Protect and Grow Wealth

How to Calculate Your Net Worth

April 18, 2016 by Emily

You calculate your net worth by preparing a balance sheet. Your net worth is the sum of your assets minus the sum of your liabilities, which are listed on your balance sheet. Your net worth and balance sheet are snapshots in time and do not directly reflect your monthly income and expenses.

First, list all of your financial assets by type and amount. Financial assets might include the money in your checking and savings accounts, investments, your home, your car, other valuable property, etc.

Second, list all of your financial liabilities or debts by type and outstanding balance. Your liabilities may include student loans, your credit card balance(s), your mortgage, your car loan, personal loans, etc.

Third, subtract the sum of your liabilities from the sum of your assets. This number is your net worth.

It is useful to track your net worth so that you can see how it changes with time. While some financial software may report your net worth daily, to make fair comparisons, it is most useful to update your balance sheet and net worth on a monthly, quarterly, or yearly basis.

Resource: What is my current net worth?

What Is Net Worth?

April 18, 2016 by Emily

Your net worth is a single number that describes how (monetarily) wealthy you are at one point in time. It is calculated by subtracting the sum of your liabilities (debt) from the sum of your assets (also known as a balance sheet). In other words, your net worth is what you own minus what you owe. As a graduate student, your net worth might be negative, close to zero, or positive.

Your net worth is only a snapshot in time, so it is useful to track how your net worth changes with time – both the direction and rate of change. If you are taking out student loans to fund your graduate education and/or living expenses, your net worth is likely decreasing. If your stipend barely covers your living expenses, your net worth is likely fairly static. If you are currently saving money, paying off debt, and/or your investments are increasing in value, your net worth is likely increasing.

To build your wealth over time and to eventually become financially independent or retire, your objective is to increase your net worth by increasing your assets, decreasing your liabilities, or both. Due to the power of compound interest, as your total invested assets increase, your net worth on average also tends to grow even faster.

Further reading: What is Net Worth?, What Does Your Net Worth Really Mean?

While it is useful to know your net worth, do not allow its absolute value or even its direction and rate of change to impact your emotional self-worth. Your net worth is not a reflection of your value as a person. While achieving (or being given) a positive and/or increasing net worth during graduate school gives you a nice start in life, it alone does not determine your continued financial success. Likewise, having a negative or decreasing net worth in graduate school does not doom you. As a graduate student, you are just starting your career, which ideally will be long and financially prosperous. If you are taking out student loans during graduate school, the liability side of your balance sheet is growing, but the asset side does not take into account the knowledge, skills, experience, and network that you are currently gaining that will help you greatly increase your income and net worth in the future.

Brokerage and IRA Account Minimums

March 31, 2016 by Emily

A very common issue for graduate students, postdocs, and PhDs just starting out in their Real Jobs who are ready to start investing is that they have only a small amount of savings to contribute to their investment accounts or they have no savings but have identified some monthly cash flow. While some brokerage firms have minimum account balances of one or a few thousand dollars, others have no minimum or waive the minimum if a monthly deposit is initiated. This post outlines the minimum amounts of money needed to open accounts at various brokerage firms. This information was last updated on 1/17/2018.

Brokerage Firm	IRA Minimum	Taxable Account Minimum
Vanguard	$1,000 or $3,000 for mutual funds; ETF price for ETFs (~$50+)	$1,000 or $3,000 for mutual funds; ETF price for ETFs (~$50+)
Fidelity	$0 to open, but perhaps more to buy	$2,500
Charles Schwab	$1,000, possibly waived with ongoing contribution	$1,000 or none with $100/mo ongoing contribution
T. Rowe Price	$1,000	$2,500
TD Ameritrade	none	none

If you don’t have enough existing savings to open an investment account (at your brokerage firm of choice), you should just continue to gradually build up their savings balance until it reaches the minimum or the minimum decreases. You can do so either in cash-equivalents (a checking or savings account) or at another less desirable brokerage firm with no minimum or a lower minimum that you can meet.

My Realistic Career Earnings Expectations Push Me to Save Aggressively

June 1, 2015 by Emily

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

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

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

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

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

In the below chart, I’ve assumed that:

For the engineer:

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

For the tenure track scientist:

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

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

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

Buying a Home

May 29, 2015 by Emily

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

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

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

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

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

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

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

Should I Buy a Home During Grad School?

May 29, 2015 by Emily

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

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

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

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

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

Further reading: Rent vs. Buy Calculator

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

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

Will my housing needs change in the next few years?

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

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

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

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

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

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

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

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

Am I prepared to care for a home?

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

Can I afford to furnish the home?

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

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

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

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