Personal Finance for PhDs

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How to Improve Your Finances this School Year

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A new school year brings the sense of a fresh start, even for those of us who are largely unmoored from the academic calendar. Even with a PhD trainee’s limited income, we can harness our renewed optimism for our finances each September. If you are willing, there are steps you can take this week, this month, and this year to improve your relationship with money, your money management skills, and your net worth.

A version of this post was first published on GradHacker.

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Improve Your Finances This Week

Identify your life values

There is no single right way that everyone should use their money; your own individual best practices will be based on your life values. Your values are the concepts that you hold most dear; examples include freedom, fun, family, health, excellence, and so on. Identifying what is most important to you will bring great clarity to your financial decisions. You can choose to spend more resources fulfilling your values and dispense with things and activities that do not.

Further reading: Determining Your Values and Financial Goals in Graduate School [A Personal Finance for PhDs Guide]

For example, when my husband and I identified ‘community’ as one of our top values, we knew we wanted to allocate more money for traveling to visit our families and attend weddings. To enable that, we cancelled our cable TV and stopped eating out for convenience, as those areas of spending did not correspond to any of our values.

Create a balance sheet

A balance sheet is a snapshot of your entire financial life – every asset and every debt listed by type, financial institution, balance, etc. If you have any confusion or disorganization in your finances – or the tendency to bury your head in the sand – a balance sheet will help you see your whole situation at a glance. If you have debts, you can also include the minimum payments and interest rates so that you can easily decide which payoff to tackle first. Your balance sheet may reveal vestigial accounts or other duplications that you can clear up this week.

Start tracking your spending

My top financial ‘tip’ for grad students newly interested in their finances is to implement a tracking system for all their financial transactions. The simple act of tracking is often enough to start optimizing behavior. You can do this manually with anything from a notebook and pen to an app such as Wally or automatically with software that links to your accounts such as Mint or Mvelopes.

Create a prioritized goal list

Taking your values and balance sheet into consideration, list the current financial goals you would like to reach. You may be able to work on some of those goals simultaneously. For the goals that should be tackled sequentially, choose the order in which you will focus on them so that you can make quick progress. For example, if you have multiple debts you want to pay off, use the debt snowball or debt avalanche method to create your prioritized list.

Improve Your Finances This Month

Implement a frugal strategy

Trying out a new frugal strategy is a great way to unblock what can feel like an impossibly tight financial situation. You don’t have to commit to it forever – just give it a test run so that you can evaluate how much money you save and how it affects your life. (Bonus points if the frugal strategy you choose reduces a fixed expense!) You can find tons of suggestions online (example: 66 Ways to Save Money in New York City) or among your peers.

Further viewing/reading: A Month of Frugal Tip for PhDs-in-Training by PhDs(-in-Training)

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Optimize your food spending

Food spending is a prime target when you are trying to free up more money, as it’s among the largest variable expenses in a grad student’s budget. Check out these articles on how to get the most for your money:

Add to your emergency fund

Even a small amount of available cash can save your bacon in the case of an emergency. If you have nothing put aside for emergencies right now (46% of Americans surveyed couldn’t even cover a $400 emergency), set a goal of saving $1,000 for that purpose. If you already have $1,000, consider setting a larger goal based on your current monthly expenses or your insurance policy deductibles. You can add to your emergency fund with a monthly savings goal or in dribs and drabs as you free up cash.

Improve Your Finances This Year

Right-size your housing and transportation

As housing and transportation eat up a huge fraction of a grad student’s income, it’s important to pay only what you can afford or – in some high cost-of-living areas – as little as is feasible. If you realize that you are overspending on rent or your car, it will take some time and doing but you can correct the situation by moving, getting a roommate, selling your car, switching to cycling for your commute, etc.

Develop a side income

There are two ways to free up more money each month: spend less or earn more. Grad students tend to focus on the “spend less” side of that equation, forgetting that “earn more” is sometimes also an option, depending on the source of your funding and your department’s culture. A judiciously chosen side job can advance your career as well as generate income, providing you with opportunities far beyond what your program can.

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Regularly invest and/or pay off debt

In some situations, the best a grad student can do is keep his head above water financially in grad school, but in others it is possible for a grad student to increase her wealth. The best way to increase your net worth is to make saving, investing, and/or paying down debt regular and automatic (pay yourself first). Don’t only use frugality or a side income to free up cash flow that is then lost to the ether. Commit that cash flow to working for you through automatic monthly transfers to your savings account, investments, or loans.

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What are you doing this week, month, or year to improve your finances?

Budgeting Methods

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Your budget and budgeting method will be unique to you as an individual. You need to find a method that serves the purposes you set for it without being too onerous for you to follow. Below are a few common ways to budget – you can mix and match as best suits you.

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Line Item Budget

The line item budget is probably what you think of when you hear the term “budget.” You start with your net income each month and create a line item for each goal or expense that includes the category and amount. The expenses included are your fixed and variable expenses that occur every budgeting period. This type of budget will be the same every month, only evolving as your expenses change with time, so it works best for people who have very regular income and expenses.

Your objective is to spend exactly (fixed expenses) or less than (variable expenses) the amount of money allocated in each of your line items. Be sure to keep a line item for miscellaneous/unanticipated expenses as well; expenses always pop up that don’t exactly fall into one of your categories. This budget resets between each budgeting period, so you’ll need a plan for what to do with your excess money when you come in under budget or your deficit when you come in over budget.

If you want to keep a monthly line item budget, Mint is a great tool to help you track your spending and match it against the line items in your budget.

One of the pitfalls to line item budgeting for a graduate student is the periodic occurrence of large irregular expenses that overwhelm your miscellaneous line item. One solution to this issue is to use targeted savings accounts.

Unbudgeting

The unbudgeting method is about as simple as a budget can get. From your net income, you set up a savings rate for one or more of your goals and let the rest of your money be unstructured. The only tricky part is to keep from overspending your remaining money in each pay period. In this method of budgeting, you can be confident that you are meeting your goals, yet you don’t feel restricted. This kind of budgeting is great for people who want to work regularly toward goals but don’t want to feel limited in how they spend their money each month.

You don’t really need budgeting software to unbudget, but it is helpful to track your expenses manually or automatically so you know when to stop spending.

Further Reading: 4 Easy Money Management Solutions for Anti-Budgeters

Unique Budget Every Month

If you want to be more exact and directive about your budgeting, you can create a unique zero-based budget every month (aka the Dave Ramsey Method). Every month (or every pay period), you calculate your unique income and project your unique expenses. You give every single dollar an assignment for the month and make sure that it is carried out. This is on the intensive side for budgeting because it requires scrutiny of the coming month and must be completed fresh every month. This budgeting method is great for people who have irregular income, are intensely repaying debt or saving, or have relatively large discretionary income month to month.

Dave Ramsey’s budgeting software that follows this method is Every Dollar.

Envelope Method

The envelope method is a longer-term spin on the line item budget. You divide up your net income into envelopes (categories) for all your fixed, variable, and irregular expenses, then spend down those envelopes. With this system, the budget doesn’t have to reset after every month, but you can continue to accumulate money in your envelopes until it is needed. You can also smooth your spending in your regular budget categories over a few months. For example, you could stock your freezer and pantry in one month of high grocery spending, then eat it down over a few months of lower grocery spending as you build up cash for the next stockpiling month. This budgeting method works well for people whose expenses are not very regular.

One example of software that uses the envelope method is Mvelopes.

A Low Income Is a Blessing in Disguise

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Believe it or not, the time you spend in graduate school earning a stipend – the very challenge that can make this period so infuriating – might very well become, in retrospect, one of most valuable times in your financial life. The value will not primarily be in the money you earn but rather the financial lessons you learn through the struggle.

(I am not calling an insufficient income – an income that doesn’t pay your basic expenses – a blessing in disguise. While it may teach you some valuable lessons, the bad certainly outweighs the good when you can’t buy food or clothing or you are racking up debt. In this post I am referring to low but sufficient stipends that are more or less living wages.)

In some cases, grad school can be a monetarily fruitful time, such as if you use your stipend to increase your net worth. But even without setting intentional financial goals, every grad student who is challenged by her stipend will learn financial lessons. These hard-won skills can be carried forward into your post-grad school life to benefit you immensely – whether or not you experience a big jump in income.

1) Budgeting

Every grad student with a low income develops a budget mindset, whether it is explicit or implicit. There is no out-earning poor spending decisions in grad school as there might be with a higher professional income. Many grad students become quite skillful with creating and sticking to an official budget, which is a wonderful habit. Even those grad students who don’t have written-down budgets naturally learn the limits of their income and how to stay within them.

2) Frugality

Living well on a stipend almost certainly involves a degree of frugality, whether or not the student knows that’s what he’s practicing. Frugality doesn’t have to look like extreme couponing or hypermiling or living in a van or any one particular strategy. It can be as simple as employing a couple easy tricks in one area to facilitate spending in another. Your limited stipend gives you the motivation to explore what frugal tactics work well for you and the time to make them habits. You won’t lose those habits when you move on to your first post-grad school job; you can choose which ones to continue with and which to conclude.

3) Discover the Fine Line Between Wants and Needs

Budget-ers usually think of needs as food, housing, transportation, utilities, clothing, etc. But those of us living on limited stipends discover that each of those types of expenditures likely involves both “need” and “want” components, i.e., some of your spending fulfills the basic need and some of it exceeds it. When you’re looking for ways to cut your spending, you become start putting expenses previously thought of as necessities on the chopping block. This is really tough to do at first, but just being aware of spending areas that you don’t truly need is immensely helpful if you ever return to a time when you have to cut back, such as during an emergency.

4) Combat Lifestyle Inflation

I think that “live like a grad student” is much better advice than “live like a college student.” I’m sure I’m not the only person to experience lifestyle deflation during graduate school. Many of our peers who went straight from college to a real job put themselves immediately on a treadmill of lifestyle inflation: every year as their income increases, their living expenses increase commensurately, so that their potential for growing their wealth or putting their money into their values is squandered or hampered. Those of us who are spending many years living on a (likely static) stipend experience a solidly deflated or non-inflating lifestyle. It’s difficult to live through, but intimately discovering this deflated lifestyle is incredibly powerful once your income increases post-graduate school. You will have an internal check against mindlessly inflate your lifestyle year after year. If you continue with your deflated lifestyle to any degree when your income is higher, you can make quick progress in building your wealth.

Further reading: Is “Live Like a College Student” Good Advice?; Earning More Does Not Cure All

The theme among all these advantages is that they confer lessons and skills over a period of time that is long enough to deeply learn but not indefinite. Of course, if your income remains low, you’ll need to keep using them. If your income jumps post-graduation and you employ the skills, however, you can gain much more satisfaction from your money than someone who doesn’t have the skills. You have the option of keeping your baseline expenses low while using the rest of your money in ways that are of high value to you.

Money Management Systems and Tools

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There are two basic components to any money management system: the plan and the execution. The plan (aka your budget) tells your money where it should go. You successfully execute your plan through automated systems, self-control, and tracking where your money actually goes.

The Plan: Your Budget

Budgets are an incredibly flexible tactic for reaching your financial goals and fulfilling your values. Any type of plan that directs your money is a budget; it isn’t necessarily restrictive or limiting. While there are many different ways to budget, every budget will have some similarities.

Further Reading: How to Create Your First Budget as a Grad Student (a Grad Student Finances Guide); Six Different Ways to Budget Your Money

An effective graduate student budget should include:

There is plenty of variation within that basic structure for different types of budgets. You can be as general or as detailed as you like in delineating your income to your regular fixed and variable expenses.

Resource: Grad Sense Budget Calculator

The Execution: Tracking, Etc.

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The single most effective action you can take to change your spending is to track it. Even without budgeting, tracking your spending will cause behavior change for the better. Tracking is a major accountability tool.

You can accomplish tracking your spending manually or in an automated manner. In the manual method, you literally note every transaction you make into some kind of ledger – paper, spreadsheet, or app. This method takes time, commitment, and memory, but it forces you into a high level of intimacy with your spending, which is ultimately better for changing it. In the automated method, you use the electronic spending record for your debit and credit cards do the tracking for you. Most typically, you connect each of your banking and credit accounts with tracking software; the software then downloads and categorizes all of your transactions. This method is easier to maintain, but you still have to check up on the data periodically.

The best way to accomplish your financial goals such as saving is through automation. Once your goals are automated, you no longer have to use your memory or willpower to accomplish them. Even better, your automated transfers should pay yourself first.

Of course, at the end of the day it is down to you to stick to your budget. Tracking tools and automation can help, but you have to be committed to living within your means and reaching your financial goals.

Tools

There are many pieces of software and apps available to help you with tracking and budgeting. You should invest some time into finding one that fits your style and personality well before committing to one, because the switching costs can be high. Your bank might provide an app or program for free, but if you would like to budget and track across accounts an independent program is preferable.

A few examples of leading budgeting and/or tracking software are:

Mint: Hook up all your banking, credit, investment, and debt accounts for an instantaneous net worth calculation. Create a monthly template budget and track your spending against it. Keep track of your bills. Set savings and track savings goals. Analyze your past spending. Free.

You Need a Budget: Hook up all your banking and credit accounts. Follow four rules: 1) Assign every dollar a job. 2) Save in advance for irregular expenses. 3) Update your budget as needed. 4) Live on last month’s income. Free for students.

Mvelopes: Hook up all your banking and credit accounts. Digitally implement the envelope budgeting method (allocate money each month to category-specific envelopes and then spend from them). Especially helpful for handling irregular expenses. Free and premium versions.

Every Dollar: Dave Ramsey’s budgeting software that follows his budgeting principle of giving every dollar a job. Manual tracking for the free version. Free and premium versions.

Set Yourself Up for Success

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Before you even move to your new city for graduate school, you will likely make decisions that will affect your financial life for possibly years to come. You can set yourself up for financial success by laying out your spending at a high level, including your “big rocks.” Two of the biggest “rocks” in any budget are housing and transportation.

As students generally set up their housing before arriving on campus, it’s the first opportunity you’ll have to make a financial decision. While you might be able to afford the rent in a posh apartment by yourself, think about how that will impact the remainder of your cash flow. A good rule of thumb is to spend less than 25-30% of your gross income on your rent or mortgage. That may not be possible in the highest cost-of-living cities or on less generous stipends, so it’s even more important in those cases to economize where possible.

Having at least one roommate will dramatically bring down your housing costs. The best deals may be found in renting with multiple other roommates, for example in sharing a single-family home. Also carefully consider the amenities that you are paying for in apartment complexes or neighborhoods like gyms and pools and make sure that you will make frequent use of them before you let them inflate your rent.

Owning a car can be one of the most expensive line items in your budget throughout your whole life. If your university is in a city with good public transportation or is highly walkable/bikeable, a car may not be necessary. Ask current graduate students if everyone has a car or if it’s possible to live without one. International students will likely give a different perspective than domestic students so be sure to ask both. If you do need a car during graduate school, be careful not to buy one that will saddle you with high debt payments or that will require expensive and frequent repairs. The best value you can get from a car is to buy a 5-6 year old used vehicle and drive it into the ground. Also consider the gas mileage of the vehicle if you anticipate driving long distances, as the amount you spend on gas will be a factor in your budget.

Sketch out the big fixed expenses in your budget before you sign a lease or buy a car. All of your needs – your rent/mortgage and utilities, all debt payments, grocery costs, insurance, etc. – should not amount to more than 50% of your take-home pay according to the Balanced Money Formula. If your needs amount to much more than 50% of your take-home pay (that’s after taxes and giving), take another look at your housing and transportation costs and consider reducing one or both.

Further Reading: How to Create Your First Budget as a Grad Student (a Grad Student Finances Guide), A Graduate Student’s Balanced Money Formula