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This Behavioral Finance Expert Gives Incredible Career and Financial Advice to PhDs

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In this episode, Emily interviews Dr. Daniel Crosby, an author and expert in behavioral finance. Upon completing his PhD in clinical psychology, Daniel realized for the first time that an academic salary would not afford him the lifestyle he wanted. He instead pivoted to translating the academic research in behavioral finance for working financial advisors, and he currently serves as the Chief Behavioral Officer for Brinker Capital. Daniel shares how he’s applied the principles of behavioral finance in his own life and specific career and financial advice for early-career PhDs, particularly those exiting PhD training.

Links Mentioned in This Episode

PhD behavioral finance

Teaser

00:00 Daniel: And rather than saying, “Oh, I’m a PhD in psychology, so let me do PhD in psychology things”, I thought, well, I know to have great conversations with people. I know how to run a training. I know how to read human emotion and human behavior and all of these things, when you conceive of them as building blocks, you can repurpose those building blocks in different ways and create a host of opportunities for yourself.

Introduction

00:34 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 four, episode eleven and today my guest is Dr. Daniel Crosby, an author and expert in behavioral finance. Upon completing his PhD in clinical psychology, Daniel realized, for the first time, that an academic salary would not afford him the lifestyle he wanted, so he pivoted to translating the academic research in payroll finance for working financial advisors. Daniel shares how he’s applied the principles of behavioral finance in his own life and gives specific career and financial advice and encouragement for early career PhDs, particularly those about to finish their PhD training. Without further ado, here’s my interview with Dr. Daniel Crosby.

Will You Please Introduce Yourself Further?

01:23 Emily: I have the pleasure today of hosting Dr. Daniel Crosby on the podcast. He is a certified expert in behavioral finance. I’m really, really pleased that he agreed to come on. And Daniel, will you please introduce yourself a little bit further and tell the listeners about the fantastic career you’ve had?

01:41 Daniel: Great to be here. Thank you for having me. I am the chief behavioral officer at Brinker Capital, which is a multibillion dollar asset manager based outside of Philly. There’s not many chief behavioral officers in the world, I guess, so by way of explanation, what I do is I create training, tools, and technology that help people make better decisions with their money. I am a clinical psychologist by education, but really haven’t spent any of my professional career in a clinical setting. I quickly learned in grad school that I loved thinking deeply about why people do the things they do, but I didn’t love working in a medical setting. I’ve looked for business applications of the thing that I studied, and I know you know what it’s like to pivot, so my career has been wild and crazy, but it’s been a great one.

Going from Psychology PhD to Chief Behavioral Officer

02:39 Emily: Can you take us back? Tell us more about your education and at what point you decided that you weren’t actually going to go that traditional, clinical route with your degrees?

02:50 Daniel: My undergrad was in psychology. Loved it. I’m the son of a financial advisor, so I went into school thinking I would study finance and be a financial advisor. Took some general ed courses in psychology and just absolutely fell in love, knew that that’s what I wanted to do, started my PhD three days after I finished my bachelor’s. I was really just on a good path to get going with this. But about three years into my doctoral program, I had just kind of had enough. I don’t think I’m wired to listen to 40 hours a week of heavy stuff. It’s hard to be that empathetic. It’s hard to not let that bleed into your own life and your own wellness, and I was just really taking my client’s problems home with me, candidly. And I said, you know, this is just a lot. The final nail in the coffin for me though, I was still sort of on the fence as I was wrapping up my PhD, I had an inkling that I would like to apply this in a business setting, but wasn’t quite sure how, so I interviewed for a dual appointment position at a local university, which would have been half teaching, half counseling and the pay was so bad. I got offered the job and the pay was just so ridiculously bad that when I sat down and did the math with my wife, I was just, there’s no way this can work. I think it’s instructive that I, as the son of a financial advisor, someone who is interested in finance, finished an entire PhD, kind of never doing the math on how the thing I was studying would put food on my table. That’s sort of an embarrassing, but true story, is to get to the end of this road that I was passionate about and then go, “Oh, well geez, what am I going to do with this?” So then I was sort of left scrambling with how can I actually make a living at this thing I’ve just spent eight years studying.

05:05 Emily: I think that’s going to be a very relatable story to a lot of people in the audience of hearing that advice, follow your passion and doing it, and doing it at a high level, and getting to the end of it and saying, “well, now what do I do?” In your case, it was because the dual position that you applied for was not attractive, financially. That could be the reason, certainly for people in the audience, why they don’t continue on the expected career path. But for many people who want to go into academia, it’s just that the jobs aren’t there. That’s the main problem is that there’s just no jobs to be had or very, very few, and so they end up having to look elsewhere. So super, super relatable story there. Would you mind me asking, was your graduate degree, did you go into debt for that or was that paid for, was it a combination?

05:52 Daniel: It was paid for. PhD programs in psychology are very selective, they’re very small, so there were only like five people in my cohort. If you get in, it’s paid for through assistantships. Then, through nothing but luck, I had parents who were in a position to support me in other ways. My parents kept the food on the table and a roof over my head, and the tuition itself was paid for, so I came out with no debt.

06:26 Emily: I see. So when you were sitting down to do that salary calculation, it wasn’t debt that was necessarily causing your initial needed number to rise, but rather just simply the cost of living and supporting your family and so forth.

06:39 Daniel: Yeah. It wasn’t debt. It was just like, “wow, I’m going to work forever.” It was crazy because it paid less than a kindergarten teacher. You go teach at a high level, at a college, go to all this school and you should have just taught first grade. The pay was much better, if you can believe it, and I think you probably can. That was just a shock to me. I had never really put pen to paper about how the jobs that were available to me would coincide with the kind of life I wanted to live. Then the other thing is, as you said, so many of the jobs — I was lucky to get a job offer in my hometown — but you know, many, many times you’re forced to move to someplace you don’t want to live or somewhere very out of the way to start your career. And that’s its own set of trade-offs, certainly.

07:34 Emily: When you decided, “okay, that’s not a viable route over there, I have to pivot and do something else,” ten or so years later, you’ve come to this point where you’re the chief behavioral officer somewhere.

What is Behavior Finance?

Emily: I want to hear more about what behavioral finance is and did that exist as a field when you came out or have you been part of developing that? What’s been the transition both for your career and also for that field over that time?

08:00 Daniel: Great question. I got out and I said, “look, I need to pivot to something that is a little better for my sanity and is also a little better paying.” I began to explore jobs in organizational behavior, organizational psychology, behavioral economics, behavioral finance, and really, no one would take a chance on me because this is 2008 and the economy’s not exactly fantastic. I’m out there, 29 years old looking, looking for a job and I’m applying for jobs in fields where I candidly have no experience, because I have this PhD in clinical psychology and they go, “well, this is, you know, industrial psychology or organizational psychology.” And so I got a lot of doors slammed in my face. And really it was just luck. I applied at an organizational behavior firm where the boss, the founder of this firm had a clinical background and had sort of made his way in the world. My story resonated with him and he saw enough potential there to take a chance. Again, I think anyone who has any modicum of career success can point to times in their career where they just got lucky. That was certainly one for me, where he saw himself in me, took a chance on me and knew what it was like to be in my position, because I just wasn’t getting a look at most places because I didn’t have the right sort of psychology background.

09:47 Daniel: In terms of the field of behavioral finance, behavioral finance is just sort of the study of finance that incorporates the messiness of human beings. A lot of standard financial and econometric models are based on simplifications of human behavior that make humans look more rational than they really are. Behavioral finance is just finance with human irrationality factored in and talking about the way that we make quirky decisions with our money. This was a field that was around. Not too many years later they gave out a couple of Nobel prizes for it. The good thing for me, sort of the niche that I found, was there were people out there charging $200,000 an appearance. These Nobel prize winning folks were out there charging a $100,000 to $200,000 every time they gave a speech and multimillion dollar contracts for consulting, but there was no one that was more affordable and there was no one that was more applied. There just weren’t many people doing more reasonable applied behavioral finance work and taking these great ideas that these folks had come up with and taking them out of the ivory tower and putting them on the desks of everyday people or everyday financial advisers. That’s sort of where my niche — my niche became being the more affordable, more practical options.

11:23 Emily: But it sounds like what you were doing was really taking academic research and translating into what can be then used on the ground by, as you said, advisors and perhaps other people, is that right?

11:35 Daniel: Yeah, that’s right. I mean that’s been sort of the trajectory of my whole career is as an intermediary between people who are much smarter than me and people who haven’t been exposed to these ideas. I sort of view myself as a translator to take these ideas, this research, and make it speak to the lives of everyday people.

11:57 Emily: This actually reminds me, from what you were saying, of my physics training, which is what I did my undergraduate degree in, where you basically assume that everything is a sphere, so the calculations are actually manageable because if you actually look at what things are, real shapes and so forth, it’s just the math is completely beyond what’s possible. Of course, not everything is a sphere, but you have to assume they are to make the math work. It reminds me of that.

12:23 Emily: I am curious if anything in your personal history — going through the PhD process and then, and then coming out as an early career PhD, and this job search and so forth — has any of that informed the work that you’re doing now within behavioral finance? Any of that personal stuff informing that?

12:41 Daniel: I don’t think so, really. I don’t think that really informs a ton of what I do from day to day. It probably informs my parenting more than my work. I have three young children and my wife and I talked, that as we raise them, I’m just trying to give them a more expansive look at the world of work and maybe a more detailed look at finding the sweet spot between following your passion and doing work that gives you the kind of life that you want. Because one thing that my studies have shown me is that we all measure what normal is on a relative basis. This is true of everything from mental health to wealth. Normal for you is financially is just kind of what you grew up with, so I think you need to be candid with your children about how they grew up and what normal is and what normal isn’t. So yeah, it probably impacts the way that I parent more than more than anything else.

13:51 Emily: Gotcha. What about the reverse ways, from taking what you’ve been learning about personal finance and behavioral finance since you pivoted into that field? Have you taken any of what you learned and applied it in your personal life or were you already kinda there with what you grew up with your particular parents?

14:09 Daniel: Yeah. What’s interesting is I have applied a lot of what I’ve learned from behavioral finance into my own life. But one of the primary ways that I’ve done this is by knowing what I don’t know. I remember, and I think every PhD has this experience, I remember I started my program when I was 23 years old. I start this PhD in psychology, 23 years old, thinking I know everything, get out a couple of years later and I’m like, did I learn anything? I feel like I know less than I did before. I think I have more questions than answers now. Especially when what you’re studying is something as hard to get your arms around as human behavior, you never quite get good at it. One of the primary things that I’ve learned from my years of study of finance is that nobody really knows anything and that knowledge is a weak predictor of behavior. I work with a financial advisor myself. And not to toot my own horn here, but I think when it comes to knowledge of markets and things, I probably know more than my advisor, but that’s not why I pay him. I pay him to keep me out of my own way. I pay him to be a barrier between me and the sort of bad behaviors I study because I know that simple knowledge of the sort of biased, irrational poor behavior that I study is a weak predictor of doing the opposite. I know I’m no better than the next person, no matter how many books I write on the subject. I take pains to diversify, to keep my fees low and to work with someone who will keep me out of my own way.

16:01 Emily: Yeah. I think this is something that’s maybe not well understood by the public. That you may be paying an advisor for expertise — you are not necessarily, but someone else may be — but an even more important role is, as you just said, to kind of talk you off the ledge from carrying out bad behaviors that you’re inclined to do as any human naturally would. You’re specifically talking right now within the realm of investing, is that right? Or does your advisor help you with other decisions as well?

16:31 Daniel: He does help me with things around, you know, the purchase of a home. He’s sort of a sounding board for things like college savings for my kids, the purchase of a home. But I’m primarily focused on investing and investing professionally is my primary focus.

Commercial

16:53 Emily: Emily here for a brief interlude. As a listener of this podcast, every week you hear strategies that another PhD has used to improve their financial picture. But listening and learning does not automatically translate into action in your own financial life. If you are ready to change how you think about and handle your money, but need some help getting started, I can be of service. There are two main ways you can work with me to create and implement a financial plan tailored for you. First, I offer one-on-one financial coaching, either as a single session or a series, as you make changes over the long term. You can find out more at PFforPhDs.com/coaching. Second, I offer a group program called The Wealthy PhD that is part coaching, part course, and part community. You can find out more and join the wait list for the next time I open the program at PFforPhDs.com/wealthyPhD. I believe it’s possible to succeed with your finances at every stage of PhD training and throughout your career. Let’s figure out together how to make that happen for you. Now, back to the interview.

Human Emotions and Financial Decisions

18:08 Emily: Is there anything else that you have learned, and then applied in your own life, aside from putting a bit of distance between yourself and being able to make a fast decision?

18:18 Daniel: Well, one of the hallmarks of behavioral finances talks about overcoming emotion. A lot of what we talk about is how do we keep people from making these emotionally laden decisions, but one of the other things you learn when you’re studying human behavior is that it’s always easier to roll with a behavioral tendency than to push against it. There’s cool research that shows that people who look at a picture of their children for five seconds before making a financial decision save more, are more likely to stay the course, et cetera. Similarly, we find that people who invest in ways that are aligned with their own personal preferences around the world that they want, in terms of social issues, environmental issues, tend to be better behaved. So I’ve tried to build some emotion into my process. I’ve tried to keep the things and the people that I love at the front of my mind and central in the planning and investing process, and I’ve tried to invest in a way that’s consistent with my values, because I think that it makes it a little stickier than say owning the S&P 500. It just personalizes it a bit. I think that those are both powerful ways to make investing a little more fun, to make the investing and planning process a little more personal and to bring about some good behavior in the end as well.

19:51 Emily: I really love those suggestions. I think I’ve also, maybe in the similar vein of looking at a picture of your children, I’ve heard that if you look at a picture of yourself aged up, you make different decisions. Is that right?

20:04 Daniel: That is right. Yeah. One of the things you learn a lot about in behavioral finance is salience and salience is just the ease with which you can sort of imagine or tap into a situation. As I sit here, I’ll be 40 next week, so as I sit here at nearly 40 years of age, it’s hard for me to imagine 80 year old Daniel, right? The idea of a guy who walks with a cane and has gray hair and stuff, it feels a little remote. People have found that if you age your face, you’re basically making it a more visceral experience to imagine yourself as this 80 year old version of yourself, it brings about better behavior. Again, that’s an imperfect example of how you imbue the process with a little emotion to help you make the right decision.

20:56 Emily: I actually had a client asked me recently what I thought about the particular RoboAdvisor Ellevest and she followed that up with, well, I’m really passionate about women and empowering women and all these things that were sort of in line with Ellevest’s mission. And I said to her, well, it sounds like you’re really excited about that, so I think they’re fine and go for it. Because, as you were saying earlier, if it it lines with her values, that particular manner of investing, she’ll probably be more likely to throw more money at it, engage with it more, and have a better outcome. Is that right?

21:27 Daniel: Yeah, that is. Without speaking to the particulars of Ellevest, I don’t know all the ins and outs of it enough to say one way or the other, I have a lot of respect for Sallie Krawcheck who heads up a Ellevest. But in general, you’re more likely to contribute to, and stay the course in your women’s leadership fund than you are your S&P 500 fund because it’s personalized, it’s tailored to you and your values and, not making any promises here, but there is also research to suggest that the kind of companies folks like Ellevest seek out, companies that have better female representation on boards and things, there’s historical research to suggest that those companies have outperformed the broad market, at least historically. I think there’s every reason to try and personalize your investing to your own preferences, feel like you’re doing a little good in the world, and if that helps to animate you to stay the course or to set aside a little money, both of which are very psychologically difficult, more power.

Behavioral Finance Strategies for the PhD

22:35 Emily: Absolutely. Yeah. Another question here. We’ve started to get some insights into this behavioral finance stuff, maybe for the general population, but I’m wondering if you see that there are any personal finance pitfalls that you think PhDs might be particularly susceptible to falling into, and then what strategies might there be to not do that?

22:59 Daniel: I’ve observed — I’ll speak to psychologists, doctors of psychology in particular, but I think that this probably applies to PhDs broadly — a lot of times we get a PhD because we want deep domain-specific knowledge, right? We get into this because we love it. We want to be the best in the world at it, but almost every position needs a bit of business savvy, and I think that we have more power than we realize. I think this power takes a couple of forms. I think first of all, you need the power to negotiate a salary. That first job you get is more predictive of your ultimate wealth than just about anything else, because it benchmarks every subsequent salary conversation. Being comfortable negotiating that first salary — I remember that first job, you feel lucky just to be there. You beat out 20 other talented people to get the offer, but don’t be afraid to know your worth and to negotiate that salary. I would say PhDs need a little business training, because we have this deep domain-specific knowledge, but we don’t know, sometimes I feel like, how to do more practical things. I think get a little bit of business knowledge.

Daniel: Then a third thing and I would say the thing that has probably served me best in my career, financially, is to just think creatively about your role. If I had stayed on the prescribed path of being a dual-appointed college counselor, I would make a fraction of what I make now. Because I thought expansively about the things that I learned in school, and rather than saying, “Oh, I’m a PhD in psychology, so let me do PhD in psychology things” I thought, well, I know to have great conversations with people. I know how to run a training. I know how to read human emotion and human behavior and all of these things, when you conceive of them as building blocks, you can repurpose those building blocks in different ways and create a host of opportunities for yourself. Rather than thinking about one prescribed path, think about your education as a series of building blocks, a series of competencies that you can repurpose in any number of ways to do a host of different things. Finally, I would say don’t be scared to get out of academia. Because when I was in academia, you’re a face in the crowd, you’re one PhD among many. But when you get out in the real world, when you get out in the business world, you’re special and people respect your expertise in a way that they might not necessarily in a university setting. Lots to be said for a university setting of course, but I think don’t be scared to get out there to try something new and to know your worth.

Dealing With an Income Increase Post-PhD

26:20 Emily: Such wonderful advice and you put that so well. Thank you. I’m wondering if you have any advice for a person in this situation, which is something that you went through, which is a person who is about to come on a large income increase? They’ve been in training, grad school, postdoc, whatever it might be, and now they’re going out there and doubling or tripling, or more, their salary, potentially in industry, or similar. What behavioral finance concept should that person know about and be applying in that situation?

26:50 Daniel: This is a great question. The concept to know here is what’s called the hedonic treadmill, which says that, as our earning increases, our consumption or spending tends to increase in ways that are commensurate with the increase in earning. And then you never feel richer. You never feel better off because your lifestyle has risen as fast as your income. My number one piece of advice here would be to not let your lifestyle rise faster than your income and to make sure that as your income increases, so does the amount you’re setting aside, because lifestyle creep is a really, really big problem. What’s fascinating is, and I’ve been certainly bitten by some of this and haven’t followed my own advice here in certain instances, but the things that seem so extraordinary to you — I think about my house; when we bought this house it was the most beautiful house I had ever seen and soon it’s just where you throw your dirty socks — it just quickly becomes the backdrop against which you live your life. So really watch out for lifestyle creep. Make sure that if your income increases 50%, that your spending only increases 25%. Have a little fun, but make sure that they don’t increase in lockstep because that’s not where happiness is.

28:26 Emily: Yeah. I guess, I think I would add onto that — you put it very well about how the hedonic treadmill operates — I think that for some PhDs, when they get out of training and they finally have that larger salary, there’s some pent up demand. There’s some pent up wanting to spend behavior because they have been on this constrained income for so long. My advice to that person, in addition to what you said, would be to splurge on something that’s a one time expense, like a grand vacation or something, and not upgrade your housing this high degree, not upgrade your transportation to a high degree, not upgrade those fixed or recurring expenses in your life, but rather have this one wonderful, pleasurable experience and then get back to a lifestyle that is, as you were saying, far below what you could actually “afford” with your new salary, just so you aren’t stuck on that treadmill over the long term.

29:15 Daniel: I love that advice and I think it’s also consistent with understanding how you can spend money in ways that make you happy. When you look at the research on how to spend in ways that makes you happy, giving money away makes us happy, spending on experiences makes us happy and spending on getting rid of stuff we hate doing makes us happy. Having someone mow your lawn for example, makes happy. Buying time, buying experiences, and giving for goodwill — these are the things that make us happy. Don’t go buy a fancy car. Don’t go buy a big house that’s going to lock you into this recurring expense trap and it’s not even going to make you feel any better. It’s a trap.

Last Words of Advice and Where to Find Dr. Daniel Crosby Online

30:01 Emily: It’s great insight. Thank you. Do you have any final pieces of advice? We’ve already heard so much, but anything more for that early career PhD in terms of personal finance or behavioral finance advice?

30:11 Daniel: Again, just really to know your worth. I felt like when I broke out of my swim lane and got out of the cattle call that was sort of herding me towards this very prescribed life and once I sort of broke out and got into the world, I found that people had a lot more enthusiasm and respect for my ideas than they might have in a more constrained academic setting. So know your worth, don’t be afraid to ask for what you’re worth and go get ’em.

30:46 Emily: Wonderful. And if listeners want to follow up more with you, want to learn more from you, read your books, listen to you, where should they go?

30:54 Daniel: Yeah, I’d encourage folks to check out my books. The Laws of Wealth* is probably the place to start, The Behavioral Investor* is next. I’m super active on LinkedIn and Twitter, @danielcrosby.

[* This is an affiliate link. Thank you for supporting PF for PhDs!]

31:07 Emily: Thank you so much, Daniel, for this interview.

31:10 Daniel: My pleasure.

Outtro

31:11 Emily: Listeners, thank you for joining me for this episode. PFforPphDs.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, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcast, Stitcher, or whatever platform you use. Two, share an episode you found particularly valuable on social media or with your PhD peers. Three, recommend me as a speaker to your university or association. My seminars covered the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes. Four, 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 Poddington Bear from the Free Music Achive and is shared under CC by NC. Podcast editing and show notes creation by Lourdes Bobbio.

Can a PhD Achieve FIRE?

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Would you like for paid work to become optional for the rest of your life? What would you do with your time if you didn’t have to work? When you become “financially independent,” you have enough money and passive income streams to sustain you for the rest of your life without earning any more. At that point, you have the option of retiring (whether or not you actually do). Achieving this goal in youth or middle age instead of 65 is the objective of adherents of the FIRE movement (Financial Independence / Retire Early). Typically, FIRE walkers earn high salaries and save a radically large percentage of their income. This article explores whether FIRE is a good or reasonable goal for a PhD (graduate student, postdoc, or PhD with a Real Job) to set.

Can PhD FIRE

 

Further listening: This Prof Used Geographic Arbitrage to Design Her Ideal Career and Personal Life

What Is the FIRE Movement?

The FIRE movement (or at least the current iteration of the trend) started to gain traction within the last decade. Two of the fathers of the movement who documented their FIRE journeys on popular blogs are Jacob Lund Fisker (Early Retirement Extreme) and Pete Adeney (Mr. Money Mustache). They both advocate establishing a very frugal lifestyle to 1) save a high percentage of your income while working and 2) minimize the size of the nest egg needed to retire from paid work.

Now that the FIRE movement has gained popularity, it has diversified (it’s not just for young, single, male tech workers!) and splintered. One of the useful delineations is among ‘lean FIRE,’ ‘FIRE,’ and ‘fat FIRE.’ Roughly speaking, lean FIRE adherents seek to achieve FIRE primarily through expense minimization (and a high salary as well) while fat FIRE adherents seek to achieve FIRE primarily through vastly out-earning their spending (and keeping a lid on expenses as well), with regular FIRE falling somewhere in the middle.

Why Would a PhD Want to FIRE?

A person who completes a PhD has passion for her work (as well as incredible perseverance). I find it hard to imagine that such a person would want to retire early from her chosen field – especially those pursuing a life of the mind in academia.

But people who complete PhDs are also people. They end up in all types of jobs with all levels of job satisfaction. Even those with high job satisfaction might want to escape the demands of full-time work.

Even if retiring early is not attractive, becoming financially independent may be. Once you are financially independent, even if you keep working, you don’t have to be concerned about losing your job or put up with a job that’s no longer a good fit. Even during the journey to FIRE, you will have a much, much greater degree of financial security than most Americans, which brings peace of mind.

How Do You FIRE?

While difficult and rare to achieve, the mechanism of becoming FIRE is easy to understand.

To become financially independent (from active work), you need to have investments and/or passive income streams that will pay for your expenses in perpetuity. I’ll focus this discussion on the investments needed rather than the passive income streams.

Basically, to achieve FIRE, you need a nest egg of investments that is large enough that you can withdraw what you need to live on each year without eating into the principal. The higher your living expenses, the larger the nest egg you need to support them in perpetuity.

FIRE adherents usually follow the “4% Rule,” also called the Safe Withdrawal Rate (SWR), or perhaps a more conservative 3% or 3.5% Rule. The 4% Rule means that withdrawing 4% of your portfolio balance each year gives you a very good chance of your portfolio not running out of money prior to your death; it is based on historical market returns. (Early retirees may adjust this rule to be more conservative due to their post-FIRE life expectancy being longer than a typical retirement.)

The 4% Rule shows you the two vital factors to FIRE: size of your nest egg and yearly living expenses. Therefore, to achieve FIRE you must save (invest) a lot of money and keep your living expenses in check. For example, for a household with $50,000 in yearly living expenses, a portfolio of $1,250,000 is needed.

A person pursuing LeanFIRE will primarily focus on minimizing living expenses. The rough definition of LeanFIRE is living expenses of under $40,000/year or a portfolio of $1,000,000. A person pursuing FatFIRE will primarily focus on building a large portfolio. The rough definition of FatFIRE is a portfolio of over $2,500,000 or living expenses of at least $100,000/year.

There is a delightful synergy between the necessarily high savings rate and necessarily low expenses. Given a static income, the less you spend on living expenses, the higher your savings rate can become, enabling you to achieve FIRE even faster. Mr. Money Mustache published in “The Shockingly Simple Math Behind Early Retirement” a set of ratios that illustrates the relationship between savings rate and years of saving needed until the SWR could be achieved. For example, with a savings rate of 10%, you need 51 years to save before you can retire, but that drops to 22 years with a savings rate of 40% and 8.5 years with a savings rate of 70%.

Because the key to achieving FIRE is an unusually (to say the least) high savings rate, it is almost exclusively pursued by high income earners. There is a floor on how low you can drop your living expenses (although that varies person to person), so if your income doesn’t exceed your expenses by much, achieving the “E” in FIRE becomes a remote possibility.

Can PhDs FIRE?

PhDs can FIRE if they commit to the process, but they have challenges that are not shared by their peers from college who went immediately into high-paying careers. (It has been done; Jacob Lund Fisker has a PhD and retired at age 33.)

The ideal path for someone pursuing FIRE is to obtain a high-paying job immediately upon completion of their education at 18 or 22, commit to a low-cost lifestyle, set up a radically high savings rate into investments, and keep the pedal to the metal until FIRE is achieved, for instance by age 30 or 35.

A PhD becomes derailed from this ideal path upon entering graduate school. Unless he previously set up massive passive income streams, a grad student’s income is nowhere near large enough to achieve a high savings rate (even if you live in a van like Ken Ilgunas did at Duke). This means that pursuing FIRE with a high savings rate will have to wait until landing a post-PhD Real Job.

However, the graduate school experience offers a unique advantage to FIRE: A necessarily low lifestyle. The $40,000/year maximum living expense for the definition of LeanFIRE is much higher than what virtually every graduate student takes home after paying income tax. Even a couple living the graduate student lifestyle can usually spend less than that amount.

Further reading: What Grad Students Can Learn from the FIRE Movement

A PhD also confers the possibility of a high income. While PhDs are not needed in currently high-paying careers such as finance, medicine (some specialties), computer science, and engineering, a person with a PhD does on average earn much more in a lifetime than the average person with less education, and people with PhDs can absolutely land well-paying jobs.

Therefore, a PhD maintaining her grad school lifestyle (more or less) while earning a high salary post-PhD is a recipe for FIRE, albeit starting in earnest closer to age 30 than age 20. A LeanFIRE early retirement can still be achieved within a short period, and of course she could opt for FatFIRE if her income is generous enough.

However, a graduate student (or postdoc) who commits to FIRE can go further than this default:

  1. Instead of living at 100% of net income during graduate school, save (invest) as much as possible. This will have the dual effect of further lowering living expenses and getting a head start on building your nest egg.
  2. Experiment with frugality to discover whether you want to ultimately pursue LeanFIRE, FIRE, or FatFIRE. You may decide that living below a graduate student’s means is not what you want long-term.
  3. Finish your training as quickly as possible to increase your income as early as possible. Prepare yourself to land a high-paying job through professional development and networking.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

What Is Your Reason to FIRE?

Ultimately, it’s vital to have clarity on why you want to pursue FIRE. It’s easy to become consumed by the numbers and the process and lose track of your motivation along the way. Sometimes it’s possible to achieve aspects of the FIRE lifestyle without actually being FIRE, and I think that’s particularly true for PhDs who have a lot of transferrable skills and potential for autonomy. Remember the parable of the fisherman and the businessman. Just like you shouldn’t put your “Real Life” on hold during graduate school, you shouldn’t put your Real Life on hold while building up to FIRE.

If you are a PhD (-in-training) and seriously pursuing FIRE, I’d love to interview you on my podcast! Please fill out this form to volunteer.

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

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

prioritize financial goals

A version of this post originally appeared on GradHacker.

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

Goal 1: Pay for Your Basics

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

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

Goal 2: Save an Emergency Fund

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

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

Accumulating Cash vs. Growing Wealth Mid/Long-Term

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

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

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

Investing vs. Debt Repayment

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

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

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

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

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

Know that More Goals Means Slower Progress

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

Living Your Life

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

My Choices During Grad School

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

How to Start Investing with Just Five Dollars per Month

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In the last several years, we’ve seen an explosion of “fintech,” aka financial technology. One of those new areas is “microinvesting;” there’s never been a better time to be a beginning investor with only a small amount of cash flow available to invest. No longer must you have thousands of dollars to open an investment account or millions of dollars to receive professional investment advice. While of course it is preferable to invest a large amount of money each month for your retirement or other investing goals, sometimes that’s simply not possible. Often it’s not possible for graduate students and postdocs, yet these groups are just as intensely interested in investing as anyone else – more so, I’d wager. This post details how to start investing with just five dollars per month (or whatever amount of money you can spare right now).

invest just five dollars per month

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Why It’s Beneficial to Invest Just Five Dollars per Month

Thanks to the power of compound interest, a small amount of money given a long amount of time can turn into a large amount of money. That means that any amount of money you can put away when you are younger is going to make a significant difference to your wealth in retirement. It’s much, much, much better to invest $5/month than $0/month when you have decades to let it grow.

Now, you’re not going to fund your entire retirement with just a few dollars per month. But starting small is perfectly acceptable when your income is suppressed during your PhD training or you are otherwise in a financially challenging circumstance. Get started now with whatever amount you can, and increase your savings rate when your income increases and/or expenses decrease.

For example, if you contributed $5/month to an investment account over 5 years and received an 8% average annual rate of return, you’d end that time period with $367. Leave that $367 invested with an 8% rate of return for 50 years, and your ending balance is just shy of $20,000. I won’t sugar-coat it: That amount of money isn’t going to get you too far in your old age. But it is $20k better than taking no action.

Further reading:

In addition to the money itself, I see two compelling reasons to start investing even with only five dollars per month:

1) Committing to an investment plan creates a habit and changes your self-identity. If you invest five dollars per month, you become an “investor.” It’s part of who you are. The positive financial habit of committing to a monthly savings rate is a very powerful one to cultivate early on in life.

2) Once you get started, it’s easy to increase. The biggest hurdle is going from investing $0/month to $5/month, not from $5/month to $100/month. If you self-identify as an investor, you are naturally going to look for ways to increase your rate of investment. When you complete your training and move into a better-paid position, you will be ready and raring to save more each month, and you’ll already have the infrastructure in place. You’ll only be a few clicks away from investing serious money each month instead of having to wrestle with all the decisions and setting everything up at the same time that you’re dealing with a job transition.

Why It’s Challenging to Invest Just Five Dollars per Month

Until a few years ago, the only way to invest a small amount of money each month and be well-diversified was to use a mutual fund. Unfortunately, to open a brokerage account in which you could buy mutual funds usually took at least $1,000 if not several thousand dollars. Even the brokerage firms that waived their minimum balances usually required an ongoing investment commitment on the order of $50 or $100/month. That barrier can seem prohibitively high to some people; instead of saving up cash for months or years to meet the minimum balance, I imagine many people gave up on the idea of investing.

Further reading: Brokerage and IRA Account Minimums

Now, however, several investing platforms use fractional ETF shares to solve this issue. The platform buys whole shares of ETFs but sells fractions to its users. In this way, a user can purchase one or more ETFs in whatever increments she likes, and there is often no minimum balance required to open the account.

(I have only included in my list below microinvesting platforms that use ETFs. Robinhood is another investing platform that I ran across many times while researching this article because it is a fee-free platform. However, it is designed for investing in individual stocks. You have to invest a lot of money to create a diversified stock portfolio through buying individual stocks. You can buy ETFs through Robinhood but not fractional shares, so that is not compatible with investing just $5 per month. I’ve decided to exclude Robinhood from my list below because it inherently encourages active investing. Of course, if that’s your preferred investing strategy and/or you have a larger amount of money to invest, Robinhood is well worth considering.)

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The Best Platforms For Investing Just Five Dollars per Month

I reviewed a number of fintech microinvesting platforms for this article, though I do not claim that it is comprehensive. I am not a customer/don’t have a relationship with any of these platforms, so I’ve drawn this information from the company websites and reviews rather than personal experience or communications.

Acorns

Acorns is probably the best-known microinvesting platform. Its concept is to round up each of your purchases to the next whole dollar and invest the change. You can also set up a recurring investment.

Fee structure: $1/month for under $5,000 (free for students for 4 years) + ETF expense ratios
IRA option: Coming “early 2018”
Portfolio creation: Suggests a portfolio of ETFs after receiving user input

WiseBanyan

WiseBanyan calls itself the “first free financial advisor.” (They earn money through upselling products and services to their clients.) The service asks you a few questions and uses Modern Portfolio Theory to construct a passive portfolio appropriate for you.

Fee structure: Only the expense ratios of the underlying funds
IRA option: Yes
Portfolio creation: Uses low-fee index ETFs according to Modern Portfolio Theory after you input data for its investor profile

Stash

Stash allows the user to choose among low-cost ETFs to create her own portfolio. The expense ratios on the ETFs are low, and Stash can recommend certain “themed” combinations of ETFs.

Fee structure: $1/month + ETF expense ratios
IRA option: In beta ($2/mo)
Portfolio creation: The user creates his own portfolio from among 40 pre-selected ETFs

Clink

Clink bills itself as more a savings app than an investing app. There is no minimum investment, but if you want to use the scheduler the minimum is $1/day. Clink invests your money in Vanguard ETFs according to Modern Portfolio Theory (a passive strategy).

Fee structure: $1/mo when balance is under $5,000 + ETF expense ratios
IRA option: No
Portfolio creation: Combines your risk tolerance with Modern Portfolio Theory to create an asset allocation of six Vanguard ETFs

In addition to these companies that are explicitly designed for microinvesting, you could also consider other brokerage firms that have wider array of financial services that includes microinvesting. For example, Betterment is a roboadvisor and has no account size minimums. If you do have a lump sum available to invest, though only $5 per month on an ongoing basis to contribute, you could consider other traditional low-cost brokerage firms like Vanguard, Fidelity, or Charles Schwab (and look around for one that will waive its minimum).

What Are the Downsides to Using a Microinvesting Platform?

The microinvesting platforms I listed above are providing a great service to a previously underserved population, and they are to be commended for that. But in order to make it possible, they have engaged in several trade-offs that wouldn’t be necessary with larger investment balances.

1) The Investment Choices Are Severely Limited

The platforms diversify your money into ETFs, but they offer only a small number of ETFs, and I suspect only a few ultimate combinations of those ETFs depending on the user’s input. This is not necessarily a bad thing. If you simply want a generally appropriate asset allocation and are not too concerned with the exact underlying funds used or the exact percentages, having those limited choices might even be advantageous. But if you want to design your own asset allocation or choose among the other thousands of funds possible, you probably won’t be too happy with these platforms.

2) The Fees Are Sky-High

There are two types of fees typically associated with owning investments. The first is due to the cost owning and transacting the investments themselves. When we are talking about an ETF, this fee is called the expense ratio and is expressed as a percentage of your investment balance. Each of the four platforms above have this fee, and it is typically quite low, approximately 0.1%. If you ever see an expense ratio that is around 1%, this is considered high and a red flag that the fund is actively managed.

The second type of fee is for administering the plan or platform itself. For reference, a full-service fee-only human financial advisor charges approximately 1%.

Three of the microinvesting platforms in my list above charge at least a $1 per month fee of the second kind. That doesn’t sound like a lot of money in absolute terms, but the whole reason we’re talking about microinvesting is because small amounts of money are worth paying attention to. If you are investing just five dollars per month, a one dollar per month fee is a staggering 20% of your savings rate. This kind of fee absolutely cripples your investing efforts. I would not be at all surprised if you lost money overall almost every year if you were investing just five dollars per month because the long-term average annual return of the stock market is approximately 10%.

Of course, you can mitigate this problem by using WiseBanyan or another platform that doesn’t charge a fee (e.g., if you are a student and can have the fee waived) or by investing more money each month.

3) They May Not Offer an IRA

Only one of the above platforms currently offers an IRA investing option to all its users. While it is great to invest outside of an IRA, if you are saving for retirement using an IRA is optimal. Plus, your IRA contribution room disappears every year. If you use a microinvesting platform for a few years as a means to save enough to open an IRA with a larger lump sum, keep in mind that your contribution room disappears with each year. It would be better to contribute to an IRA all along instead of doing it in one lump sum at the end because it would use up so much of your contribution room in the last year.

Further reading:

4) You May Develop a Sense of Complacency

I’m trying to thread a needle here: I want to encourage you to invest any small amount of money you can right now while emphasizing that to reach financial independence or retire someday $5 per month is not nearly a high enough investing rate long-term.

If investing just five dollars per month is truly all you can do right now, go for it. But do not allow yourself to think you can keep your savings rate that low when your financial circumstances change. I want you to jump that rate up by about two orders of magnitude as soon as you are able!

Doing something is better than doing nothing, but over time you must move from doing something to doing the best thing or the sufficient thing.

Further listening: Ask Dave: Micro-Investing Apps?

How to Invest When You Have More Money

As of now, I do not think that microinvesting platforms are on par with other brokerage firms and investing platforms that require lump sums to open accounts or higher ongoing investment rates. It’s fine to start out investing with a microinvesting platform, depending on your goals, but as soon as you are able, I think you should switch to a brokerage firm that offers a wider array of investments, lower fees, and IRAs. All of the advantages of the microinvesting platforms (aside from the zero minimums) – low-cost ETF investing, asset allocation recommendations – can be found at a brokerage like Vanguard, Fidelity, or Charles Schwab. Plus, start-ups like these fin tech platforms often change their business models or fold, so even if you like your solution right now it might not be around forever.

When you do make that switch, be sure to choose a diversified, passive, low-cost strategy appropriate to your goals. And increase your savings rate!

If I were in a position to invest only five dollars per month, among the microinvesting platforms I looked at I would sign up for WiseBanyan. Because it doesn’t charge a platform fee on top of the ETF expense ratings and it offers IRAs, I think it gives you the best chance at actually readying you to invest for the long-term. But you also have to consider that it uses a freemium model, which has not yet been proven sustainable in the financial sector.

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.

Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

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Today I’m sharing with you a graph that I show during “The Graduate Student and Postdoc’s Guide to Personal Finance.” It’s always shocking to the audience. It motivates some people to save during grad school and some people think it’s unreasonable; I’ll break all of that down here.

save during grad school

The point of this graph is to illustrate the power of compound interest, which roughly translates to investment returns. (More on that ‘roughly’ later!) I used Illuminations to create the graph.

Here’s the toy example:

Alana receives a $30,000 per year stipend and she saves 10% of it consistently into an IRA that is invested for her retirement (i.e., rather aggressively). So she is saving $250/month every month throughout her five years in graduate school. Her investments generate an average annual rate of return of 8%.

Over those five years, Alana puts in $15,000 and her ending balance is $18,369.21. So that’s cool and all – an extra $3k.

But then, she keeps the money invested for the same average rate of return for the next fifty years. So if she graduates when she’s 30, she checks her balance again at age 80. Remember, she’s not making additional contributions to this money at all – it’s just what she saved during grad school.

Alana’s investment balance has grown to a breath-taking $989,688.35! Her diligence to save during grad school translates to an extra $1M in retirement!!

I really want you to let that exercise sink in. That is the power of compound interest. Even a modest amount of money, given enough time and a high enough rate of return, can turn into an enormous amount of money! That is why any small amount of money that you can invest during grad school will have a huge impact on your long-term financial wellbeing.

I hope you had a “wow” moment there and are motivated to start investing or increase your investing (or pay off debt). I’m going to break down the exercise now to address the common questions and objections that I hear.

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1) It’s unreasonable for a grad student to save $250/month.

Whether or not saving $250/month is possible or reasonable is highly individual and depends both on the grad student’s income (usually a stipend rate set by the university/department) and personal living expenses. $250 is absolutely possible for many grad students (by the end of our PhDs – after lots of optimization – my husband and I were saving about $800/month together), and it’s not for others. Sometimes stipends are just too low, the local cost of living is just too high, or you have a challenging situation like paying off a lot of debt or supporting family members.

I do think 10% or $250/month are good benchmarks for grad students who have the ability to save. If they’re not saving that much yet, this illustration should encourage them to find a way to save more. If they’re already at that level, they can feel good about their efforts and maybe push for more as well.

The point of the exercise is not to say you have to save $250/month or it’s all useless. It’s to illustrate that saving early – whether it’s $250/month or $25/month, whether it’s every month or in one lump sum – has an incredible impact on your wealth over the long term. So any amount you can invest during grad school is wonderful. At just $25/month, that ending balance is nearly $100,000 – an amazing amount of money as well!

2) A guaranteed 8% rate of return isn’t available.

The objection to the 8% average rate of return figure is two-fold: 1) Why 8%? 2) You can’t get a high fixed rate of return in today’s market.

The reason investment returns are illustrated using compound interest is to make the math easier and keep the point clear. If you looked at models that include how the stock market really behaves, they get complicated and difficult to parse. You don’t end up with a nice single value but rather a distribution of possible results. There is a chance (minuscule over long periods of time, but non-zero) that you could lose all your money. There is an equally small chance that you end up a billionaire. And everything in between. But somewhere in the big fat middle of that distribution is the answer that a clean compound interest calculation gets you to.

The point of the exercise is not to predict exactly how much money you’re going to end up with in retirement down to the cent. It’s to show you the scale of change that’s possible over a long period of time with a reasonably high rate of return and motivate you to harness the power of compound interest.

If you look at enough of these types of compound interest examples, you’ll see a few different interest rates chosen. When we’re talking about stock investments, 8% is on the modest side. The long-term average return for the total stock market is often pegged at 10%, so that’s a popular figure. Dave Ramsey likes to use 12%. I chose 8% because it’s reflective of a largely-but-not-completely stock investment portfolio, which is appropriate for aggressive long-term investing (not speculating). It’s also pretty unlikely that you would have a single expected average rate of return over 50 years, as the standard advice is to move toward more conservative investments as retirement draws nearer, but the illustration ignores that detail as well. If the stock market future more or less resembles its past, 8% is a very achievable long-term average rate.

To really blow your mind, the same example above with a 12% rate of return gives an ending balance of $7,192,995.42. So this rate of return choice really matters to the illustration, and even the breath-taking ending balance I got to is a conservative example of the power of compound interest.

3) I don’t want to wait 50 years to retire.

I actually have never heard this objection from an audience member, but it’s one I have in my own mind. When I break the news that we’re looking at a 50-year compounding period, I say “So if you get out of grad school when you’re 30, you’re now 80. But don’t worry because by then 80 will be the new 50.” There’s some truth to that; people are living longer, and Ray Kurzweil thinks that by 2029 it may be possible to live forever.

There’s no special reason to use 50 years in this example, except that it’s a round number that when added to a grad student’s age puts them past the current retirement age but probably still kicking. The point is that the more years you give compound interest to work, the more impressive the outcome. It really does matter whether you start saving during grad school or after! If you’re shooting for a specific number that represents financial independence, starting earlier gets you there earlier.

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4) You’re not accounting for inflation.

Good catch! $1M in today’s money is very different from $1M in 2067 money. It won’t seem nearly so impressive at that point. But that should not stop you from saving. If anything, the existence of long-term inflation (in the US, a bit higher than 3% annually on average) argues for more saving and more aggressive investing. You are losing purchasing power if you keep it in cash and barely maintaining it using bonds.

5) Can’t I achieve the same result by maxing out my 401(k) in my first year with a real job?

I fielded this question only once, and it was during my very first seminar ever. And it’s a great one. My argument is that you come out of grad school with $18k in savings and continue to invest that for 50 years. Currently, the maximum someone under the age of 50 can contribute to a 401(k) is $18,000 per year. The point is correct: If you just max out your 401(k) in your first year with a real job and keep it invested for 50 years, you get the same outcome as you would by saving that $250/month all through grad school. The compound interest math is identical.

But guess what’s even better? Saving $250/month during grad school and maxing out your 401(k) in your first year with a real job – and every year after. And who is more likely to max out their 401(k) (no mean feat!): someone who has never saved a dime or someone who is already in the habit of saving, even in a challenging time of life like grad school?

Becoming a mega-saver with your first real job is a great step. But it doesn’t erase the opportunity you have to start investing during grad school. You can have your $1M in retirement from that first year’s 401(k) and your $1M from grad school.