Friday, March 22, 2013

What should a newly hired scientist do with their money?

Economics/finance blogger Megan McArdle runs an occasional personal finance question-and-answer feature -- her most recent one has a fun question:
Dear Blogger:
I'm wrapping up a doctoral degree in the physical sciences and heading to an industrial job in a few months. My grad school years have been spent in one of the highest cost-of-living parts of the States, so my individual savings aren't in great (mid four-digits), but I'm mid-twenties and thankfully debt-free (no student loans, never carry a credit card balance, car bought with cash, etc.) My new job will be both in a much lower cost of living state and a significant step up in salary at a little under $100,00/year base + signing bonus + potential annual bonus, dependent on company performance and my personal success or failure. The company offers a 401k with a mixed match (I put in 6%, they fractionally escalate until they've matched 4%) and discounted stock for employees. Health and dental carry a modest deductible but the coverage is good. 
I've gotten by for a little under a decade as an undergrad on scholarships and lab assistant support and then as a grad student on fellowships and TA appointments; now that I'm slogging through my dissertation I'm starting to dream about how to structure my finances once I actually have finances to think about. I've been in school longer than most so I know I'm behind in starting major retirement savings, but the emergency fund will have to be bumped up first. Industrial research jobs are growing less stable than they once were, so I'm wary of locking myself too much into the company's system beyond what I need to get the match. I'm also likely renting for the first few years as I'm not sure if I'll be settling at that particular site long enough to merit binding myself with a mortgage to the local real estate environment. If you were in my shoes and starting your first outside-of-school job, how would you allocate things for the first few years? 
-Almost a PhD
Boy, doesn't that sound like a chemist? McArdle has some good answers, including thinking about a budget, staying out of the local real estate market for a year or so (until AaP figures out their new city) and working on three things:
  • An emergency fund with 6 months worth of expenses. 
  • Saving 15% for retirement
  • Saving for other things, including a down payment on a house
All in all, fairly prudent advice, I'd think. Read the whole thing. 

10 comments:

  1. The most important thing, in my mind, is to max out your 401K contribution from the get-go. It's money that you are not used to having and you'll be able to quickly build up a nice retirement egg from a very young age.

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    1. Agreed.

      And to make this post have substance, I enthusiastically endorse the comment about staying out of the real estate market until you have an idea of things like:

      -Do you like your neighborhood?
      -Do you like your commute?
      -Do you like your job?
      -Is your job going to last (hard question to answer)?
      -Are there other opportunities in the area should things go horribly wrong?

      Relocation is much easier when you have to break a lease rather than sell your house. I should probably look at the real estate thread before I comment more.

      Delete
  2. "Boy, doesn't that sound like a chemist?"

    It does.

    A normal person would be thinking "should I get the BMW or the Lexus"

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  3. I've been trying (mostly unsuccessfully) to convince my fellow students to put money into Roth IRAs while they're in grad school, since it's hypothetically the least amount of money they should ever make.

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  4. "to put money into Roth IRAs while they're in grad school, since it's hypothetically the least amount of money they should ever make."

    That may be good advice, but Roth IRAs always scared me in that if tax rates somehow go down (it's a theoretical possibility....) it's a bad move.

    Though no doubt imprudent, I thought my approach of saving bare minimum to be prepared for an emergency in grad school and enjoying the experience was worth more than socking $ away for when I'm old and like to just watch my programs. To be clear, the sums of $$$ involved were (from my current perspective) shockingly small. Was still a good time, though.

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  5. "...little under $100,00/year base + signing bonus + potential annual bonus..."

    Surely this isn't a chemist.

    "...now that I'm slogging through my dissertation I'm starting to dream about how to structure my finances..."

    I think this person means that they're procrastinating.

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    Replies
    1. This sounds about right for a big pharma position, actually.

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  6. The OP says "I'm wary of locking myself too much into the company's system beyond what I need to get the match" due to instability in industry. But I have the opposite point of view--save as much as you can as early as you can while you're still young enough to be able to get a new job with a good salary, so you're prepared in case you are forced to retire early (or at least to take lower paying jobs when you approach retirement). Make sure you have enough of an emergency fund to survive between jobs, then sock away as much as you can in a tax-advantaged account for the future!

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  7. Increase that emergency fund to at least 18 months expenses. The state of today's job market means that you might very well go 9-12 months in between jobs. After my recent layoff, I'm very thankful that I've kept an emergency cash fund to cover more than 6 months.

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  8. I fully agree that a 6 month emergency fund doesn't cut it anymore. A Roth IRA can function as an emergency fund and/or down payment fund though (if you leave it in something safe), as you can take your contributions out any time penalty-free for any reason, and up to $10000 of gains out for a first time home purchase.
    A single, debt-free person with that salary should have no issue maxing out 401(k), Roth IRA, and building a substantial emergency fund, while still having plenty of fun money; I would know as that's what I did in a pricey part of the country.

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