Reader Kate (very nicely) asked me to help her out with this budgeting thing and cash flow.
I cannot do every single budget that comes along, so I’ll tend to do big budget and my notes for each situation and hope that it helps others who are in similar situations.
See the Budgeting Tool I use here. It is more detailed per month but it doesn’t forecast into 5-10 years unless you make 5-10 copies.
Kate, a Graduate Assistant’s Profile in her words:
I’m a 23 year old graduate student with $20,000 in loans from college.
I’m a PhD student, and will be in my program for at least another 4 years, with tuition waived and a $15,000 per year income. My loans (both Stafford) are accumulating interest (6.8%), but I don’t have to pay anything back while I’m in school.
I’m curious how you would suggest that I prioritize saving vs. paying back loans; and how much of a cushion is sufficient.
Do you think that the $1000 cushion you had while paying off your loans was sufficient*, or should I aim a bit higher.
I would also love feedback on how aggressively you think that I should try to pay off my loans now. I will certainly be earning a lot more once I have my degree, but will also have more expenses (I don’t want to rent forever, hope to have kids in my mid 30s, etc).
*Note: I had $60,000 in debt with only $1000 in cash in the bank. This is because my job was very secure and I had no worries about being fired whatsoever.
So the year that just passed, this is what Kate provided me:
- She has $1000 saved
- She has a BF who is working but whose income is not included here
She ended the year with a $1240 in deficit, plus her student loans still outstanding.
Here are her projected budgets for the rest of the years and even her life:
- Ignore the note next to Wardrobe. The major overhaul for her wardrobe only happened in 2010.
I assumed her job would pay $80,000 but net $60,000 a year. I don’t want to get into exact numbers with taxes, fees and whatever else, so Kate will have to adjust accordingly based on her personal income taxes.
- Ignore the note next to Wardrobe. The major overhaul for her wardrobe only happened in 2010.
You will notice a couple of big line items under expenses such as moving, furniture and a car.
She mentioned she wanted to buy a used car in 2016, but I don’t know what her budget is or what she’ll spend, so I took $10,000.
Could be more, could be less.
I also divided it by 12 because I am assuming she will save the money first and then spend it to pay a car off in full, without a car loan, car lease or car note.
- Ignore the note next to Wardrobe. The major overhaul for her wardrobe only happened in 2010.
ASSUMPTIONS ABOUT KATE’S BUDGET
- $60,000 net per year once she gets her job assuming 25% taxes
- Kate’s assumption: Rugrat #1 will come along in 11 years when she is 34
- Kate’s assumption: Rugrat #2 will come along in 14 years when she is 37
- She wants to save for college funds for her future kids, retirement & buy things
- Used car bought in cash, about $10,000 (not sure what it would cost)
- No second income set up here, so I’m assuming ONE income forever.
- **Assuming no lifestyle inflation but this is really optimistic 🙂
**No lifestyle inflation is a tough sell for anyone, including me.
For me not to spend more than what I’m “used” to, I have to watch my budget and keep tabs on myself. Kate’s pretty good with her budget in general, based on the numbers she gave me, so I have the utmost confidence she won’t go crazy and spend double what her expenses are today. Still, this is something to consider.
WHAT I THINK ABOUT KATE’S BUDGET
In a nutshell:
- Missing savings and/or emergency fund (what’s the difference?).
- Beef up her EF before paying her loans aggressively
- Accumulated interest from 4 years packs a punch once she graduates = OUCH
- No retirement savings included either, and I’d save for retirement over a college fund.
Missing savings and/or emergency fund (what’s the difference?)
That’s the biggest glaring omission I see in her budget. No regular or emergency fund savings. I know it’s hard when practically everything you makes goes to expenses, but life isn’t quite as rosy as we’d like it to be. Things happen, people get hurt, sick or lose their jobs.
Emergency Fund should be 3 months to a year worth of living expenses saved.
It is a lot of money, but as I said, you cannot plan for everything to go perfectly, you can only plan for when things go wrong… and if everything does go perfectly, you’re well-prepared for the future.
No retirement savings included either; Save for retirement over a college fund
It’s great to want to pay for your kid’s educations, but you also have to save for your retirement.
In fact, I am a firm believer of funding your retirement over your kids’ college funds, because you do NOT want to be relying on your children to pay for your retirement when you are unable to make any money to support yourself.
Support yourself first, ask of nothing from your children and if you can help them and you want to, by all means go ahead.
I don’t know what Kate will want to live on for retirement, but let’s say it’s 70% of her future income, or $42,000 a year.
Assuming she starts saving in 2016, or 6 years from now when she is 29, and she wants to retire at 65 she will need to save a minimum of $6000 per year or $500 a month which is right on target with my assumptions above.
Calculation here, and MSN Retirement Planner Calculator used here with my variables:
NOTES ON THE ABOVE NUMBERS:
- Age = 29 because I’m assuming NO retirement savings until she has a FT job
- She is to retire at 65
- Women live longer, so I say the age of 90 for women, 85 for men.
- Her annual income is her assumed net income after taxes (may vary)
- 10% saved for retirement is a good number, and is $6000/year
- Before retirement, her investments could earn 8% as an average
- When she retires, her assets will be in low-risk, low-earning investments so it’s 5%
- She needs 70% of her %60,000 net income, or $42,000
- I added Social Security in there, but you can decide to be more conservative & remove it
Note: The actual numbers aren’t THAT important.
Before you scream at me, they’re important, but there are SO many variables you can’t account for, that you need to just be as conservative as possible for what you think is realistic, so your numbers WILL change if you do the calculations for yourself.
She’ll want a house in the future but doesn’t know where, how much or what it’ll cost
Again, another variable you can’t control. This one I’m leaving out of any future budget calculation I make below, but keep in mind that her mortgage may not equal her $335 – $770 estimate of what she pays for in rent and utilities.
Then you have to factor in taxes for the home, that she’ll want to save a 3% maintenance fund for the house just in case something happens, realtor fees, moving fees, new furniture, decorations and so on.
Everything goes up in cost.
Instead of paying her student loans, save the amount as her EF for now
Her loans are interest free for now… but not really. All “interest-free” means, is that you don’t need to make any payments on your loan now, nor pay the interest now, but the interest actually accumulates for 4 years before it she graduates, then it gets added to her loan.
Even so, she should save for an emergency fund and then put as much as she can towards her debt (since it’s accumulating interest) so it stops compounding and increasing with a big fat loan at the end.
MY REVISED ‘BUDGET’ FOR KATE
I didn’t change much, but here it is for next year, and so on.
STARTING POINT FOR KATE
- $1000 in savings
- Has a 403(b) retirement plan but hasn’t saved anything into it
- No full-time job until she’s 29 in the year 2016
- Debt will be in the form of 2 loans the bulk of it with 6.8% interest
The major change I made is to add a savings/emergency fund plan
For the “Emergency Fund”, I would save as much as I can into it up to 3 months and then channel the rest towards student debt.
By reducing her principal, she will reduce the cost of her debt overall (I kept it at $85/month just for simplicity’s sake), and she could be debt-free before she graduates.
The decision to save for retirement is subjective: I said “No”, but she might decide “Yes”
I am still not saving for retirement at this point because the numbers she gave me are pretty low for living and even though she could start early and make use of compounding interest, this is not my call to make seeing as she has debt and wants to make that her #1 priority.
Also, retirement savings means you put the money in and can’t take it out. I want her to have liquid savings until she’s financially able to sock away money without having to draw on it until she’s 65.
She can always decide to save $100 in her 403(b) retirement plan (no match) at work.
So here’s what I’m thinking:
This is a very, very optimistic plan, and before you pick it apart, I understand that things happen, emergency funds get eaten, and sometimes you need more than you think you did.
That said, this is what I think could realistically be done:
Moving on to the next years:
As you can see this is what she could be owing at the end of 2014, going into 2015.
Once she graduates in 2015, it will only take her 4 more months or less to clear her debt to clear it in full.
She will start her full-time job in June, debt-free and be able to save for everything she wants.
Without her debt, she will have an extra $3540 left each and every MONTH to put towards what she wants.
- 10% for retirement
- 5% for emergency fund
- 5% for short-term savings
The rest of the money can be saved aside for her future kids, vacations, a new dog, or to increase her budget categories.
I really don’t want to presume anything but here’s an idea:
I know it sounds strange to save 20%, with 10% of it going to an EF and short-term savings, but I really like the idea of saving 10% – 15%, with 20% being the best if you can afford it.
Kate can always use the short-term savings towards her moving, furniture, car or house, and once the EF fund is fully funded she can stop and put the money elsewhere.
So what about kids?
Here’s what I see, assuming no changes in anything including inflation, job increases and so on, she will have to consider so many other variables:
- Cost of each kid’s first year is $10,000 a year or $833.33/month, although Jacq says otherwise
- Subsequent kid years are around $7000/year or $583.33/month as per Minimalist Mom
- Update: Amy mentioned maternity leave which means a pay cut too
- She’ll want to save for their college funds at perhaps $250/month per kid
- Don’t forget childcare either.
- Let’s not forget that she has to buy a home, and she should have $66,240 at $920/month saved
- As a result of kids and a home, ALL of her bills will increase.
- Her EF should be fully funded at only 3 months because her expenses have gone up to $4000/month
- $4000 x 3 months = $12,000 required
- $4000 x 6 months = $24,000 required
- $4000 x 12 months = $40,000 required
The good news is that she will have a good income, this is just ONE income not two, and she’s already frugal.
Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
Which social science you are in matters a lot as far as job security. Academic jobs are hard to come by no matter which field you are in, but some fields have much better "outside options" than others if you cannot find a job in academia. For example, among the social sciences, you are in much better shape with Economics as your field compared to others, because there is a lot more private sector demand for people with advanced economic modeling skills in big corporations, government, etc., as well as more think-tank/research fellowship type work that are close to academia and allow you to transition back into academia. On the other hand, there is less private-sector demand for the skills social anthropologists have.
Very true. I think that the department you're in matters a lot too, as well as which professors you work with and how much you publish. The very top programs have great job placement rates, but funding is so competitive that many students graduate with a lot of debt or choose to leave before getting the degree (for a variety of reasons). On the other hand, going too far in the opposite direction and attending a poorly ranked PhD program seems like career suicide. Basically, where you get the PhD matters. So does what you do in grad school. These are variables that everyone should be aware of when applying to and choosing a program, and while going through grad school. Anyway, I feel good about where I am, what I'm doing, and who I'm working with.
I am spellbound by how well thought out the budget is for the years to come. If only more students in university would think things out this way. Too often they get out of uni with massive debt and realize how difficult it is to find employment for their chosen path. Amazing job FB
Thanks Jolie 🙂 I really appreciate it. It wasn\’t easy, especially trying to think of the future years, but I think Kate is in an awesome position to know what she wants (in general) and to plan for it!
The job market for people who seek academic careers is abysmal. You should ask the Director of Grad Studies what the outlook is–and what the placement rate is for recent grads. Since I don't know your field, I don't know what a reasonable textbook budget is. It seems to me that for everyone the easiest categories for saving are CLOTHING, FOOD, MEALS OUT. I would be very very miserly in these areas. Any money you don't spend now can be applied to loans later–or tide you over if you have trouble finding a job–or used for a vacation. Of course, you need to spend money on meals for networking with friends and professors. But grad school is not a time to amass a fine wardrobe. That 2500 is 1/6 of your total budget!
Check out my blog if you have a chance. I fed my family of 4 on under $200/month. And we love to eat!
This is great advice! The DGS is my advisor, and our department is small enough that I've talked to almost all of the grad students who have been on the market and/or gotten jobs since I've been in grad school, so I've got a pretty good idea of current job placement of PhDs coming out of my department. It realize it's very scary out there, but I'm also very ok with taking a job anywhere I can after grad school.
The clothing spending that's done is done, and I haven't purchased any clothes in over 2 months now. I'm hoping to spend less on clothing spending for this year and in the future than I projected, but I also want to be realistic about how drastically I can change my behavior.
Is there a specific post on your blog (or a set of posts) that you would recommend on how to keep food costs low? I use coupons, check http://www.grocerysmarts.com/, rarely buy pre-made food, rarely buy meat, and rarely eat out. This keeps costs low. However, I get produce from the local CSA, buy organic when it matters (http://www.webmd.com/food-recipes/slideshow-to-buy-or-not-to-buy-organic), and will pay a bit more for healthy, ethically produced products (http://www.goodguide.com/ is a great resource). Supporting local farmers, eating lots of fresh produce, and minimizing the chemicals that go into my body are important to me, and so I pay a bit more for groceries each month than I did right after college. One thing I am planning to change to cut costs is to switch to dry beans instead of canned,
If you (and your boyfriend) are okay with "going anywhere" that opens up a lot more possibilities. Too often I see people who are dead-set on academia but restrict themselves to one city and end up disappointed when everything doesn't end up in their favor. It also helps if your boyfriend has a job that is relatively portable or there is a demand for everywhere, including smaller cities.
Daycare is the big variable for cost of raising a kid. I was lucky enough that I had my 22 yo when I was going to school and daycare was subsidized. Keeping in mind inflation since it was almost 23 years ago, I think my cost was around $100/month for daycare. I lived on ~ $750/month for 4 years with $350-400 of that being rent. For the 10 year old, daycare costs when he was a baby were ~ $600/month – so I think that's where the $833/month comes into play. At least I think that's the case.
Bear in mind too that I was raised by Great Depression era parents / grandparents and raised my own kids the same way because that was the only way I knew how (none of my friends had babies as early as I did or were as broke as I was), so the costs for what society / the Jones' considered "necessary" for raising children didn't impact how I raised mine. I've been to stores like Babies 'R Us to buy stuff for friends' baby shower presents and it's really quite mind-boggling how things have changed in the last 20+ years (besides the fact that stores like this didn't exist 20 years ago). Somebody must be buying all this stuff?
I'm not sure how pensions work in academia in the US, but at the uni I worked at in Canada, they're really good and are defined benefit. That would reduce the amount she needs to personally save for retirement.
The budget is good – some costs seem a bit high, some a bit low (the pet costs are very low IME) but it's a juggling game at that point anyway with so many unknowns.
Thanks for the great observations Jacq! There are so many unknowns about the future, and I obviously will have to adjust my 2015 and onwards budget to fit with reality. I've actually worked at a daycare before, so I'm aware of how expensive they are. I also have a more minimalist approach towards raising kids, so I certainly won't be wasting money on getting them all of the newest toys.
Pensions are a great point, and there's also possibilities for working sabbaticals into maternity leave and many universities/colleges have some kind of set-up where they will allow professor's children to attend their school (and sometimes their sister schools) for free, which would substantially decrease how much I would need to save for my children's education. So many variables to consider, and many bridges that I simply can't cross until I get there.
The real reason that I'm looking so far ahead is to decide how much I should focus on saving and paying off my loans now. It's tempting to just put off paying my loans until I graduate and have to start paying them. Given how much interest I'm accumulating and how many more expenses I'll have after grad school, thinking ahead helps me be more realistic about how my current budget will impact my future.
The only thing that stood out to me was the idea that she'd get an academic job starting at 80k, because that seems laughable to me, but I have no idea what she's studying! I just know that people coming out of psychology grad school are being paid closer to 55-60k for their first academic job, ouch! These kinds of sacrifices make you wonder if it's worth it to go to graduate school these days.
It would help to know the field Kate is in and what her career plans are. I think her clothing expenditures are way too high and the book expenses too low. I have colleagues who are teaching w/ me and are still (in late 40s/early 50s) paying off student loans.
I'm in the social sciences and planning to stay in academia. As I told FB, the average salary for my field is about $80,000 per year, but it could be in the range of $60,000 to $100,000 depending on which city I'm in. I'm well aware that this is not the starting salary. I'm also aware that professors never retire 😛
Are you referring to clothing costs for the past year (which I admit were quite high, but I was overhauling a wardrobe of jeans and t-shirts from my undergrad days) or the projected $75/month? What would you recommend?
I've been able to keep book costs low by buying used, inheriting books from older grad students and professors who don't want them, and using the internet and library. How much would you say is a reasonable amount to spend on books per month?
My parents both have advanced degrees, and didn't finish off paying their loans until I was in high school, which is part of why I'm trying to be aggressive about paying off my loans now. I also chose a program that has guaranteed funding for grad students to avoid collecting more debt.
$285/month for rent? Does she live in a 3rd world country??
I should note that I paid around $300 for rent once, I split it with BF.
..and that was in Montreal, Canada. 🙂 Not a 3rd world country.
haha, no, just the southwest…
Rent is $570/month for a 600 square foot duplex, and BF and I split the rent.
Just wanted to thank everyone so far for leaving comments to help Kate out. I really appreciate it. 🙂 Keep asking questions please!
Thank you SO much! Everything looks great! I hope your head has recovered 🙂
And thanks for the thoughtful comments!
Can't you consolidate the student loans into a lower interest loan? 6.8% seems ridiculously high at this time.
I would say forget about paying off the loan until you have a real job. It's too much of a burden right now.
Save up the emergency fund and invest instead (assuming you can get the interest rate down a bit.)
Cost of kid at 10k/year seems inflated to me. I will report back in a year. 🙂
The loans are unsubsidized Stafford loans, and I have looked into consolidating them, but it wouldn't lower my interest rate.
I also think the cost of a kid at 10k is inflated. Please do report back (and congrats)!
So having done the graduate school then a job route and seeing so many of my friends do it as well (that I met in grad school) this is what I would advise:
Stay off paying the loans until you have at least 6 months of savings.
When you get done with your Ph.D. it is actually a LOT harder to find a job than people think. The ones that you get may be good and pay well, but often you're very specialized in your skill set and so it is harder to find the RIGHT job.
For instance, I'm overqualified for most chemist positions, when I look for industry positions there are typically only 1-3 advertised PER YEAR that I'm qualified for. And I may not even be the best one for the job.
I've seen a lot of my friends being unemployed after getting their graduate degrees for between 3 to 12+ months. If they're not planning on going in to academia the minimum I've seen in 2 months of unemployment. In San Diego, not a single one of my friends was able to secure employment in less than 2 months. Keep in mind they are all chemistry/biochemists trying to get jobs in one of the best markets for pharmaceutical research in the country. I have a friend who graduated in Spring 2008 who still hasn't gotten a position and can't qualify for unemployment because he was on a fellowship as a graduate student and not a "worker".
If I could have done ANYTHING differently when I was in graduate school it would have been to live like I was still an undergrad (no cable, crappy housing, etc) and just save, save, save.
Also, while I know people like to be optimistic, she should also save on the off chance that her and her BF break up. Since she is so financially dependent on him for car issues, it would be good to have a larger savings account just in case they part ways.
Great advice! I'm planning on staying in academia, and the hope is that if I can't find a job in 2015 I can make my dissertation work last an extra semester or year and stay in grad school so I have some income. But I do realize that I need to have a good chunk of money set aside for the months between when I get the degree and when I get a "real" job.
The nice thing about the car is that I don't need it. I lived here for a year before BF moved to be with me, and am renting a house that's within walking distance of everything. So if we break up my transportation budget will actually decrease, but my rent and utilities would go back to their 2010 amounts. I'd probably end up moving to a smaller and cheaper place to keep the rent under control, but it would still take longer for me to pay off my loans.
I agree that even if you are lucky enough to get academic type positions you need to have an emergency fund to tide you over if the timing doesn't work out perfectly. For example, your first academic job may not start until a few months after you are done with grad school. Or there's a gap in between a fellowship you're doing and a teaching position.
Thank you SO much! Everything looks great! I hope your head has recovered 🙂
Also, I really would love any advice or suggestions that others have, so please do comment!
It looks like that retirement calculator grossly underestimates how much money she'll need in savings when she retires. It calls for $42 grand a year, but doesn't look like it accounts for inflation. Assuming 3% inflation, you're gonna need $137,000 in 40 years to buy what $42,000 buys today.
I noted in my post that I am not taking major variables into account like interest payments, inflation, etc. This is just a general budget that is looking 20-40 years in advance. To estimate inflation, I\’d need a lot more time, but that\’s something I think Kate should go through as an exercise, not me.
I haven't read through the entire thing, but I'm wondering why the rent went from $570 to half that. Is her BF suddenly moving in and splitting the cost? Is the space large enough for the two of them?
I will read more later – have to leave for work!
Yeah, he finished school and moved here to be with me, and I chose this place because it was the right size for the two of us. So rent and utilities were cut in half.
What is she studying? Does she really need a PHD? What are her career goals? Can she get a part-time job to increase her income?
Joe, I plan to be a professor, so I need the PhD. I don't have time for a part time job, but I do some occasional babysitting on the side to get some extra spending money.
Also in the "having kids" category – maternity leave may reduce one's income temporarily.
Excellent point!
My head was killing me at that point. It was like trying to do 20 budgets with 20 sets of variables.