We can all agree it was a terrible job market last year. And yet, some of you will be proceeding, newly hooded, into more highly paid employment than you had last year. When I was in graduate school, we used to distinguish between “a job” (something that pays better than graduate school, which could be anything from a one-year adjunct to an administrative, IT or public history position) and “a real job” (employment that offered a longer future, most likely tenure-track.) Nowadays there is also a third category that has expanded dramatically: the post-doctoral fellowship.
Regardless of what category you fall into, if you have finished your PhD and proceeded to paid employment of any kind, you may be making two to three times the money you made last year, which will make you feel giddy. For this reason, my dear, you are in need of Radical Financial Advice.
1. Find out when you will receive your first pay check, how much it will be, and how many months a year you will be paid. It is not uncommon that there is an uncomfortable to yawning gap between the end of your graduate fellowship or post-doc and the beginning of your new salary. If you have been living paycheck to paycheck (which you have) and don’t have a partner who is earning, you may suddenly find yourself anywhere from two to four months without income. Most college fiscal years begin in July, but most adjunct jobs and post docs, as well as some tenure-track jobs, begin paying only after you have actually hit the ground in September. This means you might be paid at the end of July and you might be paid at the end of September. You may be paid on a twelve month schedule, or an 8-9 month schedule. Find out and plan accordingly. Sometimes it is possible (especially with a push from a kindly chair or dean) to get your new Human Resources people to re-calibrate your salary to a cycle that eases your transition slightly better. Otherwise, you need to make a plan for whatever time you will be without income. Like crawl home, live with your parents and wait tables until your prestigious university job begins.
2. You cannot afford not to have an accountant. Used to filling out the short form? Well you may be able to go back to it year after next if you are in a tenure-track job, but not this year. Why? Because poor as you may still feel once you figure out what you will actually be living on once you begin debt repayment (see below), you have leaped up the tax ladder. Listen carefully, because this is important: you will probably owe more in taxes next April than will be withheld from your salary. Why? Because withholding on your graduate fellowship, post-doc or adjunct salary was done at a far lower tax rate. So while the amount withheld from your new salary will be appropriate, the amount withheld from your servant wages will not have been, and you will owe money.
An accountant can help you plan for this by either telling you how much to have withheld in your new job, or by calculating how much you have to save to pay the Feds in the spring. The former strategy is preferred, since under-withholding is frowned upon by the IRS, but you can probably get away with it for a year.
I’ll tell you right now: H & R Block doesn’t count as an accountant. Go to a senior colleague who looks relatively prosperous and ask her who her accountant is. You need someone good because, before taking on the financial obligations of moving, you also need to be able to plan…….
3. Your budget. That’s right, it’s Blondie and Dagwood time. And this is perhaps the most important part of this post, because the first thing you will need to get a handle on is….
4. Your debts. It’s no shame to have them: nearly everyone carries debt from college and adds to it in graduate school. But there is good debt and bad debt. Let me explain.
Good debt includes your massive student loans, that will kick in six months after the hood falls on your shoulders. Once you have learned from your accountant how much your monthly salary will be, you then need to lop these payments right off the top. My advice is to create a separate bank account for debt payment and have that part of your income immediately deposited in it; then have the same account make an electronic payment on a day or two later. This way you will never get your mitts on the money, and you will never miss it.
Good debt is buying a house. But, should you be in a position to do so, one conversation to have with your accountant is whether, in your income bracket, and given the volatility of the real estate market, this is a good time in your life (and the right location) for you to make that investment. Take it from one who is on her third home: buying a house is far more expensive than your cheerful real estate agent will tell you. Take the numbers s/he gives you for the first year and add $10,000. What you might find in this soft market is a rent-to-own situation, which might be attractive if you are tenure-track. In this scenario, you have the option of owning a year or so down the line, with a portion of your rent applied to the purchase price. In this case, you will need to discuss with your accountant how much you would need to save to complete the sale (there are transfer taxes, mortgage fees, and other hidden costs to house buying that are tax deductible, but must be paid up front.)
Another good debt is purchasing a car if you do not already have one and you will need one to get to school. Unlike student loan and credit card payment, paying back a car loan establishes your credit worthiness. In addition, even though you will have to come up with $1000 -$2,000 to put down on a car, it is also a particularly good economic environment for purchasing a car: I am still getting ads for 0% financing, and by July and August when they are trying to get the old model year off the lot, you might even see no money down offers.
But if you are living in a college town where you can easily bike or walk to work, consider not purchasing a car immediately
. Aside from the down payment, this will probably save you around $2500 alone next year in insurance, gasoline, maintenance and taxes (if you live in a state that taxes autos.) Renting a car when you need one is much thriftier, as is offering to pay for a friend’s gas so that you can both go to Sam’s Club
and Trader Joe’s
to load up on household items and frozen food in bulk.
Bad debt is credit cards. My guess is that you have what — two? Three? My other guess is that you have been closing the gap between your actual income in graduate school and what you spend with your credit cards and that you are paying a lot of interest. Maybe you have even been accepting those offers that allow you to transfer debt from one card to another at 0% for the first six months? You did that more than once? You are paying interest on the accumulated interest, aren’t you? Now listen very carefully:
You must stop. Now. Right now.
Until you stop living on credit you are not working for yourself, you are working for the bank. Credit cards are l
ike crack. They sing us siren songs, and we love what they say because we can cure so much unhappiness today and pay for it tomorrow (and the next day, and the next day, and the next day….) Credit cards are like affairs: we tell ourselves and our friends there is nothing wrong with them, and yet we feel compelled to lie about them too. Tell your accountant exactly what you owe, and tell the truth. Believe me, s/he has heard it all — and so much worse — before. Then try this: when you are shopping around for a bank, find out whether you can get a fixed-rate consolidation loan to pay all your credit cards off over a period of 36 months. Compare the rates on these loans, and choose the bank that gives you the best one. Make sure there are no penalties for early payment, and then consider teaching a summer course next year to make a serious dent in that loan. In the end this will save you thousands of dollars.
Most important, until you know all the above numbers — taxes, debt repayment, and net-net monthly salary, you will not know how much….
5. Money you and your dependents have to live on. I am going to tell you right now that even though you just got a big raise, at this point in your financial planning process this will seem like a heartbreakingly small number, particularly if you are financial obligated to parents, spouses, children or siblings. It may be a small enough number that, particularly if you are moving to a big city, you may have to seriously consider a roommate situation. But cheer up: you are not going further into debt, you have cancelled all but one credit card, you are going to pay for everything in cash from here on out and (this is the best part, after you have dealt with all your financial baggage), barring complete unemployment, your real income is most likely to go up from here on out! Budget for food, utilities (can you really afford the cable package you want?), rent (is heat included? Not an important question in Los Angeles, but vital in Boston), transportation, and clothes. And do yourself one more favor…..
6. Save something. Anything. This will make you feel powerful and in control of your fate. Make it $25 a month if that is all you have, but put it somewhere that you cannot touch it. I, for example, have a Roth IRA, where I have for years put all the money I have ever earned writing and speaking, and it has become a nice sum over two decades of employment. Look at it this way: a $250 honorarium for giving a talk locally isn’t much money, but with compound interest over the course of your working life, it becomes an impressive sum on which you have also deferred taxes. If you are a highly self-disciplined person, you might want to save up your money for a bit and then put it in a CD, where it is slightly more available to you but you have to make a conscious decision to actually use it rather than fritter it away.
This advice may be more appropriate to some people than to others, but the important message is plan
. Plan now
. You don’t have to be Suze Orman
to know that one of the worst legacies of a prolonged period of debt accumulation and low income is learning to ignore the real state of your finances as you fear deprivation more than you fear living beyond your means. While this can be OK during graduate school, when your first priority is establishing yourself as an intellectual and accumulating debt can allow you to complete your studies in a timely manner, to prolong debt accumulation into your salaried life can limit your options severely down the line.
On the other hand, at a moment when you are launching yourself into life as a professional intellectual and so many things are out of your control, this is one place — with a little prudence and self-discipline — where you can feel powerful and in charge.