Author Topic: Reader Case Study - Grad student with little "earned" income  (Read 3591 times)

intirb

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Reader Case Study - Grad student with little "earned" income
« on: September 01, 2015, 12:12:10 PM »
Life Situation: 27 years old graduate student (3 years left to a PhD in STEM) who lives with a partner (also 27, wage earner) in a HCOL city.  We are unmarried and file singly, but we have mostly joint finances.

Gross Salary/Wages: Combined total is probably a little over $50,000 a year.

I receive a fellowship that works out to about $36000 a year (on top of tuition).  I pay taxes on it, but it isn't considered "earned income" according to the IRS.  The fellowship also limits my ability to take outside work, though I do have a small side gig for ~$2k a year that goes straight into a Roth IRA.  It's more than a typical graduate student would make, though.  It also expires in a year, at which point I will be paid for normal graduate student work (TA/RA) and will be getting earned income.  Health care is provided for me by the university.

My partner earns a wage, working about 30 hours a week at about $12 an hour.  The work is variable and the hours are not consistent.  He gets free health insurance from the state.

Taxes: Last year I paid ~$4500 total in federal + state taxes.  I don't have my partner's numbers on me right now, but I think he paid less than $500 total.  After tax, I estimate that we pull in about $4000 a month, often a little less but sometimes more.

Current expenses:

Average joint monthly expenses, approximate:
Rent is free (thanks university!)
Transportation: $60 (we mostly walk or bike or take public transportation)
Dining: $150
Entertainment: $50
Groceries: $350
Medical: $50
Vacation: $100 (saved up for holiday trips, mostly)

In addition, we each have a "personal" category of $300 each.  This money is mostly our way of maintaining some individual control over the budget.  Some of it goes to things like haircuts, clothing, fun purchases, but sometimes it goes to paying off loans quicker or saving up for a vacation.  I guess the relevant thing for the case study is that there's about $300 a month in our budget that I have zero control over (and I'm fine with this).

So far we have: $1360 a month

Other recurring monthly expenses:
Roth IRA: $458 in his and an average of about $100 in mine
Student loans: paying about $2000 a month right now, but almost done!

Total: ~$3950 a month, but soon to have an extra $2000 a month and no plan for what to do with it

Assets:

Checking + Savings: $17k ($10k emergency fund, $5k is joint savings for something like a vacation maybe (no concrete plans), $2k is personal savings between us from our personal money)

Roth IRAs: $11k all in VFIFX

Liabilities:

Student loans, all mine:
Private student loan: $3k left at variable interest rate, currently 3.75%.  Down from about $40k when I graduated.  Right now we're putting everything left over into this, and I think it will be gone this month!  Finally!
Public student loans: $9k between 6-6.8%, currently subsidized and accruing no interest until I am done with school.

We have a credit card we use for points and such but we pay it off in full every month.

Specific Question(s):

My main question is - what do we do with all our money once the private student loan is gone?  Normally I know the answer would be to put the money in tax-advantaged accounts like a 401k, but I don't have any earned income, and my partner is already maxing out his Roth IRA (I don't think his work provides him with a 401k since he's part-time technically?  They don't provide him health care either). 

Right now we have a few options: I-bonds, buying stocks outside of tax-advantaged accounts, savings account, paying off student loans that are accruing no interest.. 

To complicate matters, how would the answer change if some time in the next few years we ..
get married?
have kids? (partner would quit work and take care of them full time)
want to buy a house? (not until after my PhD is over and I get a "real job", so at least 3 years away)

I welcome any other advice if something jumps out at you from the case study.

MDM

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #1 on: September 01, 2015, 12:25:39 PM »
Right now we have a few options: I-bonds, buying stocks outside of tax-advantaged accounts, savings account, paying off student loans that are accruing no interest.. 

Highlighted the choice that seems best for your situation.  Just checking: do you do know that you can invest in index funds outside of tax-advantaged accounts?  That may have been what you meant by "stocks" but again, just checking....

intirb

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #2 on: September 01, 2015, 12:32:56 PM »
Yes, sorry.  I was being casual and inaccurate, but I'd be getting index funds.

What is the timeline trade-off when home ownership is a distant but not too distant goal?  I wouldn't buy a house while I'm still in grad school, but maybe when I get a job somewhere and get settled down, it would be a good idea.  But there's a lot of uncertainty in that plan.  Does it make sense to put money away for a down payment now, and if so.. where would I put that money?  Is there a sane compromise between 100% index funds and 100% down payment savings?

MDM

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #3 on: September 01, 2015, 01:20:09 PM »
What is the timeline trade-off when home ownership is a distant but not too distant goal?  I wouldn't buy a house while I'm still in grad school, but maybe when I get a job somewhere and get settled down, it would be a good idea.  But there's a lot of uncertainty in that plan.  Does it make sense to put money away for a down payment now, and if so.. where would I put that money?  Is there a sane compromise between 100% index funds and 100% down payment savings?
In short, you can defend any given split between (and including) those 100% extremes.  Much depends on the non-financial value you attribute to home ownership.

One approach to consider is doing pretty much what you have been doing:
 - Maximize any tax-advantaged investment options
 - Until you have a "permanent" (however you define that) location, invest your taxable money with a bias toward the higher long term returns historically provided by stocks.  E.g., somewhere in the 80/20 to 100/0 stock/bond allocation range.
 - When you first move to your "permanent" location, rent instead of buy.  That gives you more time than a rushed "house hunting trip" to find the location(s) that will best suit you.  At that point you could consider directing your cash flow toward lower-returning but safer investments (e.g., online savings account) to be used for a down payment.

BMEPhDinCO

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #4 on: September 07, 2015, 09:46:19 AM »
Life Situation: 2

I receive a fellowship that works out to about $36000 a year (on top of tuition).  It also expires in a year, at which point I will be paid for normal graduate student work (TA/RA) and will be getting earned income.  Health care is provided for me by the university.


If I understand this correctly, you are only going to be making the unearned wages for 2016, correct? After this time, you will then go into an RA or similar in which it counts as earned income and you can contribute to the ROTH?  So really, you only have 1 year of an extra $2k per month (ie, $24k) to consider?  If this is the case, I would honestly just eliminate the other $9k loan first off - it feels SO good to get rid of student loans while in grad school (I did the same thing during my PhD).  That still leaves you with $15k to put into an 80/20 stock situation. Alternatively, you could put some of that into a bank account or CD for 1 year, and then it would allow you to max out your ROTH IRA immediately. 

I'm a little confused as to the timing here, since fellowships are typically on a school schedule, in which case you would have earned income in 2016 (ie, the start of the Fall semester) and you could then max the ROTH for 2016 as well.

If it is the second case, then I would absolutely put the $9k into the loan, get rid of it.  Then put $5.5k aside for 2016 Roth and then put the rest into stocks.

Good luck finishing up! 

intirb

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #5 on: September 07, 2015, 12:50:27 PM »

If I understand this correctly, you are only going to be making the unearned wages for 2016, correct? After this time, you will then go into an RA or similar in which it counts as earned income and you can contribute to the ROTH?  So really, you only have 1 year of an extra $2k per month (ie, $24k) to consider?  If this is the case, I would honestly just eliminate the other $9k loan first off - it feels SO good to get rid of student loans while in grad school (I did the same thing during my PhD).  That still leaves you with $15k to put into an 80/20 stock situation. Alternatively, you could put some of that into a bank account or CD for 1 year, and then it would allow you to max out your ROTH IRA immediately. 


Yeah, you've got it right.  Tentatively, I'll be doing an RA/TA next year (i.e. starting Fall 2016), so then I'll have earned income and I can contribute to a Roth fully.  I actually didn't even consider that I'll have some earned income at the end of 2016 - so I guess fiscally speaking, it's not as far away as I thought.  Thanks for pointing that out!

I'm also super tempted to just eliminate the other loan, but since it's earning zero interest, in theory it seems best to just save up the money and keep it in a CD or something so I can pay off the loan immediately after graduating. 

It seems like everyone (ok, two people so far) is advocating putting the leftover money into non-tax-advantaged investments, probably because my home ownership horizon is so tentative and far off? 

K-ice

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #6 on: September 07, 2015, 01:38:48 PM »
... Combined total is probably a little over $50,000 a year.


My partner earns a wage, working about 30 hours a week at about $12 an hour.  The work is variable and the hours are not consistent.  He gets free health insurance from the state.

....


I welcome any other advice if something jumps out at you from the case study.



The biggest thing that jumped out is why your partner isn't making more money?

My apologies if it is medical or something.

Check out MMM suggestions for jobs around 50K that do not require a degree.

Congrats for getting such a great scholarship & free tuition & housing.

But I would be very scared about rent, the real world & the psychological imbalance between you and your partner once you are Dr. Intrib.

Unless your kids come quick, & he loves being a super dad, either you or he may feel resentment in your roles.

Ie you wish you could be a SAHM but DH has no possibilities to support the family.

I know people who make the SAHD thing work, but it is better to be by choice vs it may be necessity in your case.

Please no face punches back at me. You asked for any other advice, I just hope you two have discussed this scenario.

Dee18

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #7 on: September 07, 2015, 02:48:00 PM »
You say "paying student loans...almost done!" and then a few lines later acknowledge that's the private loan, but there's also a public loan.  Go ahead and pay it off  in the next 5 months and then begin investing.  Being debt free really does feel great.

intirb

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #8 on: September 07, 2015, 05:11:18 PM »
You say "paying student loans...almost done!" and then a few lines later acknowledge that's the private loan, but there's also a public loan.  Go ahead and pay it off  in the next 5 months and then begin investing.  Being debt free really does feel great.

Even though it's currently 0% interest?


I know people who make the SAHD thing work, but it is better to be by choice vs it may be necessity in your case.

Please no face punches back at me. You asked for any other advice, I just hope you two have discussed this scenario.

No face punches, haha.  We have discussed this, and we're both in agreement :).  He likes what he does, and he works hard at it.  If he stays home with the kids, it would be by choice - I don't mind paying for childcare, but I'm definitely not interested in staying home myself. 

Edit: also, he sacrificed earning potential to follow me to my graduate school of choice. 
« Last Edit: September 07, 2015, 05:28:25 PM by intirb »

Argyle

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #9 on: September 07, 2015, 06:08:06 PM »
The student loan is now at 0%, but it won't be as soon as it starts coming due.  You head that off by prepaying.  I know some people would advocate investing that money in the stock market (index funds).  Of course that's a gamble.  It depends on whether you value possible higher returns over the long run, or more flexibility through being debt-free.  I personally prefer the debt-free option, especially on such a low salary as you have now and will have when you start your career. 

intirb

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #10 on: September 08, 2015, 09:56:48 AM »
Of course that's a gamble.  It depends on whether you value possible higher returns over the long run, or more flexibility through being debt-free.

Maybe I should clarify that there is also no minimum payment until I graduate.  So flexibility doesn't come into it.  I could put the $9k in a CD and earn $300 in interest before I graduate and then pay off the loans.  Why wouldn't I just do that?

nobody123

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Re: Reader Case Study - Grad student with little "earned" income
« Reply #11 on: September 08, 2015, 11:31:40 AM »
If you don't have some written agreement how you would deal with a breakup (finances, living arrangement, etc.) I would get one in place.  For instance, I'm assuming if you break up you wouldn't want him living with you, so does he get $X from the emergency fund for a security deposit?  Was the emergency fund filled 50/50, or did one of you contribute more than the other and expects more back in return?  That conversation will lead to lots of discussion about 'our' money and goals, and what you and your partner want to do is much more important than the opinions of some random internet strangers.

Normally, I would have issues taking 'our' money to pay off 'my' student loans before marriage.  But, since you've already merged finances and made career decisions based on your PhD program, I'll assume your goals as a couple are aligned, so go ahead and do it.  Personally, the couple of hundred dollars in interest that I would make by saving it in a CD and paying the loan in a lump sum wouldn't matter as much as the psychological boost of eliminating a non-dischargeable debt.  So I would just pay off the loan over the next few months be done with it, assuming some partial payment doesn't end the deferment.

Three more years of underemployment doesn't look too appealing to me, though.  I would encourage your partner to improve his situation.