Embarking on a 4 year personal financial voyage. What to do with savings

January 11, 2015 9:52 AM

MF, you're the best, I am entering into a PhD program with 24k in the bank. Wife is quitting her job to stay home with our 7 month old. Is an index fund/savings account/... the best place for these funds now? Anyone come out the other side of something like this successfully?

We have never invested anything and we keep going back and forth with what to do with our savings. I will be funded with about $2,700 a month, plenty for us to live on for the next few years.

A savings account seems most obvious for the 24k but will I be kicking myself in four years for not putting it into an index fund? Stocks (especially right now at our all time highs) scare the bejesus out of me. The wife wants a portion in a 529 (Ohio College savings account) for the kid, but it also worries me locking away a portion of our savings, even if we don't expect to use it anytime soon.

posted by 1inabillionmistake to Work & Money (26 answers total)

I would put it in a Vanguard managed fund. They're diversified and only go down in major market corrections, and it wouldn't be outlandish to see gains of 10-15% per year currently.
posted by mathowie at 10:00 AM on January 11, 2015 [6 favorites]

You need a personal emergency fund before you put money in riskier investments. So many things can go wrong and if one of those "major market corrections" happens right before you need the money you will be in big trouble.

I would save at least six months of your family expenses in an FDIC-insured savings account. With what's left, what you do with it depends on your personal goals. Maxing out retirement savings accounts before putting money in a college savings account is probably better for most people. If you don't have the assets to pay for college, the kid can get financial aid, loans, or a job. No one is going to give you a loan for your retirement.
posted by grouse at 10:12 AM on January 11, 2015 [8 favorites]

Response by poster: Of course we will have ~$10,000 in savings, but what to do with the rest, that is my big question. Also I don't like retirement accounts.
posted by 1inabillionmistake at 10:15 AM on January 11, 2015

Can you explain what your problem is with retirement accounts? The "standard" advice for this kind of situation is "keep several months of savings in very safe cash accounts, put the rest in index funds in an IRA," so if you don't want that answer, it'll help to understand why.
posted by Tomorrowful at 10:18 AM on January 11, 2015 [5 favorites]

You've already been taxed on it so a Roth IRA is the way to go if you want to do retirement saving with it but retain flexibility (you can withdraw principle after a certain time frame with no penalty but you can't touch the earnings without being taxed on them).

Also do not expect 10-15% returns (that is outlandish particularly over the long haul). Vanguard's balanced index funds are currently around 10% +/- 2% or so on their page and their balanced managed funds are about the same and that is a hot market.

Don't bother trying to time the market. It's a waste of time. Smarter people than you fail at it all the time.
posted by srboisvert at 10:18 AM on January 11, 2015 [1 favorite]

I've been told that index funds are the way to go for this sort of thing, as they seem to perform better than mutual funds or etc over similar time frames.

Do be aware that you may need to burn some or all of that savings during a Ph.D, especially if you're taking care of your wife/child on a RA/TA salary, which ain't much. I started 6 years in a ph.d program with about what you had in savings (but single, no kids), and ended up paying my moving expenses with a credit card, when I dropped out and took a non-academic job in another state. Granted, I ended up taking up some expensive hobbies to keep sane, but I'm not certain that paying for two additional peoples' expenses is less expensive.
posted by Alterscape at 10:19 AM on January 11, 2015 [3 favorites]

BTW the reason people recommend Vanguard is that their fees are low. This is critically important for long term investment. Some places eat your earnings up with high fees and it can be a difference of tens of thousands or more when you finally do retire.
posted by srboisvert at 10:21 AM on January 11, 2015 [2 favorites]

I don't like retirement accounts.

Why is that? If I were you, I'd put the money into a Roth IRA so as to take advantage of your low tax rate. They have the advantage that you can remove the money you put into them penalty free if you have some kind of financial disaster or need the money for a downpayment or the like.

To answer your question more directly, savings rates right now are low enough that you effectively lose money to inflation. If you want to make money with it, put it into a good index fund, but be aware that you're risking losing money in the short term as well.

If you're going down to a single income, make sure that you have some kind of plan in place for if you get sick/injured/lose your funding.
posted by Candleman at 10:25 AM on January 11, 2015 [2 favorites]

Oh and one more thing. Find out the average completion time for your graduate program and budget for that. It is not unheard of for 4 year graduate programs to have average completion times of around 6 years.
posted by srboisvert at 10:25 AM on January 11, 2015 [3 favorites]

When you're calculating your monthly stipend are you taking 9 months of stipend and then dividing it by 12 months?
Other PhD expenses: probably 2k per year for conferences; does your program cover your family's health care over the summer or will you have to pay for that?

Also, for what it's worth, kids are cheap in grad school! It is possible that you can get into student family housing or subsidized childcare. It may be more financially advantageous for your wife to work if she wants to.
posted by k8t at 10:45 AM on January 11, 2015 [1 favorite]

I will be funded with about $2,700 a month, plenty for us to live on for the next few years.

This goes against the grain of the usual metafilter advice, but I've been a grad student, and if I were doing it again and had that much savings, I would probably keep all or most of that money in the bank. 2700 a month is _not_ very much to absorb emergency expenses. Also, there are a bunch of expenses you may not have thought about. For conference travel, which you will likely need to do quite a bit of, most systems have you front the money and get reimbursed, and so depending on your field / where the conferences are, you could need at least a few thousand float for that. If your computer suddenly dies you may need to get another on very short notice. If you take longer than 4 years (that is a very short time, so it is probable) and there is really no funding after that, you may need some spare cash to live on. If you finish and don't get a job (which is entirely possible in many fields right now) you may need something to tide you over while you figure out what to do. 10k seems like a bare minimum or even not enough in cushion for a 1-income/3-person grad student household.

I'd at least recommend holding the money and then making the decision 6 months or a year in so you have some better idea about the grad student lifestyle.
posted by advil at 10:47 AM on January 11, 2015 [15 favorites]

That's not a lot of money, in the grand scheme of things, and you can't afford to risk any of it in investments.

You want to keep it safe and handy, but earning a decent interest rate. Consider laddering CDs.

Rather than annual rates, I might do it in Quarterly rates. Keep $6,000 handy in an interest bearing savings account and then split the remaining $20,000 over 4 CDs. So a 3 month CD, a 6 month CD, 9 month CD and 1 year. That way your savings are earning a wee bit of interest, (not much frankly, but a bit of something,) and heaven forbid you need the money, you're never more 3 months away from the CD coming to term. If one comes to term and you don't need the dough, great! Put that $5,000 in a 1 year CD and just keep doing that.

You really need to reassess your thoughts on retirement funds. Especially 401(k) or deferred comp (for the future) because you are losing a LOT of money to inflation, and missing out on employer contributions that can double your money.
posted by Ruthless Bunny at 11:16 AM on January 11, 2015 [1 favorite]

This question can't be answered without more information. The information needed to give you a better answer is at the least:

1. What are your financial priorities?
2. How much risk can you tolerate?
3. Do you expect to need this money, and if so, for what, and when?

It sounds like you're afraid to put your money anyplace where you can't access it readily (i.e. anyplace where the money is not 'liquid' and can't quickly be converted to cash). This implies that you think you might need that money in the short term. If you have an emergency fund, what do you expect to need that money for? A down payment on a house? A car? Some other specific financial goal? You need to know what you're saving for and what the expected time horizon for that need is. After that, determining your risk tolerance will help you choose the right investment.

If you are extremely risk averse, and that is the reason why you don't like retirement accounts and you fear putting money in places like a 529 account, then you are going to severely limit the amount of interest you can earn on it, because generally, less liquid investments can earn you more, and higher risk investments can earn you more. If you're not willing to actually commit savings to a goal like college education for your child via a 529, or retirement for you or your wife via a 401k or IRA, you will also miss out on major tax breaks you could receive by utilizing these investment vehicles, which - if you invest the difference - can translate to much higher savings for you - just like avoiding account with high fees, in the future through the power of compound interest.

I'm reading into your post now, but if the reason for your fear is that you don't feel like you understand personal finance very well - you are not alone, it would be a great idea to try to understand it better before you make your decision on what to do, and I would highly recommend getting out some books from the library or taking an online course to learn more (I use Get Rich Slowly as an example because it's the site I used to learn about personal finance, but there are many others).

As a side note, you say 'of course' you will have $10K in "savings" - I suggest you closely consider that assertion. How much interest does your savings account make? If it's like most savings accounts, you're making less than 1% interest - maybe a lot less! You're essentially losing money on these savings, taking into account inflation. Choosing a less obvious option, like a rewards/high yield checking account, can earn you significantly more on your money (or at least lose less!).
posted by treehorn+bunny at 11:36 AM on January 11, 2015 [4 favorites]

With your wife, right now you can put almost all of it in Roth IRAs by putting in maximum contributions for 2014 and 2015. Do that and opt for the total stock market index fund. Principal can be withdrawn at any time without penalties. DONE.
posted by metasarah at 11:53 AM on January 11, 2015

Your going to want a vehicle from which you can withdraw without penalty, because if you finish your 4 year PhD in 4 years, you're either in a very specialised program or a very rare bird.
posted by DarlingBri at 11:59 AM on January 11, 2015 [6 favorites]

This goes against the grain of the usual metafilter advice, but I've been a grad student, and if I were doing it again and had that much savings, I would probably keep all or most of that money in the bank.

I very strongly agree with this. I'd give up the potential investment gains in favor of keeping all or most of the money reasonably accessible. That could be as basic as a savings or money market account, or the suggestion above of laddering CDs if the rates are good enough to make that worthwhile.

For conference travel, which you will likely need to do quite a bit of, most systems have you front the money and get reimbursed, and so depending on your field / where the conferences are, you could need at least a few thousand float for that. If your computer suddenly dies you may need to get another on very short notice.

Both of those match my experience, plus I had a couple of opportunities for overseas travel that were about 80 percent funded -- without a cash reserve, you might have to pass up on those kinds of chances to do important research or networking. My school was very slow about travel reimbursements, too, which forced many people I knew to carry credit card balances every time.

Also, hopefully your grad school will be better, but mine provided super crappy health insurance (especially for families), and I knew people who faced real financial problems from fairly minor health issues, or even just basic stuff like vaccinations for overseas travel.
posted by Dip Flash at 12:04 PM on January 11, 2015 [4 favorites]

As a note, keeping the money in a savings account does not preclude making it an IRA - while most IRAs tend to be investment accounts, most banks offer IRA savings accounts and CDs. Again, with a Roth, you can get access to the principle without penalty, while still gaining the tax sheltered advantages and being able to roll that money into a tax sheltered investment account down the line if desired.
posted by Candleman at 12:50 PM on January 11, 2015

I agree with the above about retirement accounts - if you're willing to invest in index funds, you should do so in a Roth IRA. You can withdraw the contributions any time without penalty so it also functions as an emergency account, and starting one earlier rather than later is beneficial not only for the benefits of compound returns, but because once the IRA has been open five years you can also withdraw the earnings for certain expenses, such as a first time down payment. One thing to note that I don't think has been mentioned is that this may be your last chance to open an IRA for a while. Any contributions need to come out of earned income from that year, and depending on how your program is funded, your stipend may not qualify as earned income. Because your wife worked this year, you can each put in $5500 as long as she earned at least that much.

So that takes care of $11,000. Personally, I would put the rest in I-bonds through treasury direct. I bonds are savings bonds that are guaranteed to match inflation plus whatever the interest rate is when the bonds are bought. Right now the interest rate is 0%, so while your money will grow at the rate of inflation, it won't actually gain value above inflation. Even so, I-bonds are currently increasing by 1.48% based solely on inflation, which is higher than most savings accounts and CDs. They'll announce a new interest rate in May, so I'd wait until then to buy - it can only go up!

Unlike most bonds, I-bonds cannot lose value, even if interest rates rise or if there's a period of deflation. You don't need to pay federal taxes on any earnings until they are redeemed, making them much less complicated than investing in index funds (at least outside of a retirement account), and they're exempt from state taxes. You do need to hold them at least one year before redeeming them, but you have a $10,000 cushion so even in an emergency you'll likely be able to make it a year before needing access to that money. After a year they can be redeemed any time with a small interest penalty, and after five years there's no penalty. They can also be redeemed tax free for certain educational expenses, which makes them a lot like investing in bonds in a 529 account if you choose to use the funds for your child's education.
posted by exutima at 1:18 PM on January 11, 2015

$32,400 a year for a married couple and infant child isn't a lot, and you're apparently locked into those low earnings for years. I would put the whole thing in a high yield savings account and keep it all for an emergency fund.

However, if you really feel good about a $10,000 emergency fund, then put the rest of it in a Vanguard index fund. S&P 500 or total stock market if you want long-term growth and are sure you won't need this money; some of your money in a total bond market fund or something if you want to be more risk-averse and are willing to sacrifice growth for stability.

Retirement accounts are tax-advantaged and an investment savings account is not, so your idea that you "don't like retirement accounts" is not a good one if this is really investment money for the long-term.
posted by J. Wilson at 1:18 PM on January 11, 2015

To put things into a bit more context based on my IRA returns this year by not investing your funds you lost out on about an 11% return. So at 24K that works out to over $2640. Assuming this is a hot market return that you can't expect every year a realistic conservative earning estimate of 8% is just under $2000. Compounding that over 4 years it isn't chump change you are turning down by avoiding retirement funds (after 4 years it would compound out to 32,651.74 total - principal + interest). That doesn't include shielding your current income this year from taxes if you do a conventional IRA which would make your earnings ( prevented losses actually + earned interest) even greater.

Being completely risk averse can actually cost you more than the risk in terms of financial mistakes.
posted by srboisvert at 3:45 PM on January 11, 2015

I have a friend who did this in [Highly Desirable University Town], caught a massive boom in that town's real estate in the 90s, and practically lived on the proceeds of renting the place out for many years, in a lovely Latin American city

That is probably an unrealistic scenario in most places at most times, but everywhere there is definitely a smart path. In the place and time I was in grad school that was actually buying a trailer in one of the trailer parks next to the campus -- housing prices were not good, but trailer prices were cheap and didn't drop (and trailer site rental costs were low), making that a fantastically better option than renting over four or five years. I wasn't that smart, but I was envious of the people who were once I figured it out.

The point being, look at the actual local situation and make the best choice for that place -- and having those cash reserves will let you do that. You have enough for a down payment for a house in many places, a trailer where I went to school, or simply an emergency reserve if renting in grad student family housing is the smart option. Don't make the final decision until you know the place well enough to make a smart choice.
posted by Dip Flash at 4:19 PM on January 11, 2015

One wrinkle for an IRA is that graduate stipends generally are not considered "earned income" unless they are reported on a W-2 as wages. If they are reported only on a 1099 as a grant, then they don't count as earned income. You need earned income to qualify for an IRA contribution. The earned income must at least equal the contribution to the IRA.

But in your favor is the fact that either spouse can contribute to both spouses separate IRAs. So if your spouse has earned income, then the spouse can contribute $5,500 to each IRA for a total of $11,000. If you do this for both 2014 (up until April 15) and for 2015, then you can contribute a total of $22,000 right now. But keep in mind that you must have earned income for both years of the contributions.

I agree that a Roth makes the most sense because of your likely low tax bracket. Given your education path, you really need to keep your cash available and it will be available for withdrawal at any time in the Roth IRA. If it turns out you don't need the money for an emergency, then you can leave it to grow tax-free in your Roth for the rest of your life. It's a win-win.

But if you give up your once a year opportunity to make a Roth contribution, you don't get a do-over. You've missed your once a year opportunity for lifetime tax free investing.

To keep the money relatively safe for near term expenses over the next few years, your best bet would be a short to intermediate term bond fund at Vanguard. Once you've finished your education and established a more certain income, you can move your money into more risky investments.
posted by JackFlash at 6:18 PM on January 11, 2015

I agree with dip flash and advil--the most important thing is to make sure you have enough money available for unexpected expenses. It's amazing the stuff grad students are supposed to pay for out of pocket, and even if it is something that will be reimbursed eventually that process can be slow. I was especially amazed how much money is required transitioning from a postdoc to an academic job. You have to front money for tons of travel to interviews, buy clothes to look the part, and cover your expenses for any gap time you may have between finishing training and starting your job. After years of being in school and not making much it is a lot money, especially for someone with a family. You have an advantage by actually having savings, but that is only if you keep them somewhere where you can access them! A 529 plan should definitely be out.
posted by insoluble uncertainty at 6:19 PM on January 11, 2015

Although it can't hurt to throw $25-50/month into a 529 and maybe see if grandparents are willing to do the same.
posted by k8t at 7:58 PM on January 11, 2015 [1 favorite]

I will be funded with about $2,700 a month, plenty for us to live on for the next few years.

You should check with your HR or payroll department to find out exactly how your income will be reported to the IRS. Universities are not consistent in how they do this for grad students and fellowships. You may be faced with an unexpected surprise concerning actually how much money you will have for living expenses. There are three cases:

1. They report it as wages on a W-2. In that case, they will deduct FICA and income taxes from your take home pay, just like a regular job. Your net take home pay will be $2700 minus estimated income tax and 7.65% FICA tax.

2. They report it on a 1099-MISC in box 7 as non-employee compensation. In that case you will be considered self-employed. Not only must you pay income tax, but you must also pay 15.3% self-employment tax (FICA). This money will not be taken out of your check. You must save this money yourself for taxes at the end of the year. You should pay your estimated taxes quarterly.

3. They report it on a 1099-MISC in box 3 as other income. In that case, it is not considered self-employment income and while you are still responsible for income tax, you don't pay self-employment tax (FICA). You are still responsible for saving the money to pay taxes. You should pay estimated taxes quarterly.

It's important that you know this in advance so that you don't have a nasty surprise at tax time next year and find out that you have unpaid taxes and penalties, and have overspent your real net income.
posted by JackFlash at 8:04 PM on January 11, 2015 [2 favorites]

One comment about travel/conference money (relevant since it would mean you might get away with less cash on hand): it's entirely possible your university can do cash advances for things you expect to be reimbursed for. I only found out about this during grad school because my advisor was very savvy and sensitive to the challenges of living on a grad student salary. I would buy plane tickets, fill out the appropriate forms with the department secretary, head over to some other campus office where they cut me a check, and then make sure to meet their deadlines for filling out the actual reimbursement paperwork. (If I recall, it was not particularly onerous, like having everything officially submitted 30 days after the end of the trip.)
posted by ktkt at 9:15 PM on January 11, 2015