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Personal Finance: Young Scientists Need Firm Plan to Make Up for a Late Start

Ken Robinson
United States
8 September 2006

Scientists often begin their careers at a financial disadvantage. While their counterparts in other fields are contributing to 401(k) retirement plans, academics are still scraping by on graduate fellowships or assistantships that lead some to wonder when they took a vow of poverty.

They spend 6 years or more in graduate school, then several more years doing postdoc work. By the time they start earning a decent salary, most scientists are in their early 30s; some are in their mid-30s, or older. And many--especially those with clinical degrees--carry more education debt than do their contemporaries.

Yet it's not uncommon for scientists to do quite well financially. Many scientists, in academia and in industry, end their professional years financially comfortable--even wealthy. All it takes is a plan. But with the obligations of an academic career--lesson plans, research and writing, faculty committee work--who has time for financial planning? You do. A financial plan doesn't have to be complicated. A few relatively simple steps, followed consistently, will greatly improve your chances of achieving financial security at an earlier age than you thought possible. The key is to focus on the steps that generate the greatest financial benefit with the smallest time commitment.

Financial responsibility doesn't require a monastic existence or--once you're out of graduate school at least--a vow of poverty. It doesn't mean that you can't have some of the good things in life--although it does mean you can't have all of them right away. If you have been waiting patiently for a new car, or better coffee, go ahead and enjoy them. Just don't develop a lot of expensive habits or indulge in them too often. Being underpaid for so many years can even work to your advantage: Years of tight spending have probably taught you a few things about living cheaply--but well. You probably don't even have time for too many indulgences, anyway.

Becoming more financially aware can help you understand how much, and how often, you can afford to indulge yourself now without adding unwanted years to your career or significantly harming your financial future.

So let's get started. As soon as possible, you should:

• begin a new savings program,
• make plans to buy a house,
• pay down your consumer debt if you have any, and
• learn about and use your institution's employee-benefit programs.

The transition from student to professional is a very busy time for a scientist. But the effort you put into financial planning early in your career will save you untold hours--and dollars--in years to come.

The key: Save, save, save
The single most important financial skill at this stage of your career is the ability to save money out of every paycheck. Your savings program is the foundation for achieving several financial goals, such as accumulating an emergency fund, saving a down payment for a home, contributing to retirement savings plans, and paying off consumer debt.

Very likely, your first true professional position will bring the biggest percentage pay raise you will ever get. "We're talking about a 50% increase," says financial planner Karen Folk of Folk Financial Planning in Urbana, Illinois. That substantial raise makes it relatively easy to save. Many people find that the biggest impediment to saving isn't the amount of money they earn--it's how much they're used to spending. After a postdoc, you're used to living on a smaller income. All you have to do is keep doing what you're used to doing with a few modest and occasional indulgences added to your lifestyle. "If you start from the get-go, you will never miss that money," says financial planner Rob Reed of Reed Financial Planning in Columbus, Ohio. So start saving now while you're still accustomed to having far less.

The goal of saving money usually brings up the idea of budgeting. But success at budgeting eludes many who try it. And of those who succeed, few enjoy it.

Fortunately, there's a simple alternative that works better for most people. Just "pay yourself first." Simply decide how much you want to save each pay period. Instead of leaving that money in your checking account where it's easy to spend, put it aside in a separate savings account where it's a little harder to get to. Then see whether you can make it through the pay period on the money that's left over. If you succeed, try saving a little more the next pay period. Experiment until you find how much you can save regularly. Then use direct deposit or a scheduled transfer to your saving account to make the process automatic. You're more likely to succeed when the money is saved without your intervention.

Cash needs
Now that you know how to save, what will you be saving for? The first thing to do is to build up a cash reserve (so you don't need to use credit cards) and an emergency fund for unforeseen expenses. These funds should be kept in Federal Deposit Insurance Corporation-insured accounts in the bank. Your goal should ultimately be to maintain a balance of ready cash plus emergency funds of about 30% of your annual income. After you've bought a home, some of this can eventually be held in the money-market option of tax-deferred accounts such as a 403(b) plan or an Individual Retirement Account.

Buying a home
As you go from being a student to being a professional, consider how long you will be in the community. "If you're in one place for 5 or 6 years, even if you don't make tenure, chances are you'll benefit from home ownership," says Folk.

If you're going to buy a house, you'll need a down payment. At least part of your cash savings can double as your down-payment fund.

Be sure to ask your institution's Human Resources department whether they provide help for homebuyers. "In bigger cities," says Reed, "some schools pay a housing subsidy." Others offer incentives for faculty members to buy homes near the university. The school may finance the purchase or sell homes that it owns at a special rate.

Especially in expensive big cities, many universities provide subsidized housing rentals for faculty members--and sometimes for postdocs and students. Owning a home is usually a good idea, but in an expensive community where you have access to subsidized rentals, this option might make sense.

Retirement savings
Your employer may offer a traditional pension; those offered by public universities are often quite strong. Every $1000 of monthly pension income is equivalent, by some estimates, to $170,000 to $240,000 in investments.

Pensions are important, but you'll benefit from the flexibility of having some self-directed savings as well. You'll probably have access to plans that are similar to 401(k) plans: The 403(b) plan is the educational/nonprofit variety, and the 457 plan is a common public-sector equivalent. At a public institution, you may have access to both. One of the greatest advantages is that once you set up your contributions, they happen automatically with every paycheck. It's especially helpful if your employer matches some of your retirement savings with contributions into your account.

When deciding how much to save, Reed recommends starting with 10% of your gross pay. "What I do is say, 'Let's split it': 5% for establishing a cash position--first for saving for a house, later for emergency funds--and 5% for retirement." Once your home has been purchased and ready cash and emergency funds have been accumulated, it's time to concentrate more of your savings on the retirement account. Actually, says Reed, "I want them to be very aggressive savers," to provide greater flexibility later in their careers. Without substantial retirement savings, many scientists have no option other than to continue working in the field they first became interested in--an interest that does not always last a lifetime.

Folk encourages her clients who teach at public universities to save 15% of their pay. They're typically required to contribute 8% into the state's traditional pension plan; she has them save another 7% on their own.

Debt repayment
It's important to pay down consumer debt such as credit cards or personal loans. If you have several cards or consumer loans, concentrate on the one with the highest interest rate. Paying this off first means you will spend the least on interest charges over time. But don't rush to pay down that 30-year fixed-rate mortgage, or those low-rate tax-advantaged student loans. Depending on how you've got your money invested, you may be better off putting extra money into your retirement accounts than paying down these debts.

Get familiar with your institution's employee benefits
You can still find valuable employee benefits at many institutions. Insurance programs, for instance, are often competitively priced.

Another example is disability insurance, which pays you a portion of your regular income if you can't go to work because you're sick or hurt. You may qualify for public disability benefits, but it's not enough, typically, to replace what you would earn if you could keep working. It's often difficult to get individual disability policies, especially for public-sector employees, so if you have the chance to buy disability coverage through your employer, you should probably take it.

Term life insurance is one of the most common employee benefits. You can easily compare costs with policies available from retail providers, using a life insurance quotation Web site, such as www.term4sale.com or www.insurance.com. Be sure to consider the insurer's financial strength; the insurance provider should have information on the company's ratings from a variety of companies that evaluate the reliability of insurers.
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Start early. Compound interest can pay off handsomely for a 35-year-old scientist earning $60,000 and getting 4% annual raises, assuming a 6% rate of return.

Your institution may also offer medical and child-care spending accounts, which allow you to use pretax dollars to pay for certain out-of-pocket expenses.

Planning for the long run
The beginning of your career, when your financial life is relatively simple, may be the best time to consult a financial adviser. Spending just a few hours with a planner will help you set up your savings to be automatic and to focus on near-term decisions that will create the greatest long-term benefit. You probably need basic guidance at this stage, when doing things right will reduce the amount of professional help you're likely to need in the future.

Don't assume that your 403(b) plan representative can help you. They may be trained in sales, not financial planning, and may not know, for instance, whether you have enough emergency cash set aside. You will be served best by an adviser who will consider not just investments but all aspects of your financial life.

Consumer advocates--including Consumers Union, the nonprofit publisher of Consumer Reports--recommend a "fee-only" financial adviser: one who takes no commissions and is paid directly by the client. The National Association of Personal Financial Advisors can help you find a fee-only adviser, at www.NAPFA.org or 847-483-5400.

As you make the transition from student to professional, your best financial moves are saving money, buying a home, paying down consumer debt, and getting the most out of your employee benefits. At this stage, it's not about finding the best investments.

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