are a fellow or graduate student. This is why there is such a focus on contributing to 401(k)s and similar and less so IRAs.

Now we come to the question of how to create more contribution room. Of course, you only need more contribution room if you are currently maxing out the contribution room available to you.

When I was in grad school, I never maxed out my IRA. So if you are maxing out your IRA as a grad student, please hear me: You are a rock star. I am not telling you that you have to contribute more. I’m only going to show you how you can if you already want to.

If you are maxing out a 401(k), etc., you are also a rock star. But if you want to contribute even more to make up for lost time or hasten your retirement date, I can show you how.

Self-Employment Retirement Accounts

The specific strategy I’m teaching you today is about self-employment retirement accounts and how they can supplement your IRA, 403(b), etc.

But to have a self-employment retirement account, you have to own a business. That could sound like a really fancy, complicated thing, but it definitely doesn’t have to be. All I mean is that you file a Schedule C with your tax return, assuming your business is unincorporated. You might describe yourself as a freelancer, an independent contractor, a gig worker, a solopreneur, or self-employed.

You know as well as I do that lots of graduate students and postdocs have side hustles to supplement their pay, and many of those, whether the person thinks about it this way or not, are businesses. Again, if you file a Schedule C with your annual tax return, this information is for you.

If you aren’t a business owner and have no plans to become one but you know a grad student or PhD who might be interested in this strategy, please share this episode with them!

I’ve covered the two main requirements you should check off before pursuing a self-employment retirement account: 1) that you own a business and 2) that you want more contribution room in tax-advantaged retirement accounts.

My Story and My Client’s story

I’ll tell you what motivated me to first investigate self-employment retirement accounts a few years ago.

When my husband and I were in grad school, as I mentioned earlier we never maxed out both of our IRAs. So even though I did have some self-employment income by the end of grad school, we had no need to open a self-employment retirement account.

We defended in 2014, and in the year following, my husband was a postdoc employee and I had self-employment income, so we had our two IRAs plus access to a 403(b), and we didn’t get anywhere close to maxing out that contribution room.

Halfway through 2015, my husband took a job at a start-up that offered a 401(k). That was when our household income really jumped up. We knew we would need more contribution room than just our IRAs to meet our retirement investing goal of 20%.

However, the 401(k) offered by my husband’s job was and is really expensive. It’s offered through Edward Jones and composed of American Funds, both of which are notorious for charging high fees. And the company doesn’t offer a match.

So in 2015, I read up about self-employment retirement accounts and opened one for Personal Finance for PhDs. We had a lot of options in where to open the account and which funds to purchase within it, so we could keep the costs really low. And that’s been our tax-advantaged retirement investing strategy for the past five years. We can meet our retirement investing goal using our IRAs and my self-employment retirement account. If we do ever need more contribution room than those accounts provide, we will use the expensive 401(k), but not until.

Your motivation to use a self-employment retirement account to increase your contribution room might be different from mine. Honestly, I didn’t imagine that any graduate students, for example, would want to contribute more than the $6,000 IRA ceiling.

But I was wrong. One of my recent coaching clients through The Wealthy PhD, a grad student, maxed out her 2020 IRA, but had some additional money that she was interested in getting into a tax-advantaged retirement account. She did freelance work on the side of her role as a graduate student, so I suggested that she look into self-employment retirement accounts.

Self-Employment Retirement Account Options

Our conversations throughout that program on this topic inspired me to create a new training inside the Personal Finance for PhDs Community titled “Self-Employment Retirement Account Options.” You can access the training by joining the Personal Finance for PhDs Community at PFforPhDs.community.

As you can tell, I love to encourage PhDs to invest early on in their careers, even during grad school or a postdoc. I also love teaching about taxes. So this training is a perfect crossover point between my two favorite personal finance subjects, and it stretched me quite a bit as well as I learned lots of new things.

The objective for “Self-Employment Retirement Account Options” is to help you choose which self-employment retirement account type is right for you and your business. I haven’t mentioned it yet, but there are at least half a dozen high-level options and many of those have various permutations.

As I was sifting through these options to decide what to include in the training and in what depth, I kept in mind my coaching client who inspired the training. There is a lot of information out there about self-employment retirement accounts, but it’s largely intended for people who work full-time in their business, like I do, or even for small businesses with employees.

What I decided to do with the training in the Personal Finance for PhDs Community was to create it with a side hustler in mind instead—a solopreneur who has only a few thousand dollars in self-employment income—but who wants to maximize their retirement account contribution room even on that smaller income. When you frame the question that way, I believe the best choice becomes much clearer.

I included in the training detailed information about the three most popular self-employment retirement account types. The less popular account types are not ideal for a side hustler or solopreneur. The types I included are SEP-IRAs, SIMPLE IRAs, and one-participant 401(k)s.

Across these three account types, I compared the type of business they are ideal for; their employer, employee, and overall contribution limits and formulae; whether a Roth version is an option; and their deadlines to set up. For each account type, I also calculated the overall contribution limit for someone whose net business profit is $24,000 per year, an amount that highlights well the differences among the plans.

I also show you how contributions you or your employer make to a retirement account offered through your primary job affect your contribution room within each of the types of self-employment retirement accounts. This information is not the type you uncover by reading quick summaries of various account types, but it is crucial for a side hustler.

Ultimately, I recommended one account type over the others. I present whether that account type can be opened at 13 of the most popular brokerage firms today and a few specifics about the account at each of the firms where it is offered, such as what fees are charged. All of that is to save you a bit of research time when you are actually going to open your account.

I admit I did not do any research on the best place to open my self-employment retirement account. I opened it with Vanguard, which is where I had all my other investments. It was quite surprising to me when I looked around at other brokerage firms to find that Vanguard is not necessarily the best option.

The very last module in the training shows you how to use a certain IRS worksheet to calculate your contribution room, and I show four calculation examples. This module is really in the weeds, but should be super helpful for someone who trying to put as much money as legally allowed into their self-employment retirement account.

I actually didn’t know about this worksheet a couple of years ago when I accidently slightly overcontributed to my self-employment retirement account. Once I realized my mistake, I had to reverse that contribution in a slight panic right before the tax deadline. I don’t want anyone else to go through that process or overcontribute and not catch the mistake, so that’s why I included this module.

Summary

Let’s come back around to the compound interest illustration that I relayed at the beginning of this episode. Given the assumptions in that example, investing $250 per month for five years and then letting the portfolio grow for fifty years resulted in a balance of almost one million dollars.

Whatever your saving rate, increasing it by $250 per month is going to have a very impressive outcome, either in more wealth in retirement or achieving financial independence even earlier.

If your budget has no room for additional investing right now but you have a bit of time on your hands, consider pursuing a self-employment side hustle such as consulting; freelance research, writing, or editing; tutoring; baby or pet sitting; or gig work.

To invest $250 per month in the type of self-employment retirement account that I recommend, you only need to net $269 per month through your business. Let’s round it up to $350 per month to account for income and self-employment tax.

If you earn $15 per hour after expenses, you can earn $350 in 23 hours of work, or less than 6 hours per week.

At $25 per hour, that’s 14 hours of work in a month or between 3 and 4 hours per week.

If you charge $50 per hour, which is quite moderate for some of the types of work I mentioned earlier, you can earn $350 in just seven hours of work per month. Increase it to $100 per hour, and you’re down to less than 1 hour of work per week to meet your goal.

If you think that charging $50 or $100 per hour is outlandish, you’re probably anchoring against what you’ve been paid as an employee and/or for work outside of your unique skill set. Capitalize—literally—on the skills you built or are building during your PhD to command higher pay rates.

Do you think you can find between 1 and 6 hours per week to devote to a side hustle over just five years if it can become an extra million dollars fifty-five years from now?

If you’re already there with your self-employment side hustle or will be soon, please consider joining the Personal Finance for PhDs Community to take the Self-Employment Retirement Account Options training. You will learn which self-employment retirement account is best for you and your business and where to open one to protect your investments from taxes and maximize their growth over the decades. You can access the training by joining the Personal Finance for PhDs Community at PFforPhDs.community.