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This Graduate Student Launched a Passion Business Based on His Research

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In this episode, Emily interviews Dr. Nelson Zounlome, a recent PhD in counseling psychology from Indiana University and assistant professor at the University of Kentucky. Nelson started graduate school with a negative net worth, but over the six years of his PhD he increased his net worth to nearly six figures, including investments in both a Roth IRA and taxable brokerage account. Nelson practiced intentional frugality, particularly with respect to his large, fixed expenses and high-ticket purchases. However, what really moved the needle in Nelson’s finances was increasing his income, both through winning an external fellowship and starting a business. Nelson and Emily discuss in detail how his business complements his research and became an asset during his recent hiring process.

Links Mentioned in the Episode

This Graduate Student Launched a Passion Business Based on His Research

Teaser

00:00 Nelson: I didn’t have an advisor who was seeing this work as a conflict, right? And instead, actually, seeing it as an asset and a complement to my research in a lot of ways. Because a lot of the work that I do is focused around my research, right? So using my skills and my expertise in a way to give back to communities in a different way, aside from writing articles and getting grants and things like that, which is, you know, often what we focus on in academia.

Introduction

00:32 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 16, and today my guest is Dr. Nelson Zounlome, a recent PhD in counseling psychology from Indiana University and assistant professor at the University of Kentucky. Nelson started graduate school with a negative net worth, but over the six years of his PhD he increased his net worth to nearly six figures, including investments in both a Roth IRA and taxable brokerage account. Nelson practiced intentional frugality, particularly with respect to his large, fixed expenses and high-ticket purchases. However, what really moved the needle in Nelson’s finances was increasing his income, both through winning an external fellowship and starting a business. We discuss in detail how his business complements his research and became an asset during his recent hiring process. Without further ado, here’s my interview with Dr. Nelson Zounlome.

Will You Please Introduce Yourself Further?

01:42 Emily: I’m so excited to have joining me on the podcast today, Dr. Nelson Zounlome. He is a faculty member at the University of Kentucky, but he recently, just a few months ago, finished graduate school at Indiana University. And so we’re mostly going to be talking about his finances during graduate school. By the way, we’re recording this in October, 2021. So Nelson, thank you so much for joining me for the podcast. It’s a pleasure to have you! Will you please introduce yourself to the audience a little bit further?

02:07 Nelson: Yeah. So thank you so much for having me. Excited to be here and just share a little bit about you know, my journey. So I’m Nelson Zounlome, I did my undergrad and doctoral work at Indiana University where I studied, in undergrad, psychology and sociology, and then in graduate school, I studied counseling psychology. So as you mentioned, recently graduated and happy to have a job as an assistant professor.

Balance Sheet Before and After Grad School

02:32 Emily: That’s wonderful. So let’s go back to the beginning of graduate school. Can you give us an overview of your balance sheet at that time? Like what was going on with you financially?

02:41 Nelson: Yeah, so when I first started graduate school, I had a stipend for my fellowship of about, I want to say, maybe $19,000 a year. So in Bloomington, Indiana, thankfully pretty affordable for the most part, so that was able to cover most expenses, but I didn’t have a lot leftover at the end of the month. Also going into graduate school, I did have $7,500 in student loans. And so one of my first priorities was to figure out basically how to get rid of that. And so that’s something that I budgeted for. During that time, I wasn’t doing an assistantship, so just focusing on classes at the time, which was helpful. So that was kind of, you know, what that looked like financially.

Assets at the Start of Grad School

03:27 Emily: So you had $7,500 of student loan debt. You mentioned your stipend, and it sounds like you didn’t have any significant assets. Did you have like a bunch of money and savings or anything like that?

03:37 Nelson: No. Maybe like a thousand or $2,000 in savings. So, you know, not a lot of money at the time, just coming right out of undergraduate. Yeah.

03:46 Emily: Yeah. So negative net worth. But having a thousand or $2,000 in the bank starting graduate school is not bad at all. And then I want to fast forward us to, when you finished graduate school, give us that picture. And then we’ll talk about how you got from A to B.

Assets at the End of Grad School

03:59 Nelson: Yeah. So by the end of graduate school, let’s see, paid off my student loan debt pretty early in my graduate program. So graduated debt-free. At that point in time had a net worth of almost a hundred thousand dollars and had a job. So yeah, that’s about where I stand now.

04:23 Emily: Fantastic. Wow. And how many years was that? How many years were you in graduate school?

04:28 Nelson: I was in graduate school for six years.

Financial Goals and Building Net Worth in Grad School

04:30 Emily: Okay. Wow. What a huge swing. I’m excited to learn more about this. So you mentioned paying off the student loan debt and you mentioned, well, you mentioned that you ended up building up significantly other assets. Did you set any particular financial goals during graduate school? Aside from the student loan debt, which you mentioned, were you intentionally building up these assets on the other side of the balance sheet?

04:52 Nelson: Yeah. So, you know, paying off the debt was my first, right. So that’s something that I budgeted for. Other things were more in line with making sure that I was living within my means, and actually below my means as much as I could and still, you know, have a fulfilling life during graduate school. So things like keeping track of all my expenses throughout graduate school. But also, you know, keeping costs low with things like furniture. So, you know, getting secondhand furniture in graduate school and on college campuses, there are a lot of ways to get free or reduced furniture. I think, you know, a lot of students don’t realize that you know, and that was a huge way. And then also just rent. So something that I was willing to do was actually move regularly to find a better living situation, particularly if that meant a better cost or just, you know, closer to campus. So then the commute time and commute costs were down. So those were the things that I kind of considered. And then thrifting, right? So just, you know, anytime I needed something new, I would check multiple locations for that to make sure that I got a good deal to keep costs low.

05:59 Emily: Yeah, those are some great frugality tactics. I guess what I’m asking is, did you accidentally build up a net worth of a hundred thousand dollars? Or like, were you like no, I’m funding my IRA and like I’m also have these savings goals or like what was going on in your mind with respect to, you know, what were you pursuing and also, why were you pursuing it?

06:18 Nelson: Yeah, yeah, yeah. So it was part accident, and in part planned. So I would say initially, right, the debt was the biggest thing, but once I had that figured out, it was like, okay, I got used to living, you know, with this take-home., right? And so the idea for me was, okay, I should save this money because I’m going to need it for other things. And so that’s initially all it was, was saving. And then it was maybe my third or fourth year, I kind of stumbled upon different podcasts, different books, right? So, you know, Millionaire Next Door, Automatic Millionaire, you know, other kinds of resources like that, that got me more knowledge around Roth and retirement and brokerage accounts and things like that. And so I spent a lot of time over the next couple of years researching that.

07:06 Nelson: You know, listening to your podcast and other things like that to figure out like, oh, there’s much more that I can do with my money beyond just saving it, right? And so the motivation behind you know, a lot of that too, is that I grew up poor, right? So I grew up from in a very low-income, single-parent household. I lived in public housing for most of my life. And so you know, a lot of the messages I received about money were just save, save, save, right? And so it wasn’t until I got to these other resources that I realized that I can invest it, right? I can do other things. And then in addition to that, so that’s kind of the part that I stumbled upon, right? But the more intentionality came with learning, and then another really big strategy that I think is important for graduate students to know is being able to monetize your skills. And so something else that I did was create a business, right? And so I created my business, which is Liberate the Block, which is focused on providing educational and mental health resources for BIPOC students to help them live their lives holistically. And so I was able to create and publish a book. I was able to create an online course specifically for those groups of students, which help also contribute to my net worth and things like that.

Paying Off Student Loan

08:23 Emily: I’m really glad you brought that up. And we’re going to go more into detail about that in a moment, but like doing the quick math for me, I’m thinking $20K stipend times six years, $120,000. How did you get, you know, almost a hundred percent like savings rate on that income that you’re making? But it’s because we went beyond the stipend to make more money. So that’s great. So we’ll talk about that more in a moment. Since it was the student loan debt repayment that kind of kicked off this whole process for you, why did you decide to repay that student loan? Did you have to, or could have been in deferment? What were your decisions around that?

08:59 Nelson: I did not have to, it could have been in deferment, but it was something that it was instilled in me long ago that that debt is just something in my family that we don’t like. And so, you know, even that by comparison to others that I know is a small amount of debt. It’s just something that I didn’t want hanging over me, something I didn’t want to have to deal with later. And so it was just something important for me to feel financially secure and to really start that, getting rid of that debt and then focusing on how I can grow that net worth afterwards.

09:32 Emily: I’m so glad you brought that up because, are you familiar with like the debt snowball and the debt avalanche methods?

09:37 Nelson: I am. Yeah. And it was kind of unintentional that I did that. Yeah.

09:41 Emily: Well, what I like about this is that like, according to the debt avalanche, and also according to what I like typically teach, defer those student loans, pay them off later, especially if they’re subsidized. But what I like about what you said is that it was important to your psychology to get rid of that debt. And that’s much more in the debt like snowball camp of like get rid of these small debts. Like you don’t even want them on your mind. And of course, I mean, $7,500 is a small amount of money, but compared to your stipend, that’s like over a third of your stipend. So in your world, it was not a small amount of money, but anyway, so I’m really glad to know like your reasoning for why you did that. And I totally, if it helps you sleep better at night, like that’s awesome. Go for that.

Increasing Stipend and Income in Grad School

10:20 Emily: So let’s talk more about increasing your income and let’s start, like, in your role as a graduate student, was there anything you did to increase your stipend over the course of graduate school?

10:31 Nelson: Yeah, so something that I did as well was looking for an increase in stipend through a fellowship. So I was able to apply for, and luckily received my second time around, a national fellowship that increased my stipend from the 19 to about $24,000 a year. And so, you know, me being me, I kept my cost of living the same, right? So even though I had a higher stipend, I was being able to use that in the same way for my expenses. So that is also kind of what helped me, you know, start to increase my net worth and then start to use some of that money to invest in a general sense, right? Brokerage account, Roth, and things like that. But then also back into myself through things like my business and other things.

11:20 Emily: Gotcha. And I believe what I heard you say is that you started off graduate school with a fellowship as well, right? Not an assistantship. And then you got this higher fellowship later on.

11:31 Nelson: Correct.

11:31 Emily: So you didn’t have like teaching responsibilities or any research responsibilities that didn’t relate to your dissertation, is that correct?

11:40 Nelson: Well, so my first year, I did not have any of those responsibilities, but then my second and third year I did teach. And then my fourth year on, because I got that additional fellowship, I did not have those responsibilities. But as a counseling psychologist, I was also engaged in clinical work, you know, 10 to 20 hours a week on top of classes and teaching and things like that. So that took up a good amount of my time as well.

Business Helped Increase Net Worth

12:06 Emily: Wow. Okay. Busy schedule, because now we’re about to add the business in here as well. So you mentioned the name of it and a little bit of the mission earlier, but let’s talk more kind of like tactically, like what was bringing in money for you during that period of time?

12:22 Nelson: Yeah. So what was bringing in money were, you know, book sales, right? So, the book that I published which is you know, a book for BIPOC students to help them thrive in undergrad and graduate school. So that was actually the primary way. But then also I started being able to do speaking gigs. I also worked as a consultant, right? So individually with students to help them thrive in graduate school and undergrad, but then also working with, you know, larger school programs that focused on student success or, you know, BIPOC students matriculating into graduate school and things like that. So that’s also, you know, work that I’ve continued to do and to be hired for. And so that’s, you know, definitely increased my net worth in a good amount.

Finding Mentor Support and Being a Mentor

13:09 Emily: I love your story, because it’s been rare to have on the podcast, like a true business owner who started that business during graduate school and made significant income from it. Because this is also bringing up questions for me around like, your advisor must have known about this because you’re being invited to speak places and so forth. Like, and then, so how did you handle those conversations about sort of balancing your world as a graduate student and your role, like launching this business? And then there’s a time management portion of it too. So can you give us a few comments about that?

13:41 Nelson: Yeah. I mean, luckily my advisor, super great you know, very, very just, just a great mentor, really, not else to say about that, but he was really supportive. And so, you know, when he was found out that I was writing the book and then I published the book, right? He was one of the first people to get it and he was excited about it and encouraged me to do speaking and other things like that. So, you know, I assume that really helped me as well. I didn’t have an advisor who was seeing this work as a conflict, right? And instead, actually seeing it as an asset and a complement to my research in a lot of ways because a lot of the work that I do is focused around my research, right? So using my skills and my expertise in a way to give back to communities in a different way, aside from writing articles and getting grants and things like that, which is, you know, often what we focus on in academia.

14:35 Emily: It actually sounds to me like, I don’t know how this is in your field, but it sounds to me like you were doing as a graduate student, the kinds of things that faculty members do. The kinds of, you know it’s not even really a side hustle, it’s part of their work. It’s just not part of their job, right? As a faculty member, they publish books, they do speak, and they do all these other things, yet seeing that at the graduate student level is uncommon. Can you say, like, how did you like get up the like, audacity, like do this to like launch this huge thing, like as a graduate student? Like, how did you have the idea that this is even going to be possible during this time?

Monetize Your Skills

15:13 Nelson: Yeah. So in those same books you know, that I had mentioned, or just resources that I was consuming at the time around finance and retirement and all those things, something that kept coming up was, if you want to increase your net worth, you know, one of the best ways is to monetize your skills, which is to create a business, right? And so, you know, I was working on a research project that had to do with advice for students of color, which is, you know, what ended up becoming my book. But when I was doing that, I was like, man, this is really great advice that these participants are giving. It would be great to be able to put this in a medium, other than a research article, right? And so that’s where the idea of a book came. And then from there, it was just doing a lot of research around how to start the business, right?

15:58 Nelson: How to start, you know, doing all of these pieces. But because it was, you know, something really similar to the work I was already doing and because I am genuinely passionate about and excited about helping BIPOC communities and students in general, to me, it just seemed like a natural fit and complement to the work I was already doing. And so, you know, the time management piece was difficult, right? You know, staying up late and working hard and doing this and doing that. But, you know, I feel like the reward of just being able to engage with students really just gives me a lot of energy and excitement around that.

16:34 Emily: Wow. I’m so excited about this journey for you. This is amazing. I don’t know if this is like reading too much into the situation, but it sounds like these personal finance and entrepreneurship related books that you were reading maybe opened your mind to that possibility more so than maybe the average graduate student would be. And okay, so I think I also had kind of a similar experience from books and also from other types of personal finance content to like, think about, oh, wow. Like I can invest while I’m a graduate student. I don’t have to be limited to this like student mindset. There’s things I could do in my finances beyond this. For me, it didn’t look like starting a business at that time. But doing other things for my finances that were like pretty ambitious, like for a graduate student. It sounds like you went through a similar journey as well through this reading and exploration.

17:25 Nelson: Yeah. One hundred percent. And something that, you know, I often recommend to students as well is, you know, really take ownership of your education. Yes. But also remember that universities are really big resources, right? And once you leave, you know, academia, we often lose access to those resources. So while you’re there, it’s really, really important to take stock of that. And so something that, you know, I definitely should mention is at my university at IU, we have so many resources like access to lawyers, access to people who will help you with business planning, access to people who will talk to you about finances and other things like that. And so that was part of what I did was just take stock of the resources that already existed at my university and use all of those things to my benefit, to help launch my business. And so that’s something I would 100% encourage students to do is to take a stock at what the resources are at your university. And think about how you might be able to take advantage of some of those in a similar way.

18:28 Emily: Love that message. Wish I had heard that during graduate school!

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, December 15th, 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.

Liberate the Block is an Asset

19:45 Emily: With respect to your business, how much of a role did that play in your hiring process? Like, was it an asset that you have this business on the side?

19:56 Nelson: It was, and so, you know, as a counseling psychologist, one of our core components is social justice and multiculturalism. And so since my research and my business, you know, that’s basically the heart of those things as well. It was something that actually came up, you know, during my interview process. But it was referred to as an asset like Oh, you know, I was also a published author of a book, right? Not just on articles and you know, those types of things.

20:23 Emily: Fantastic! Is there anything you want to say further about either your business or increasing your income during graduate school?

20:31 Nelson: You know, if anyone wants to find more out just about the business itself, you can go to liberate the block dot com. And again, focusing on just the mental wellness and academic persistence of BIPOC students and professionals. And so book, out there already, and then an online course as well. So check that out if that’s useful.

Limiting Home Expenses

20:53 Emily: Fantastic. Let’s turn our attention to the other half of the cashflow equation, your expenses during graduate school. You mentioned earlier a couple of the strategies that you used to decrease your expenses. For example, I want to hear a little bit more about moving, because I kind of always point to these, like, you know, your big fixed expenses, housing being the top one on that list as targets for, if you’re trying to reduce your expenses, you need to think really critically about that particular line item. So can you tell us a little bit more about why you chose to move and how you made it work?

21:26 Nelson: Yeah, so because I had done my graduate school in the same place that I did my undergrad, or I guess we could flip those. You know, I was pretty familiar with the town already at Bloomington. And so I initially, you know, just wanted to switch the side of town that I lived on. So, I lived on one side of town, and I enjoyed it, but you know, it wasn’t the best, right? And so when I was able to find something that was closer to campus that was actually a bit more affordable, you know even though I hate moving, I was like, okay, this financially makes sense. And so and then also I was at the same apartment complex and I actually ended up moving right just across the street to another apartment for kind of a similar reason in the same complex. And so basically, you know, I was just able and willing to make that transition, you know, in light of my fixed cost of always thinking about, okay, how can I keep costs down?

22:28 Emily: That makes sense. And with a market like Bloomington, I have to ask, you chose to rent. Was buying ever on your mind as a possibility?

22:38 Nelson: It wasn’t until I had been there for quite some time, so maybe, you know, in the same time where I was consuming all of these finance, you know mediums, right? It was like, oh, buying actually maybe would have made a lot of sense. But around that time, you know, I only had about a year left in the program. And so it just didn’t make sense to me because I also had no idea where I was going to be in the next year. And so it was something that I definitely wish I at least would have looked into early in their process. And had I known, I would have continued on into graduate school a little bit earlier in Bloomington, that definitely would have been something that would have made a lot of sense. Because over the course of that time, I was in Bloomington for nine years. My last year, my program was an internship. I actually lived in Baltimore, Maryland. But for nine years I was in Bloomington. So yes, that would have been awesome to have been paying all that money for a house and not just for rent.

23:33 Emily: I do think it probably would have been difficult though, like on your $20K like starting stipend. I don’t know how well, you know, we have to go back in the Wayback machine to figure out housing prices at that time. But it may have been too much of a stretch. But by the time your income increased, like you said, your time is growing short in that particular city, so totally understand why it went that way. Are there any other areas of spending that you want to bring up where you like intentionally tried to sort of keep a lid on expenses?

Keeping a Lid on Expenses

24:02 Nelson: I mean, this kind of goes along with furniture, but just honestly anything that was kind of a high ticket item, right? So even when I got a new monitor for my computer, even when I got a desktop, just so I could work at home with and things like that a bit better. We have a surplus store at IU called the IU surplus store. And, you know, they would have old monitors, old desktops, old furniture, old, you know, whatever there. And so, you know, anything that was high ticket, I would almost always go there first to see if they had it to keep those costs down. You know, something I was also mindful of is, you know, food budget, right? So not eating out very often or limiting myself to about you know, just a couple of times a month. And just being mindful of that. And then just doing my best to, if there were conferences or other things, looking for funding for that. So within my program at the national level for my professional organization, I was constantly applying for these grants, fellowships, travel awards and things like that. So that spending, you know, to conferences and whatnot didn’t have to always come out of my pocket. And so I think I was able to really save a lot of money that way, compared to some of my peers.

25:21 Emily: I think this, it sounds like so strategic now, like you were focusing on building, of course, graduating, also building your business, increasing your income focusing on the big line item of housing, and then just letting you know, it sounds like you’re a naturally like frugal person, but just not being too concerned about the minutia. But just when those, as you said, the higher ticket items came up, made sure that you were being really intentional about your spending in those areas. And so in that way, your energy kind of goes more towards this like increasing income side of the balance sheet. I know for me in graduate school, I probably went more to the frugal, like extreme than was necessary and probably put too much energy over there. I should have been focusing more on like the increasing income or, you know, preparing for the next job, like side of the spectrum, but it’s all in retrospect.

Current Money Mindset

26:06 Emily: Okay. So you talked about how, you know, during this six years in graduate school, your net worth went from slightly negative to almost a hundred thousand dollars. Wow. Amazing. How has that set you up financially for your current like career stage and life at the University of Kentucky?

26:23 Nelson: Yeah. So I would say, you know, for me, I’m really using the same principles, right? So you know, I have a pretty cheap place. You know, two bedroom, but my rent is below a thousand dollars, which is great. But you know just based on the cost of living and everything here, I definitely be paying more to live in a more expensive area, right? Maybe with some more amenities and things like that. But it’s important for me to you know, spend my money on my business and other things that are a bit more important to me like visiting family. So I’m happy that I live pretty close to family, and less around kind of the rent side. And now I’m actually choosing to rent as opposed to buy, because I want to get a sense of the area right now before, you know, buying a house.

27:10 Nelson: And also as I’m sure you’re aware of like this whole past few months for buying was ridiculous. So as a first time home buyer, I was like no, I’m okay. But yeah, so just really keeping the same cost of living, like the same habits, the same cost of living for myself into my profession that I was as a graduate student. So, even though, you know, my salary is much higher than my stipend was, I didn’t then magically start, you know, spending a lot more. I’m keeping the same habits because I was pretty comfortable, right? I spend more money on higher price items that, you know, I think are good investments for long-term and things like that. But, you know, my eating habits haven’t changed much, right? The way that I obtain furniture is actually very similar, right? My budget on that has increased a bit, but you know, I’m on Facebook marketplace, I’m looking around, you know, here, I’m going to Goodwill, I’m going there, you know, just to see what’s around. So, you know, it’s important for me to keep those costs down so I can save more, invest more, and also just have more, yeah.

Investments and Retirement

28:12 Emily: Tell me what you’re doing with your investments now? Are you maxing out? What’s up?

28:18 Nelson: Yeah. So right now I’m maxing out my 403(b), which has an employer match, which is amazing. And then I’m also making the max contribution to my individual Roth. And then I also am able to contribute a little bit right now to an actual, additional Roth that I have through work, which is really cool. And then I also have a brokerage account that I fund pretty regularly, too. And so all of those things are just automatic, right? So, you know, my paycheck comes, and all that money is taken from my paycheck to the different accounts invested automatically. And so I think that’s also just the beautiful part is that I really don’t miss the money because I don’t really ever see the money, right? It’s all in these other accounts. So I don’t even get the chance to spend that extra money. It’s just taken directly. And you know, it’s just invested in growing. And so once retirement hits, you know, at this point, even, I’m not actually that concerned about retirement, right? If, you know, as expected, my career continues and you know, my income hopefully will increase over time.

29:24 Emily: That’s fantastic. And I think that what you’ve done makes so much sense for someone in your situation where you have this like big, big jump in income and you don’t really feel the need to increase your lifestyle that much. Sure, a little bit here and there, on parts that are important to you. But overall not making a huge leap in lifestyle, just funneling all that money away into your investments and watching it grow. And then you’ll have lots of options in the future, right? Whether it’s retiring early or doing something fantastic with the money in another way. That’s awesome.

Best Financial Advice for Another Early-Career PhD

29:54 Emily: So let’s conclude the interview with the question that I ask all of my guests, which is what is your best financial advice for another early-career PhD? And that could be something that we touched on in the interview, or it could be something completely new.

30:08 Nelson: I feel like I have several pieces of advice, but I will keep it short. So I would say, my first thing is, I know from experience how overwhelming and how uncomfortable, and that’s a lot of what you address, you know, in some of your materials Emily, is how uncomfortable that can be at first, especially when you come from a background that money wasn’t something that you really talked about and whatnot. But really, you know, utilize these resources such as this podcast and, you know, other books and materials to just learn. And once you get past that little bit of discomfort, it’s actually, it’s pretty easy, right? So to be able to set up, you know, these accounts into investing, and so really just believe in yourself. Yes, it’s going to be uncomfortable.

30:50 Nelson: Yes, it’s going to be anxiety-provoking, but you know, once you get past that and set yourself up, you’re really mostly set up for the rest of your life, which is great, right? And in a really short period of time, you could set yourself up for financial success, which is amazing. And I really wish I had known that my first year. I’m very happy I stumbled upon this, but I really wish I had, you know, more of a resource like this beginning, so I could have been more intentional. And then the other piece is, you know, what I touched upon before is really take stock of your university resources and see what is there for you, right? And really think about, you know, whether that be through lawyers or, you know, business incubators, or, you know, just pitch competitions, all these things that happen at universities that might be helpful for you, if you’re someone that, you know, making a business or even being a part of a business makes sense.

31:41 Nelson: And related to that is we, as PhD students, have a lot of really marketable skills. And I think, you know for those of us who are in fields that industry isn’t something that’s discussed as much as an option, I would take the time to research careers, right? Because you know, myself as a psychologist, we often think about clinical work or academia, right? But we don’t think about all the plethora of ways in which we can apply our degree, right? And so, you know, think about ways outside of those two mediums that you might be able to contribute while in graduate school or outside that might, you know just help increase your financial wellness.

32:24 Emily: So well-put, I’m so glad we’re ending the interview there. It’s wonderful advice. Thank you so much for volunteering to give this interview, Nelson. I really enjoyed talking with you, and I’m just so glad to see this bright career and financial future ahead of you. It’s wonderful.

32:38 Nelson: Yeah, thank you so much! I appreciate it.

Outtro

32:45 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.

This PhD Entrepreneur Advocates for Universal Basic Income (Part 1)

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In this episode, Emily interviews Dr. Jim Pugh, the founder of ShareProgress and co-host of the Basic Income Podcast. Jim earned a PhD in computer science and subsequently worked for the Democratic National Convention and other progressive groups. He always aspired to start a business, and his post-PhD work experience inspired him to found ShareProgress, a software product and consulting service. Jim describes the evolution of his business, which now brings him sufficient income to support him in San Francisco in exchange for about 5 hours of work per week. Jim’s observations of changes in technology and the workforce while building his business and newfound time freedom drew him to investigating universal basic income.

Links Mentioned in This Episode

PhD entrepreneur basic income

Teaser

00:00 Jim: As you’re doing something, you’ll see many other, adjacent great things to do as well, but that can so easily be a distraction from actually figuring out, “Alright, what is the core of this successful business going to look like?” And if you let yourself be pulled in that direction, it can really detract from your chance of building something big.

Introduction

00:25 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 six, episode one, and today my guest is Dr. Jim Pugh, the founder of ShareProgress and cohost of The Basic Income Podcast. Jim’s doctoral work in computer science and his experience working for the Democratic National Convention inspired him to start ShareProgress seven years ago. In this first half of our interview, we discuss the growth and evolution of his business, which now brings him sufficient income to support him in San Francisco in exchange for about five hours of work per week. Jim’s observations while building his business and newfound time-freedom drew him to investigating universal basic income. Without further ado, here’s the first part of my interview with Dr. Jim Pugh.

Will You Please Introduce Yourself Further?

01:15 Emily: I am delighted to have joining me on the podcast today, Dr. Jim Pugh. It’s a really special episode for me because Jim and I know each other in real life. He is the older brother of a dear friend of mine and my husband’s from college. And we actually had lunch a couple months ago when we were visiting and had gotten into this really interesting conversation about what Jim’s up to these days, the activism that he does. And it was just really exciting and I could see there was a definite PhD angle there, not just because Jim himself has a PhD but also because what he works on has implications for PhDs. So, we will get into all of that in just a few minutes. So, Jim, will you please take a moment and introduce yourself a little bit further to the listeners?

01:53 Jim: Yeah. Well Emily, thanks for having me on the podcast. My background brings together a few different areas. My academic background is in the sciences. I did my undergraduate and doctorate in computer science, specifically robotics, my doctorate. And following that, ended up getting involved in the political world. And so, I spent some time working on the 2008 Obama campaigns, spent a few years in D.C. after continuing political work out there. And then about six, seven years back decided to take honestly experiences on both those fronts to start my own company called ShareProgress, working primarily with political and nonprofit organizations, providing them with tools and other technical support. And then just in the last few years, I started to delve really in on the activism side of things myself and helped to start an organization that does a lot of work around universal basic income doing both advocacy around that topic and also some policy development work in that field.

What Role Did Your PhD Have in Starting Your Business?

02:58 Emily: Yeah. Super, super exciting. Thank you. Clearly, you have a lot of skills and a lot of interesting experiences that you’ve brought to bear on these most recent endeavors. So, kind of backing up slightly to the business that you started, ShareProgress. How did your PhD prepare you for ultimately starting that business? Obviously, you had some work experience after that point before you started it, but how did the PhD specifically prepare you? Or how did it not prepare you very well for that?

03:25 Jim: So, I would say the PhD itself wasn’t terribly relevant for starting that because I was really in a hard research area and was working on algorithms and models that didn’t have any clear path to monetization to turn it into a company. So, that I don’t think was terribly relevant. What was a bit more relevant is I was involved with, at the university I was working with, which is the Institute of Technology in Lausanne, Switzerland. They actually were making a pretty significant investment in cultivating entrepreneurship amongst their students, both undergraduate and graduate. And so there was a program on campus that was talking a lot about that. And so, I feel like there was some stuff I learned through experience with that going through events, and they had various activities that they would organize. And so, I felt like that it was informative in some ways, but it really was very much focused on taking the sort of research you do through your doctoral degree, through your academic work afterwards and turning that into a company. And my company that I ended up starting really didn’t resemble that much at all because that was much more informed by the political work I’d done and seeing what the needs were in that space. So, there were there aspects around “what does it look like to go through that process?” that I would say generally provided me with some guidance. But as far as the specifics, really not much at all.

Jim’s Entrepreneurship Journey

05:02 Emily: Did you have in your mind at that time that you did want to pursue entrepreneurship?

05:08 Jim: I did. That was something from I think pretty early on in college I realized was an area I was quite interested in. And when I was graduating from undergraduate, actually, I kind of had in my head either go to grad school or do a startup. I didn’t have an idea for a startup, so I said, “Well I guess it’s grad school.” But it definitely was something that I had been thinking about for awhile.

05:34 Emily: And did you initially, when you were getting involved during your PhD program with this training program for entrepreneurship, were you thinking about the possibility that you might turn your PhD work into a company? Or were you already like, “No, that’s definitely not going to happen, but this is just like for future reference?”

05:50 Jim: More the latter. Maybe there were a few moments where I considered something that was closely connected, but in general, that wasn’t where I saw opportunity. I more generally was thinking about, “Oh, I want to do something at some point. And this is an area that interests me and is just an area that’ll be helpful to know more about.”

Relevant Technical Skills Gained During PhD

06:10 Emily: Gotcha. And what about, I guess I could say, your technical chops. Did you use those in your business, or were you always hiring out for that? And then also is that something you got from your PhD, or do you think your undergraduate education was sufficient in that area?

06:23 Jim: I think there definitely was some of that from my PhD. Obviously, as an undergrad I had done a lot in that space, but I think that some of the specific technical skills and areas of expertise–and I think also just generally understanding different technological ecosystems–some of that did come through in my PhD. When I was starting my company, I very much structured it to not have put myself in the role of that technical person because I was interested in really taking on the CEO mantle in the more traditional sense. So, I had hired out for a developer to actually build out our software platform from the get-go. That said, I was being involved in various ways with the technical stuff throughout, and at different points definitely got more engaged on that front. And so, having that background definitely proved to be important and a valuable asset. And honestly, I mean I think those of us who are deeply into tech, and particularly doing software development and whatnot, we think of tech in a pretty extreme way as compared to the population in general. And so, just knowing how to work with various technical systems out there, I know it’s a leap for a lot of people not committed to that space. And so, certainly my background had equipped me well to be able to handle that sort of thing.

07:50 Emily: Yeah, I kind of see this as being a common sort of value of the PhD. You sort of prove yourself in an area, you can work very deeply, you can master something completely. And then after that, a lot of people do take a step back and allow other people to do that kind of work and do more of the management. And that’s kind of the PI model. Right? So, that sort of does apply, in a way, to what you did after. But it sounds like the actual work experience that you had after your PhD with the Obama campaign and so forth, that was what gave you the idea–right?–for what your company would ultimately be. Can you talk a little bit more about that?

Inspiration While Working for the Democratic National Convention

08:19 Jim: Yeah, so the work I was doing, to some degree on the campaign, but in particular when I was out in D.C., I was working for the Democratic National Committee at that point, and we were actually running, effectively, the continuation of the Obama campaign. It was called Organizing for America at that point. And so, my role, I was the director of digital analytics and also web development for the program. And so, it was really paying attention to/digging in on what was actually happening under the hood with all of our digital presence, our social media, our email lists, our website, and so on. And so, I got a chance to see what’s possible, what’s not, what works well, what doesn’t. And one of the observations I had was that so much of our ability to do anything, whether that was raise money, whether it was to try calls to Congress, whether it was to get people turning out in their local communities for events, it depended on us having a wide reach.

09:19 Jim: And that reach, to a large degree, came from us intentionally doing outreach to get people involved. Whether that was big publicity efforts, whether it was paid acquisition online. But then the third category being people bringing in their friends. And actually during that time period, that was really crucial for us that so much of the new people we had coming in, it wasn’t from anything we were doing in particular, it was because our existing supporters were recruiting people they knew to get involved in a campaign and whatever the moment was. And it was an area that there really had not been much investment in as far as figuring out, “Alright, well how do we facilitate, and how do we amplify this?” So, that was really the motivation for my company, which was, “Let’s build some software tools that make this more effective and easier to do.”

How to Gain a Wide-Reaching Audience

10:10 Jim: And so, basically we had a plug and play solution where organizations, as they were doing this sort of advocacy work, they could be encouraging their supporters to be reaching out to their friends through various digital social channels. So, social media, Facebook, Twitter, but also just getting people to email folks they knew and say, “Hey, I’m involved in this really important thing. Will you be involved as well?” And that’s proved very, very effective at bringing in new people, particularly in high-energy moments. And then we allowed organizations to track the analytics on what was happening there. And so they really understood what was going on and actually allowed them to do controlled testing around what sort of messaging they could give to their supporters that made them more convincing, basically, to people they knew. So, when their supporters post on Facebook they could have a couple of different headlines, a couple of different thumbnail images and the system would be able to measure, “Okay, well how effective are those different pieces of content at getting their friends to say, ‘Oh, I’m interested,’ and click through it and get involved.”

Evolution of ShareProgress

11:16 Emily: Yeah. Super scientific approach to that. Right? I’m sure your background helped with that, the design of it. Okay, so that’s around the product that you created. I think you said when you introduced yourself that this was maybe six, seven years ago that you started the company. Two years ago, you transitioned more to doing this advocacy around universal basic income. So, I’m curious about how your role within the company, and in particular the time that you put into it, evolved over that, five-ish-year period.

11:44 Jim: Yeah. So, at the start, the software that I just described, the plan was for that to be the company. That was what we were going to do. I realized relatively early on about six months in that the growth that we were seeing from that wasn’t going to allow us to sustain. And in exploring different investment strategies, the type of company I was looking to build, which very much had a social mission, wasn’t looking to make as much money as possible, as quickly as possible if that compromising that, wasn’t actually a great target for traditional investment routes with startups. And so, what I decided to do was to couple on with that a consulting arm where we would actually work with the same sorts of organizations that we were providing the software to, but a system with either data analysis work or some sort of web design development work, which is similar to what I had been doing out in D.C. prior to that.

12:42 Jim: And so, that actually ended up being the bulk of what the company did for most of its existence. We were able to find clients there. I was able to scale up our staff with that sort of work. And so, while we were doing the software, we were continuing to grow the consulting side of the company. And so, our peak was I think early 2017 we were nine people and most on the consulting side. But it was around that time I had realized–I had known pretty early on, I didn’t really want to start a consulting company. That seemed like where the path to profitability was. But around that time, my interests had started to shift to more of the advocacy work around universal basic income. And we went through some tough periods as far as expectations around business and profits and not matching reality. So, we had to do some downsizing. And so, at that point I actually decided, “This isn’t where I want to be investing my time and effort for the future. So, let’s just ramp down the consultant product company.” And at that point, our software was making enough money that I could support a much smaller staff. And so, over the course of 2017 I went through a process around that. That ended with, at the end of the year, I was having more of a skeleton crew and requiring not very much of my time in order to just keep our software running, or the clients that we had there.

Consulting as a Stage of Growth

14:20 Emily: So, I’m curious, with the evolution of adding the consulting aspect and then winding it down, are you happy that you did that, or do you think that you should have just stuck with the software product kind of throughout that whole time and come to this point where you are now maybe a little bit sooner?

14:36 Jim: Well, it honestly wasn’t an option to do exactly that because we did need the consulting early on in order to make payroll. So, it took a while for us to build up enough of a client base and the software where that was an option at all.

14:49 Emily: So, it’s a stage of growth, then.

14:51 Jim: It was a stage of growth. Whether or not I would have invested as much as I did in that, I think looking at it solely from a business perspective, I think that was probably a mistake. I think that it would have been a better approach to say, “Let’s keep focused on the software. Let’s do this as much as we need to, but let’s not really invest in growing that as the company.” Because I think that in most cases, when you’re trying to do more than one thing, you’re not going to do either of them as well. And so, that would have been the better business decision. As far as from a personal perspective, I think I certainly learned a lot through the whole process. So, I wouldn’t say it was a bad decision from that. It certainly was stressful at times, but I think that it’s hard for me to make a valuative judgment on it.

San Francisco Venture Capital (VC) Environment

15:40 Emily: Sure. I want to say for the context, for the listeners, that you live in San Francisco right now, and you mentioned living in D.C. before that. Did you start the company when you were living in San Francisco?

15:50 Jim: Yes, that’s right.

15:51 Emily: So, you’re in a very different environment than probably most of the listeners who are maybe still on academic campuses, you know, spread throughout the U.S. and other places. So, anyway, I just want to say that because you probably had a lot of exposure just from your environment in things like how to approach for VC funding, whether that’s actually a good idea for your business. You decided that the values that they’re going for are not exactly the values that you were going for. And so it wasn’t a good match there. This is actually something I’ve heard about quite a bit that people elect not to go the VC funding route for various, I guess, “vision” reasons.

16:23 Jim: Well, I should clarify that I did attempt to raise funds for the company with already knowing that there would be certain people I wouldn’t accept money from, certain types of investment that I wouldn’t be comfortable with. But, I was hoping to be able to do it in some capacity and was not successful at it. So, that was part of it. Maybe had I met the right people, those things could have looked differently. But I will say, both prior to that and since then, having observed the dynamics in that space, I see how that would be a challenge for many, many people who are attempting to do something similar. But it wasn’t as though I was equipped to know upfront, “Oh, there’s no way this is going to work.” It was very much a learning experience for me.

Current Role in the Business

17:11 Emily: Yeah, that sounds really great, actually. And you’re still living in San Francisco, so you’re still exposed to all of that stuff. But I’m curious about this decision that you said around two years ago, you wanted to focus more on the UBI stuff and you restructured the business. And now, how much time do you spend working on the business now, maybe per week or per month? And what is your role in it now, exactly?

17:32 Jim: Yeah. Well, I’m still CEO of the business, but to be honest, it probably averages about five hours a week at this point because we want to keep running, we want to keep our clients happy there. The idea is really to have it be maintaining the service rather than doing new things. And so, that just doesn’t require that much work. So, I have an employee who is, basically, like any sort of support we need to provide, is dealing with that, keeping an eye on things, and then myself overseeing things. And that allows us to keep going with that.

18:06 Emily: And to ask kind of a more pointed financial question, but you are supporting yourself entirely off of your business income for which you’re only putting in about five hours a week at this point?

18:16 Jim: That’s right, yes.

Financial Independence and Early Retirement (FIRE) Movement

18:17 Emily: Wonderful. Wonderful set up for you. So, we’ll talk about this a little bit more in the upcoming UBI conversation. But the reason I was kind of interested in your story and sharing it on the podcast is because there’s this big movement in the personal finance community called the FIRE movement, Financial Independence and Early Retirement. In season three, I released a pair of interviews with someone on that subject. And your story, while the FIRE community might not call you financially independent by their definition, a lot of what they’re going for, financial freedom, you have bought for yourself with your business, right? So, there’s a lot of overlap there between the goals of the FIRE movement and what you’ve done for yourself. So, I was really interested in having you on the podcast for that reason.

Business Advice for Early-Career PhDs

18:59 Emily: So, okay, now that we’re going to transition to sort of the universal basic income aspect of our conversation, I kind of wanted to wrap up the aspect of our conversation about the business by just asking if you had to give some advice, if another early-career PhD asked you advice around starting a business, what would you tell that person now?

Advice #1: Talk to People

19:20 Jim: I think just go and talk to a lot of people who’ve been through the process because I think part of the challenge is it does look very different in different situations. And that was something I struggled with early is thinking, “Okay, well, there’s going to be standards around this. And so did a bunch of Googling online for like, “Okay, what is the standard, whether it’s around the equity or whether it’s around other aspects of the business.” And I found some stuff but not as much as I expected. And so, I think that, if you can just talk to a lot of people who have gone through the process, you get a sense of the diversity of ways that can work. And so I think it can give you a better idea as to what the trajectories may seem to be. That was something I know I struggle a lot with, and I think may have delayed me deciding to start a business, is that it just felt too amorphous and scary. Alright, what does it look to get something like this off the ground? And in hindsight, it’s such a simpler process than so much of the work I had done before, but I think that there is that opacity and then those unknowns that make it difficult. I feel like I was not unique in having that perspective.

Advice #2: Find Your Focus

20:33 Jim: And then I think focus is another big thing that I continually struggle with frankly, but I see many, many people struggle with. There’s many great things to do and, as you’re doing something, you’ll see many other, adjacent great things to do as well, but that can so easily be a distraction from actually figuring out, “Alright, what is the core of this successful business going to look like?” And if you let yourself be pulled in that direction, it can really detract from your chance of building something big.

Commercial

21:07 Emily: Emily here, for a brief interlude. I bet you and your peers are hungry for financial information right now, especially if it’s tailored for your unique PhD experience. I offer seminars, webinars, and workshops on personal finance for early-career PhDs that can be billed as professional development or personal wellness programming. My events cover a wide range of personal finance topics or take a deep dive into the financial topics that matter most to PhDs like taxes, investing, career transitions, and frugality. If you’re interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. We can absolutely find a way to get this great content to you and your peers even while social distancing. Now, back to our interview.

Should Entrepreneurs Move to San Francisco?

22:06 Emily: I’m trying to think about for someone who is, let’s say still affiliated with the university, I would imagine there are some people to talk to there, networking, especially universities that have incubators or something from launching a business out of. But I asked you before about living in San Francisco, what do you think about moving to a place like San Francisco where you can just run into other people who are on a similar path? What do you think about that idea?

22:31 Jim: I mean, I think it’s a very double-edged sword because certainly the density of that happening is a significant asset for a lot of this sort of work. And it is so expensive here that if you’re looking to hire locally, you’re gonna be paying, sometimes easily two, three, four times as much as you’d be paying, not too far away. And so, I think it’s a question of balancing those sorts of things. I mean, I think there are ways, like either if you live somewhere not too far away, where you can go into the city and have those easy conversations in-person with folks, but still be in a place where it doesn’t cost you thousands and thousands of dollars every month to pay for your rent. That could be your compromise. Or, just take the occasional trip out here. Assuming you can afford whatever the travel costs are. And then I think there are other areas where you’re starting to see better density. I don’t really have a great sense for what it actually looks like yet. And I do think that there is a cultural component to why Silicon Valley is Silicon Valley because there’s kind of a pay-it-forward mentality, pretty broadly, where people who have done well are eager to help new people coming in, which I think has made a big difference. But yeah, you get both sides of it.

Advocacy for Universal Basic Income

23:54 Emily: I see. Okay. So, now that you pay for your life based on your business, which you only work in a few hours per week now, I’m curious about this transition that you made two years ago. I mean, you said it was kind of like you became more interested in universal basic income and that movement. You then structured your life so that you didn’t have to work so much. So, I guess the question is, how has your experience of having that business and having that source of income that requires only a very small amount of work at this point or small amount of time, how did that lead you into your advocacy for universal basic income?

24:34 Jim: So, I think there are a couple of different ways that I can answer that. So, as far as what first got me interested in universal basic income, a big part of it was the process of starting my company because I had certain expectations coming in around staffing related to operations, to payroll, to HR services, and expecting that, assuming things at all got off the ground pretty quickly, I would need to be hiring at least part-time help to assist with that. And what I found is that there were all these new online services that automated a lot of that. And so, from the beginning for payroll in the company, we use Gusto. It used to be called ZenPayroll, which you have to plug in the information to start with people’s where they live, their bank account transfer information, what the unemployment insurance rate is in the state. But then every twice a month you just say, “Okay, go,” and it pays them and files their taxes and that’s it. And costs not very much money to do it. And so, that being one example of how technology is allowing us, not just to replace jobs because I think you lose something when you describe it just that way, but is A) definitely changing the way that that work is being done, and B) and this is the thing that really stood out for me, is allowing much smaller groups of people to be able to do far, far more than was true before.

Small Business is the New “Big”

26:14 Jim: Because in the past, if you wanted to start a big company, or I shouldn’t say big, I should say a company that was going to generate a lot of income and wealth, kind of inherent to the process is you would need to involve a lot of other people. And it’s far less true now. You can have a team, I mean if you look at I think, what was it, the WhatsApp team, which is like half a dozen, a dozen people who then sell a company for multiple billions of dollars. Never in human history before could something like that happen. And so I think that was an A-ha moment for me and realizing that things are already starting to and will continue to look very differently than they have in the past and we need to stop assuming that the economic solutions that have been effective before are necessarily the right ones going forward.

27:06 Emily: So, it’s not necessarily just jobs are going away, but maybe some jobs are going away, some other jobs are popping up, the people that create the companies and the software and so forth. Are you also speaking about wealth concentration?

27:20 Jim: Yeah.

27:21 Emily: Gotcha.

Changing Mindset Around Universal Basic Income

27:22 Jim: Yeah. And I think for me, that was as much of a factor as jobs are not. I think we’re used to thinking about the jobs thing, so it’s more clear why that would be problematic if we had only a requirement that 10% of the people have a job. But I think that, particularly as I’ve worked on the issue more, that piece more clearly is a big issue that I think as our systems are structured now is really incompatible with having a fully-functioning society, I would say. Anyway, so that was kind of how I first started to think about UBI, universal basic income. And I don’t even remember where I first heard about the idea. I think I read maybe some piece about the referendum that Switzerland was pursuing.

28:18 Jim: It started back in 2013. But my initial reaction was, “This seems dumb, frankly.” I was like, “Oh, this seems like an oversimplification. Just thinking you can give people money and that will solve things. And then I started to look more into it and look at the research and understanding what are the actual, both economic and psychological ramifications when you do this. And it turns out it was incredibly positive that this is something where we have, at this point, a lot of evidence that unconditional cash–people take that and use it for whatever they actually need to use it for. And that, in fact, it confers a sense of agency to people that they might not otherwise have. And that in itself is hugely beneficial because it encourages people to think more longer term in terms of sensing more responsibility for a situation, all things that are actually very valuable in sending people out for their own longterm success.

29:15 Emily: I want to leave this for part two of this interview. Where we’ll be talking less about your personal story and more about, well, maybe what you’ve been learning over the last few years. We’re going to take a step back and define universal basic income because we haven’t done that yet. So, listeners, if the next part of this conversation sounds like it’s going to be really interesting to you, please tune in next week. For the second part of the interview, we’ll be talking a lot more about universal basic income with the expert, Dr. Jim Pugh.

Outtro

29:40 Emily: Listeners, thank you for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, please consider joining my mailing list for my behind-the-scenes commentary about each episode. Register at pfforphds.com/subscribe. 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 and show notes creation by Meryem Ok.

Don’t Make These Investing Mistakes

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Just as useful as knowing what to do with respect to investing is knowing what not to do. In fact, some of the core investing principles that I teach involve pitfalls to avoid: don’t pay high fees, don’t jump in and out of the market, don’t delay, etc. This article details 11 common investor behaviors and choices that are detrimental. Don’t make these investing mistakes!

investing mistakes

Wait to Get Started

There’s a common aphorism on investing: “It’s not timing the market, it’s time in the market.” We’ll get to market timing as an investing mistake later in this post; for now focus on the time in the market.

Once you are financially and mentally ready to invest, get in the game! Do not wait on the sidelines for months or years on end! On average, waiting means you’ll miss out on gains. The math of the power of compound interest show you just how damaging it is to miss out on even a year of returns.

Remember my example showing how the investments you make just during graduate school can translate to $1,000,000 in retirement? Instead, let’s say that you invested over your final four years of grad school instead of five. Your ending balance drops by $225,000!

Further reading:

And on that note, one particular mistake that might cause you to wait to get started is that you…

Get Stuck in Analysis Paralysis

I’ve made this mistake more than once with my investments! Investing is an intimidating subject to approach for a novice. But investing isn’t complicated! (Some people like to make it (seem) complicated, but that isn’t better than a simple approach.) I’ll boil it down for a long-term goal like retirement: Buy a stock index fund and hold it until you need the money in retirement.

OK maybe you want a little more detail on that, but you don’t need much more before you get started! Really, you can learn all you need to know about investing in a couple hours. (If you’re super interested, keep going, of course, but you don’t have to.) After that, just start! You can refine and improve your strategy along the way if you want to as you learn more.

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Think You (or Your Broker) Knows Better than the Market

Think you can beat the market or place your money with the person who can? Think again. After costs are taken into account, in a given year the vast majority of both individual investors and professional fund managers fail to even match the returns of the broad market sector they’re invested in. And to beat it year after year after year? Vanishingly rare.

The Efficient Market Hypothesis (EMH) states that it’s impossible to beat the market because share prices always account for all known information about each investment. There are no market inefficiencies to exploit through market timing or precise selection of individual investments.

The EMH is a theory and up for debate, but there is little evidence that contradicts it. Even the most well-known investor in our time to consistently beat the market, Warren Buffet, recommends the S&P 500 index fund, which simply tries to represent the market sector of large-capitalization stocks (source).

This is good news for those prone to the previous mistakes: there is little analysis needed to invest in index funds, and therefore you can skip the paralysis and jump right in.

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Save Too Little

According to the EMH, you can’t control your investment outcome; the best you can do is match your (sub-)asset class of choice. What you can dial in are costs (more on that later) and your savings rate.

Given a certain rate of return on your investments, what’s the best way to double the amount of money you have in retirement? Save twice as much. Your savings rate is a linear scaling factor in the math of compound interest.

If your goal is to fund your retirement/become financially independent, you need to build up a very large nest egg. It takes decades to save what you need and to allow compound interest to work its magic. So in addition to starting early, save at a very healthy clip: 10% of your gross income is a great goal if you start in your 20s, more if you start in your 30s.

Bonus: The higher your savings rate, the smaller your goal savings amount. If you want to reach financial independence, you should save up approximately 25 times your yearly living expenses (following the 4% safe withdrawal rate). The more you reduce your living expenses, the smaller the nest egg is that you require to retire and the faster you’re able to save up to reach it. For example (given certain assumptions), increasing your retirement savings rate from 15 to 20% means that you can reach financial independence 6 years sooner. Jumping your savings rate up to 30% shaves an additional 9 years.

Further reading: The Shockingly Simple Math Behind Early Retirement

I know a retirement savings rate of 10-15% a big ask while you’re in grad school or a postdoc. If starting early and saving only a little have to play off against each other, start early with whatever rate you can. Just know that you’ll need to jump it up when your income increases.

Get Sucked in by Gimmicky Fintech

One of the great advances in personal finance in the last several years is the explosion of “fintech” or financial technology. Fintech has enabled small investors to access some services and benefits that were only previously available to higher net worth investors because financial advisors have been able to scale their services.

These fintech platforms are now heavily advertising to their new potential clients, i.e., you. While more choices for regular people with respect to investing is a good thing, this heavy advertising environment for the new technology has perhaps crowded out the choices that were and are still available for those same investors, which may in fact be the more appropriate.

For example, the rise of microinvesting platforms that enable people to invest as little as a few dollars per month might give the impression that 1) those platforms are the only ones available for beginning investors or 2) it is sufficient to invest only a few dollars per month. Believing either of those premises is detrimental to the investor.

Another example is roboadvising services. Roboadvisors are a lower-cost, lower-touch substitute for full-service human financial advisors. While they might represent a less expensive but sufficient alternative for a person who would otherwise use a financial advisor, they are a more expensive (i.e., possibly wasteful) alternative for someone who could manage his own investments just fine (the DIY approach) if he knew it was an option. (It’s an option! An easy one! Your brokerage firm will almost certainly make an asset allocation recommendation to you for free if that’s all you’re looking for.)

Pay Too Much or Too Little Attention

On the spectrum of how much attention you should pay to your investments, there is a wide range of what is appropriate. Only the extremes will get you into trouble.

You don’t need to pay a whole lot of attention to your long-term investments. If it stresses you out to see your balance fluctuate daily due to a choppy stock market – and especially if paying that close attention will cause you to try to time the market – force yourself to tune out. You don’t need to check your account balances or investment news daily.

On the other hand, you shouldn’t go years between check-ins, either. You do need to make sure that your investments are doing basically what you expected they would and that they are still appropriate for your goals. A quarterly check-in is sufficient for long-term investments.

Time the Market

One of the gravest investing mistakes that I’ve already hinted at is market timing, which is when you attempt to jump in or out of a market at just the right time to make a killing or avoid a staggering loss.

Guess what? It’s a super ineffective strategy, way worse than just staying invested or steadily adding to your investments. This again relates to the EMH. Any insight you might think you have about an impending skyrocketing or plummeting of the market has already occurred to a zillion other people and been priced in.

You might think you’re buying low and selling high or being fearful when others are greedy and greedy when others are fearful, but most of the time you’re probably just doing yourself a disservice. Besides, even if you guess right once and get out at the right time or in at the right time, you have to be right again to get back in/out!

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Be Undiversified

One of the core tenants of modern portfolio theory is diversification. This means that instead of owning one investment of a type, e.g., one stock, you should own a collection of that type of investment. It’s the basic principle of not putting all your eggs in one basket. You never know which stock is going to be a huge winner and which will go to zero. Instead of picking only one or a handful, own a few tens or a few hundreds and spread out the risk.

One of the sneaky ways to become undiversified is through employer stock that you are given or able to purchase at a discount. If you have a high percentage of your portfolio (e.g., > 10%) tied up in employer stock, then not only is your job at risk if the company falters but much of your savings as well!

Pay Too Much in Fees

Fees, just like taxes, are a drag on your rate of return on investment. Instead of getting a 8% average annual rate of return, for example, fees or taxes might knock you down to 7.5, 7, or even 6%! That makes an enormous difference over the decades – to the tune of hundreds of thousands of dollars!

If we use tax-advantaged retirement accounts to avoid taxes on our retirement savings, doesn’t it also make sense that we should minimize our fees?

Sure, it would be worthwhile to pay higher fees if you actually got better investment returns, but, after accounting for fees, approximately 80% of actively managed funds underperform similar passively managed funds.

The way that you can keep an eye on fees is through a fund’s expense ratio. That’s a single number that expresses the all-in costs of owning the fund in terms of a percentage. A very high-fee fund will have an expense ratio of 1% or even higher, whereas a low-fee fund would have an expense ratio of a couple tenths of a percent or even below 0.1%.

Mix Investing with Insurance

A very expensive investing mistake is to mix investing with insurance though a whole life or universal life insurance policy. The selling point is that you build up money in an investment product as you pay your insurance premiums.

However, what you might not realize as you are being pitched such a product is that your premiums are several times or even an order of magnitude higher than they would be for the same amount of term life insurance, and the investment product doesn’t give you great returns, either.

It’s much less expensive to buy term life insurance (the same sort you have on your car – expiring after a set length of time) and invest the rest of the money you would have spent on the premium on your own. It’s very likely that you’ll end up with more money after decades of using that method.

After all, you don’t actually need life insurance for your whole life – just until you reach financial independence. And that day will come a lot faster if you don’t mix insurance with investing.

Basically, the only people who recommend mixing investing with insurance are those who sell that kind of product. Speaking of which…

Blindly Take the Recommendation of Someone Earning a Commission

I’ve met a few graduate students with no need for life insurance at all who own whole/universal life insurance policies. And it was easy for me to correctly guess why: a family or friend had started selling those products.

There are three types of financial advisers, differentiated by how they are paid.

With two of them, it’s transparent how they are paid. One type charges you straight up for their time and will help you create a financial plan. The other type charges you a percentage of your portfolio to manage your money for you. These two types are usually held to a fiduciary standard, which means they are ethically bound to give you the best financial advice for your situation.

The kind that will meet with you for free is likely to make their money through commissions on the products they sell you. They are not fiduciaries. That’s not to say that they will behave unethically, just that they are not required to be objective in their recommendations. They are permitted to pitch you the product that earns them the highest commission as long as it’s “suitable.” And that’s how a grad student with no need for life insurance ends up with a whole/universal life policy.

The caution against blindly taking the advice of someone earning a commission applies to more than just financial advisors. Affiliate advertising is incredibly widespread right now. You may learn about a product from a content creator (e.g., website, podcast) whom you respect. It’s quite likely that the person will earn money if you buy it through their link/promo code. (I used to be an affiliate myself for a few products through a prior website.) Again, earning a commission doesn’t necessarily mean the person is pushing a bad product or is behaving unethically, but you just have to recognize that it is a form of advertising and you should be a savvy consumer. It’s very difficult to claim to be completely objective when there is a commission in the line.

Everything You Need to Know about Roth IRAs in Graduate School

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As you are no doubt aware, graduate students are clamoring for information on investing for retirement. I’ve observed this during my seminars and it’s been documented by the Council of Graduate Schools’ Financial Education. Graduate students are wondering how to get started saving for retirement during graduate school or want to be prepared to start immediately following graduate school. Roth IRAs are an integral component of preparing for retirement for graduate students. This article covers everything you need to know about Roth IRAs in graduate school: what an IRA is, why you should use one, the differences between traditional and Roth IRAs, the type of income you need to contribute to an IRA, how much to contribute to an IRA, and how to open an IRA.

Roth IRA graduate school

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The information in this article is current as of 2023.

What Is an IRA?

IRA stands for Individual Retirement Arrangement. It is a tax benefit offered by the US federal government to incentivize saving for retirement. Anyone with taxable compensation (or a spouse with taxable compensation) can contribute to an IRA; it is not a benefit offered by your workplace like a 401(k) or 403(b). The contribution limit to an IRA in 2023 is $6,500 ($7,500 for people aged 50 and older) or your amount of taxable compensation, whichever is lower.

An IRA is not synonymous with particular investments; you buy investments inside (or outside) of your IRA. An IRA (and other tax-advantaged retirement accounts like a 401(k) or 403(b)) is like a shield that protects your investments from taxes.

If you invest in a regular taxable investment account, every year that you realize a gain you will pay some tax on the gain. This tax effectively suppresses the growth rate you see on your investments, which saps the power of compound interest. An IRA or other tax-advantaged account maximizes that growth rate by eliminating the tax, which ultimately maximizes the amount of money you have in your investments.

However, this tax-advantaged status comes with a trade-off. The purpose of an IRA is to help Americans save for retirement, so there are restrictions on when and for what purpose you can remove money from your IRA. In limited cases, you can remove money from your IRA without incurring any penalty, but in general you have to wait until you are 59.5 years old.

Why Use an IRA Instead of a Taxable Investment Account?

If you were to save for the long-term into a normal investment account, every year you would pay some tax on the gains you realized in the account. If your account had a great deal of turnover in the course of a year, you would pay your marginal tax rate on the gains (10%, 12%, 22%, etc.) plus whatever state tax would be due. If your account had very little turnover, your tax rate(s) would be lower. If instead your money was in an IRA (or a similar tax-advantaged retirement account like a 401(k) or 403(b)), all the gains would be tax-free.

Taxes on a regular investment account amount to death by a thousand cuts. Every year, a fraction of the growth (if there was growth) is removed through taxes and no longer serves as part of the principal for the growth in a subsequent year. Using a tax-advantaged account like an IRA allows the growth to continue unfettered. Over many decades, the balance in an IRA can be hundreds of thousands of dollars larger than the balance in a taxable account to which the same contributions were made.

Further reading: Taxable vs. Tax-Advantaged Savings

For short- or medium-term investing goals, taxable accounts are appropriate because of the complete accessibility of the money contributed. But for long-term investing goals such as retirement, it is very advantageous to use an IRA or other tax-advantaged retirement account.

Why to Contribute to an IRA during Graduate School

Graduate students have a limited income and plenty of claims on that income. They must first and foremost pay for their basic living expenses, which not all stipends can even cover. If there is any money remaining, the student must choose among upgrading his lifestyle, saving up cash, paying down debt, investing, giving, supporting family members, etc. They may very well have higher priorities than saving for retirement. However, there is a very compelling reason for starting to invest for the long term if possible: the power of compound interest aka the time value of money.

As graduate students are most often in their 20s or 30s, time is currently on their side with respect to investing. Many Americans put off saving for retirement until their peak earning years in their 40s and 50s, but the advantage of starting earlier is that you need to save less money overall to reach the same endpoint. This is the time value of money: the money that you invest today is worth more than the money you invest years from now because the intervening time adds value. Investing even small amounts of money during graduate school can massively add to your wealth in retirement, much more so than large amounts of money saved later on.

The mechanism of the time value of money is the power of compound interest.

In qualitative terms, this is how compound interest works: In year 1, you invest some money and it earns a return (we’ll say a positive return, to keep things simple). In year 2, you invest more money which earns a return, plus your contribution and the return from the previous year also earn a return. In year 3, you invest more money and it earns a return, plus your contributions and earnings from previous years earn a return. Before you know it the increases to your account balance each year are coming more so from the growth your previous contributions than on your current contributions; after decades, most of your account balance will be due to growth rather than your direct contributions.

The power of compound interest is modeled by this equation, which represents exponential growth:

compound interest equation

Using the equation for compound growth, you can get an idea of how much money can grow with a given rate of return and time period. In real investing in the stock market, you will not receive the exact same rate of return each year like clockwork; in some years you will lose money, in others you will see a very high return, and everything in between. But on balance, over long periods of time, the math of compound interest reveals the scale of growth possible with even an irregular return like you would see from the stock market. (Investments that give a regular and guaranteed rate of return, such as bonds and certificates of deposit, are comparatively low-returning and not usually considered appropriate long-term investments for a young person.)

For example, if you invested $250 per month at an 8% average annual rate of return for five years during graduate school, in that time you would contribute $15,000 and your ending balance would be $18,369.21. The growth over that time period is nice but not staggering.

But if you then leave that money alone to continue compounding at 8% per year for 50 years – make no additional contributions – your money grows to a mind-boggling $989,688.35!

That’s an extra one million dollars in retirement that you would not have had if you had not started investing during graduate school!

The numbers above are for illustrative purposes only. It’s still incredibly worthwhile to begin investing during graduate school even at a rate of less than $250/month. Compound interest works the same on any sum of money, whether $5 or $5,000. The point is that investing with time on your side turns small amounts of money into large amounts.

Further reading:

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The Difference between Traditional and Roth IRAs

When you open an IRA, you have the choice between opening a traditional IRA and a Roth IRA. (You can contribute to either/both in the course of a year, but the maximum contribution limit applies to them both together, not each separately.) There are a number of differences between the two types of IRAs, especially when it comes to eligibility and withdrawing money in retirement, but there are two key differences that are most salient for young people who are eligible for both types: when you pay income tax and how to withdraw money without penalty prior to age 59.5.

Further reading:

When You Pay Income Tax

With both types of IRAs, you won’t pay any tax while the money is growing inside the IRA.

With a traditional IRA – unsurprisingly, the first type introduced into the tax code – there is an additional tax incentive upon contribution to the IRA, which is that you exclude the amount you contribute from your taxable income for the year (take a tax deduction). You take a tax deduction on the money you contribute, then your money grows tax-free, and then you pay ordinary income tax on the amounts you withdraw each year in retirement. The traditional IRA is a mechanism of tax deferral.

The Roth IRA is the newer type of IRA (named after the senator who introduced it). The tax break on the Roth IRA is the flip of the one for the traditional IRA. You pay the full income tax due on the contribution you make to the Roth IRA, then your money grows tax-free, and you withdraw it tax-free in retirement.

The key to choosing between a traditional and Roth IRA is to guess when you will pay a lower tax rate: upon contribution or withdrawal.

One way to approach this question is by considering when you will be in a lower marginal tax bracket: now or in retirement? The rationale behind this is that you are going to get the tax break on the last dollars of your income, which are likely to fall in your marginal tax bracket. You know your marginal tax bracket today; most graduate students without outside sources of income fall in the 12% marginal tax bracket or even lower (plus your marginal state tax rate). But you have to guess whether the marginal tax bracket you will fall into in retirement will be higher or lower. In the intervening decades, you will experience personal changes in your income and tax bracket, and there are likely to be legislative changes to the tax code and rates.

This guess is probably easier for graduate students than for the average American. Graduate students can make the reasonable assumption that their current income is much lower than their income will be throughout their careers and likely also in retirement. (Ask yourself: Do you want to be living the same lifestyle in retirement that you are in graduate school or would you like it to be more lavish?) Whatever might happen to the tax code more broadly, confidence that you are in a personal low-income and low-tax bracket period is a strong argument for the Roth IRA over the traditional IRA. I and virtually every graduate student I’ve spoken with about this issue chose the Roth IRA over the traditional IRA during grad school.

However, there are more nuanced arguments that you might consider that are more in favor of the traditional IRA, even for someone in a low tax bracket currently. Such arguments are beyond the scope of this article, but there is plenty of reading material available on the decision between the traditional and Roth IRA for you to dive into if you are interested.

Further reading: Traditional vs. Roth IRA: The Unconventional Wisdom

Penalty-Free Early Withdrawal

One of the big planning/psychological barriers to beginning to save for retirement is the nagging question “What if I turn out to need the money in the near future?” After all, life is unpredictable; sustained loss of income or a very expensive emergency might be just around the corner. Some people find it difficult to put barriers between themselves and their money no matter what degree of cash they may have accessible in an emergency fund or other savings. The prospect of sequestering money that can only be used many decades from now in retirement can be daunting.

The Roth IRA (as opposed to the traditional IRA) helps to alleviate this anxiety. While it is rarely a good idea to take already-contributed money out of an IRA (after all, you are unplugging that money from the power of compound interest), you do have that option with the Roth IRA. Because you have already paid your income tax on your Roth IRA contributions, you can withdraw those contributions at any time without penalty (or additional tax). Certain conditions must be met to withdraw earnings early without penalty or tax. For one example of a qualified distribution, the IRA must be at least five years old and the withdrawal is used to buy a first home (up to $10,000); there are other conditions that create qualified distributions as well.

With a traditional IRA, on the other hand, early withdrawals always result in tax due, and penalties are also assessed if the withdrawal is not qualified.

The Type of Income You Need to Contribute to an IRA

Only “taxable compensation” (formerly “earned income”) can be contributed to an IRA; while IRAs are independent of your workplace, they are not independent of work. For most Americans, this is a non-issue, because they work for their income. For example, they might be employees receiving W-2 income or self-employed; both of these types of income are taxable compensation.

Up through 2019, taxable fellowship income not reported on a W-2 was not considered taxable compensation. Starting in 2020, taxable fellowship income not reported on a W-2 is considered taxable compensation. That means that a graduate student receiving a stipend is eligible to contribute their stipend income to an IRA, whether that stipend is reported on a W-2 or some other form (or not at all)—as long as it is taxable in the US.

If none of your income is taxable in the US because you are a nonresident and benefit from a tax treaty, you don’t have “taxable compensation” and are not eligible to contribute to an IRA.

Further reading:

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How Much to Contribute to an IRA during Graduate School

The right amount of money to contribute to an IRA in a given year of graduate school might be $6,500, $0, or somewhere in between.

Graduate school is an extraordinary time of investment in one’s career, possibly to the exclusion of investing for retirement. While many graduate students are paid stipends that more than cover their living expenses, some graduate students are either not being paid a living wage or have unusually high expenses (e.g., have dependents).

To determine the right amount for you to contribute to an IRA, you must explore your means and your goals.

Means: How does your stipend compare to the local living wage? While the local living wage will not exactly match your expenses in every category, it should give you a sense of the baseline cost of living in your county or metro area. If your stipend is at or above the living wage and you aren’t able to save anything, try to reduce your expenses so you can start to invest or accomplish other financial goals. If your stipend is below the living wage, you may not have the means to start saving or investing right now; getting through graduate school without accumulating debt may be an appropriate financial goal.

Goals: Not all graduate students with discretionary income should jump right into investing. There may be higher-priority financial goals such as paying off high-interest debt or saving cash for emergencies or short-term expenses. But if investing for retirement becomes your top financial goal or a goal you work on concurrently with other goals, it is appropriate to contribute to an IRA.

If a graduate student does have the means to invest and investing is their top financial goal, rules of thumb come back into play. The most common (mainstream) retirement savings rates bandied about in the personal finance community are between 10 and 20% of income (gross or net). I think investing 10% of gross income into a Roth IRA is a great initial goal for a graduate student; it was my retirement savings rate when I started graduate school. It may be one easily reached (especially if you build it into your budget from the beginning) or quite challenging. If it takes you years of budget optimization to reach 10% (or you never do), that’s fine. If you want to go higher than 10%, that’s great too, and you’ll have a wonderful nest egg when you transition out of graduate school. (My husband and I reached a 17.5% savings rate from our gross income by the time we defended, but it took years to raise our savings rate to that point.)

A higher retirement savings rate will help you reach financial independence faster, but you always have to balance that against your quality of life in the present. But if you have the means and aren’t working on a more pressing goal, I do recommend regularly contributing to a Roth IRA during graduate school, even if it’s a small percentage. Getting into the habit of saving for retirement is as valuable as the savings itself; if you save during graduate school, once you have a Real Job you’ll never be able to tell yourself that you “can’t afford to save right now.”

Further reading:

How to Open an IRA

The actual process of opening an IRA is straightforward, but choosing where to open it and what to invest in inside the IRA will take some research and decisions on your part.

Briefly, using index funds (a passive investing strategy) is the most effective, least expensive, and most time-efficient manner of investing. You can buy index funds (e.g., the S&P 500 index fund) or a fund of index funds such as a target date or lifecycle fund at any number of brokerage firms. (Brokerage firms that specialize in trading single stocks, i.e., the ones you probably see the most advertisements for, may not offer index funds.)

When you select a brokerage firm, you need to ensure that: 1) it allows you to open an IRA, 2) it offers the investments you are looking for, 3) it is not too expensive to own the funds, and 4) you can meet the account minimums. Index funds are inherently inexpensive, but there will still be some price differences among brokerage firms. Different firms also set different account size minimums, such as between $1,000 and $3,000, but some waive these minimums if you set up an automatic savings rate into the account.

Further reading: Brokerage and IRA Account Minimums

Once you have selected your brokerage firm and investment, you are ready to open your IRA. You should be able to complete the process online in just a few minutes, and the brokerage firm’s website will guide you through the process. You will be asked for your personal information such as your name, SSN, and address. Once you have the IRA open, transfer in the amount of money you need to open the account and/or set up an automatic savings rate, and choose the investment(s) you want to buy with your money.

Options for Paying Down Debt During Grad School

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A version of this post was originally published on GradHacker.

During my presentations on personal finance for grad students, I am frequently asked about debt – more specifically, when and how to pay off debt. Debt often appears to be an attractive option for low-income individuals like graduate students because it can enable you to “buy now, pay later” – acquire possessions or experiences now and spread paying for them out over months or years into the future. However, debt is even more of a trap for low-income people than it is for those with higher incomes because a greater percentage of your pay or cash flow going forward is going to be tied up in debt payments. This leaves even less flexibility in how the person uses his money than he would have without the debt.

Many if not most graduate students are in one or more kinds of debt, be it student loans (from undergrad and/or grad school), an auto loan, credit card debt, a mortgage, personal loans, etc. How a graduate student should manage her debt depends on her ability to repay the debt, her personal disposition toward debt, and the type and terms of the debt. Students who are able to pay down debt during grad school must choose their repayment method and balance that goal with other financial priorities.

debt repayment grad school

Ability to Repay

As a graduate student, what is your current ability to repay debt?

If you are taking on student loan debt during graduate school to pay for your tuition and fees or living expenses, any debt repayment you make is essentially trading your existing debt for student loan debt. While using student loan money to repay other debt might be attractive based on the interest rates, keep in mind that student loans, unlike all other debt, are virtually never discharged in bankruptcy. However, if you are struggling to make ends meet, in terms of taking on new debt, student loans are often preferable to high-interest debt such as credit card debt.

However, if you receive a stipend and tuition waiver, you may have the ability to make your minimum debt payments as well as meet other financial goals, whether they are saving or accelerated debt repayment. Students who grasp the power of compound interest will be motivated to cut back on their spending somewhat to put money toward debt repayment or investing.

Disposition toward Debt

People’s attitudes toward debt vary widely. On one end of the spectrum, some people view debt as a useful tool to help you live a better life or build wealth. (These people might be proponents of the permanent income hypothesis and encourage grad students to calibrate their lifestyles toward their expected future income rather than their current income.) On the other end, some people view debt as a dangerous burden that should be repaid as quickly as humanly possible. While you likely fall somewhere between those two extremes, it is important to reflect on how your debt makes you feel.

People who are quite bothered by their debt are likely to prioritize debt repayment over other financial goals. People who are less sensitive to the risk that comes with debt may use a more mathematical analysis to determine financial priorities, perhaps by paying down only high-interest debt before starting to invest for the long term. Any of those decisions are legitimate if they are congruent with the individual’s disposition and the ‘math’ of the situation (the terms of the debt) has also been taken into consideration.

Types and Terms of Debt

While it’s difficult to define any particular type of debt as “good” or “bad,” the terms of your debt should certainly influence how high of a priority accelerated repayment is. The chief term to pay attention to is the interest rate. What you used the debt for should also influence your repayment priorities. In some cases, you have an appreciating asset that collateralizes the debt, such as a home (in most cases), but other debt may have a depreciating asset as collateral, such as a car, or be uncollateralized. The dangerous aspect of uncollateralized debt or debt on a depreciating asset is that you don’t have associated property to sell to completely pay off the debt if it becomes necessary.

Student Loan Debt

Federal student loan debt and often private student loan debt is a unique type of debt because your student status and income can influence the repayment terms. While you are a half-time or more graduate student, you may be eligible for loan deferment, which means that no payments will be due. If your loans are subsidized, no interest will accrue during deferment. If your loans are unsubsidized, interest will accrue during deferment, and the interest will capitalize at the end of the deferment period and become part of the principal.

Deferment is a good option for graduate students because it gives the payer more flexibility to skip or shift around the now-optional payments if it is inconvenient to make them. Students could even save up for long periods and pay down the debt in lump sums. All students should make a plan for loan repayment during and/or following grad school, even those who cannot make progress until deferment ends.

Mortgage Debt

Graduate students who have taken out mortgages on their homes during and since the Great Recession likely have quite a low interest rate on their mortgage debt. The long-term average rate of inflation in the US is between 3 and 4%, which is similar to recent mortgage rates for top borrowers. After you reach 20% equity in your home and stop paying Private Mortgage Insurance, there is not much of a mathematical argument for making more than the minimum payments on the mortgage.

Consumer and Personal Debt

The terms for consumer debt can vary widely. In the current low interest rate environment, it’s not uncommon to have consumer debt at or close to 0%, but it can also easily be at 15-30%. How you prioritize paying off consumer debt may have a lot to do with the interest rate and other terms. Some debt offers come with a no payment or zero interest period of one or more years, sometimes contingent on the debt being paid off in full during that time. The repayment terms for consumer debt sometimes come with catches, so you should carefully abide by them or risk paying large sums of money in interest or hurting your credit score. Debts that are held by a family member or friend may have more favorable terms, but your relationship will be colored by the debt until it is repaid.

While it can be argued that student loans and mortgage debt have been used to buy appreciating assets, consumer and personal debt usually doesn’t have the same positive associations. For this reason, students may choose to prioritize repaying this debt just to get it out of their lives.

Paying Off Multiple Debts Simultaneously

If you have two or more debts that are immediate-priority payoff goals, there are two popular methods for choosing how to prioritize them: the debt snowball and the debt avalanche methods. Both methods work off the principle of intense focus on only one debt at a time.

With each method, you make the minimum payments on all your debts and throw all your excess cash flow at your top priority debt until you completely knock it out. With the debt snowball method, you rank your debts from lowest payoff balance to highest payoff balance and work on the smallest debt first. With the debt avalanche method, you rank your debt from the highest interest rate to the lowest interest rate and work on the most expensive debt first.

While mathematically the debt avalanche method is supposed to get you out of debt sooner (given the same amount of money contributed under each method), empirically the debt snowball method has been shown to get people out of debt sooner because of the psychological motivation garnered from the early win of paying off one debt completely.

Prioritizing Debt Repayment against Other Financial Goals

You likely recognize that there are financial goals other than just paying down debt that you might set during grad school, such as saving a cash emergency fund, saving for short-or mid-term purchases, and investing for the long term. Only you will be able to determine how those goals rank in comparison with accelerated debt repayment, after considering your personal disposition and the math involved with each scenario.

What is your experience with debt repayment during grad school? Which decisions regarding your debt are you happy with, and which decisions do you regret?

How to Establish Credit in the US

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One of the most common issues international grad students face when they start grad school in the United States is how to establish credit. The US credit system draws its data only from debts incurred in the US, so whatever credit you had in your home country won’t transfer. Although your options for establishing credit are limited when you first arrive in the US, if you take the right steps, you will build credit quickly.

It’s important to note that in the US your credit is all about debt. The chief reason you want to have good credit is so that you will receive favorable lending terms on any future debt you want to take out. (A secondary reason is that potential landlords and employers sometimes check your credit score to verify your trustworthiness or check for conflicts of interest.) To have good credit, you have to have previously demonstrated that you can manage your debt well. Counterintuitively, having a lot of money to your name or paying your non-debt bills (rent, utilities) on time does not positively affect your credit score. Therefore, to establish your credit for the first time, you have to take out a form of debt, even if that is totally unnecessary for your finances.

What is a credit report and credit score?

A credit report is a list of all the financially-related accounts you have used in the past seven years. There are many different institutions that track this data, but the three main ones are Equifax, Experian, and TransUnion. Your credit report will include data on these accounts, such as how long they have been open, how much outstanding debt you have, and whether you have made any late payments.

A credit score is a number from 300 to 850 that summarizes how ‘credit-worthy’ you are. Another way to say that is how risky it would be for an institution to lend to you. Similarly to the credit report, each credit bureau will calculate its own credit score for you, but they will all be similar as they draw from the same data. A credit score above 750 is considered quite good.

FICO credit score range
Image by CafeCredit under CC 2.0

Lenders will look at your FICO credit score, but your attention should be on the accuracy of your credit reports. You can order one free credit report from each bureau once per year through annualcreditreport.com. Once per year (ideally on a 4-month rotation), you should order your credit report from each bureau and check its accuracy. Report any mistakes back to the bureau, and of course if you catch any identity theft, take steps to ameliorate that.

Further reading: “I Want a Credit Card, But I’m Scared”, Don’t Buy the Pro- and Anti-Credit Card Hype

How is my credit score calculated?

While the exact formula each credit bureau uses to calculate your credit score is proprietary, the components are widely recognized at a general level: payment history (35%), amounts owed (30%), length of credit history (15%), account mix (10%), and new credit (10%).

FICO credit score breakdown
source

The way to optimize your credit score is to:

  • make every single payment on time
  • pay down your outstanding debt
  • keep your debt utilization ratio (the percentage of your credit limit that you actually use – both for individual credit cards and all your accounts together) below 30%
  • keep your oldest accounts open (e.g., your first regular credit card)
  • let time pass (to lengthen your credit history!)

In rare situations, taking out a new, un-needed installment loan for the purpose of increasing your credit score might be a reasonable strategy, but you should conduct heavy-duty research that option before taking such a step (i.e., don’t let a bank representative/salesperson talk you into it).

While applying for new debt will have a small, short-term negative effect on your credit score, you should probably only consciously avoid taking out new debt for this reason in the months leading up to applying for a large loan such as a mortgage.

Further reading: Building Credit as an International Student

How can I establish credit for the first time in the US?

Step 1: Sign up for a secured credit card.

A secured credit card operates similarly to a regular credit card, but the lender holds an asset of equal value to the line of credit extended to you. You give the lender an amount of money (e.g., $500), and that amount is the limit of what you can borrow at a time. Use the secured credit card for purchases, then pay it off on time and in full the way you would a regular credit card (or be charged interest, which only harms you). After several months of using the secured credit card properly, you should have a high enough credit score to qualify for a regular credit card.

Be selective about which secured credit card you sign up for. Community banks and credit unions usually offer better products and customer service than national chain banks. Also examine the annual fee on the card and the interest rate (if there is any possibility of you not paying off the card in full every cycle) to minimize your out-of-pocket costs.

Further reading: What Is a Secured Credit Card? How Is It Different from an Unsecured Card?

Step 2: Close your secured credit card and open a regular credit card.

You can ask your lender to upgrade your secured credit card to a regular credit card, or apply for a new regular credit card and, once approved, close your secured credit card. When you upgrade or close your secured credit card account, your deposit will be refunded (assuming you had no balance due).

Continue to use your credit card perfectly, paying off the balance in full before the due date every month. Keep your utilization ratio low. You will probably have a low credit limit on this first card, so if necessary you can pay off the balance multiple times per month.

You should plan to keep your first credit card open for at least seven years, so choose one without an annual fee, even if it doesn’t offer the most lucrative rewards program.

Further reading: How International Student and Immigrant Workers Can Get a Credit Card

Step 3: Take out an installment loan (e.g., auto loan) or open additional credit cards.

This last step is optional, but helpful for building credit faster. After using your credit card perfectly for several months or a year, your credit score should be increasing gradually. At this point, you are eligible for debt with better lending terms than before.

If you want to buy a car, it should be possible to get an auto loan if you can’t pay for the car outright. If you do take out an auto loan and make payments on time, it will continue to improve your credit score. Similarly, if you open more credit card accounts, your credit score will temporarily dip, but your utilization ratio should also become lower to raise your credit in the long term.

But keep in mind why you are trying to build credit in the first place, and don’t harm yourself (e.g., by paying interest on an unnecessary loan or getting in over your head with credit cards) just for the sake of improving your credit score.

How do I build credit over time?

The best ways to build your credit after you first establish credit in the US are to:

1) Continue to pay all your bills on time and in full.

2) Allow time to pass, which will more firmly establish your track record as a responsible borrower and lengthen your credit history.

3) Pay down outstanding installment loans (though not necessarily off completely) and keep your credit utilization ratio low. (It is a myth that you have to carry a balance from month to month on your credit card for it to improve your credit score; in fact, this strategy will depress it.)

International students are not the only graduate students without credit; some domestic students who have avoided student loans and credit cards face the same issue. Just keep in mind your ultimate goal that motivates your desire to establish credit (e.g., qualify for a lease, borrow money for a car at a good interest rate), and don’t take unnecessarily extreme steps with your borrowing simply to achieve a high score. Making on-time payments, holding on to minimal amounts of debt, and time are the best boosters to your credit score.