Erik S. Barton is about to make the leap from postdoctoral fellow at Washington University School of Medicine in St. Louis, Missouri, to a faculty position at Purdue University in West Lafayette, Indiana. Barton's 440-kilometer relocation will be accompanied by scientific independence and many other personal and professional changes--not the least of which is a $38,000 pay increase. His new base pay--$65,000 for the academic year--will be supplemented by an additional 20% ($13,000) for a summer appointment. This roughly doubles the pretax income he currently receives as a postdoc.
There will be plenty of opportunities to spend that money. Barton's wife Carrie, a schoolteacher, plans to stay home with the children for a couple of more years. There's a house to buy and new cars. There's new clothing for faculty parties. Their three children, aged 6 months to 5 years, will need to go to college someday. And Barton has already started thinking about retirement.
So what approach should Erik and Carrie take if they want to do the fiscally responsible thing? They should:
Find out how much they can save comfortably. The substantial pay raise is an opportunity to save aggressively.
The savings rate should be at least 10% of gross pay, but more is better. Because they don't have some of the financial obligations of other postdocs--family members paid off three-fourths of their education loans as a wedding present 13 years ago; the rest they paid off themselves while still in graduate school--they should be able to put 15% of their income into permanent savings, and possibly more. The more they save now, the less they'll have to save later.
Build up a cash position. Their basic liquidity should be about $8000. They should be able to access this money in a matter of hours. Another $16,000 should be put into certificates of deposit or--if it can be withdrawn in a true emergency--into the cash option of a 403(b) account (such as TIAA-CREF) or an Individual Retirement Account.
Keep out of consumer debt. The only loan in the Bartons' lives is a mortgage on their home in St. Louis. They're planning to buy a home in Indiana. They should use a 30-year fixed-rate mortgage and shouldn't rush to pay it off. But consumer debt is another story. They keep their credit cards paid off every month, even on Erik's postdoc income. Any family with consumer debt should make paying it off a high priority.
Don't overbuy the house. The St. Louis housing market has been good to the Bartons, and the temptation will be strong to buy as much house as they can in Indiana, taking out the biggest loan they can qualify for. They shouldn't. The more the house is worth, the more it will cost to maintain. They should put 20% down to avoid having to pay for private mortgage insurance. They could make a larger down payment to lower their monthly payments, but if they feel confident about long-term investing in the equity markets (preferably using mutual funds that own stocks), the loan could cost less than their investments would give them over 30 years.
Save for retirement first, then for college. The Bartons were able to get loans for college, and their children will probably be able to as well. But no one's going to give them a loan to retire. The Bartons should avoid saving money in custodial accounts with the children's names, because this often has negative effects on college financial aid. Purdue will put about $11,000 into Erik's TIAA-CREF retirement account in his first year. As his pay increases, an amount equal to 15% of his raises will go into his account as well. It's not a traditional pension with a defined payout at retirement, but it is portable if Erik should eventually move to another institution. He also has great opportunities to save: Purdue allows faculty members to put up to $15,000 into each of two retirement savings plans: a 403(b) and a 457 plan.
Learn a little about investing. Because the Bartons are relatively young, the money they save and invest now will yield big returns, even in more conservative accounts or investments. This is a good time to read up about investing basics, so they understand the risks and benefits of their investment choices.
Don't forget those other employee benefits. Purdue offers a variety of employee benefits, including a tax-advantaged flexible spending account for out-of-pocket medical and child-care expenses. Purdue automatically enrolls tenure-track faculty in its long-term disability plan, paying half the cost. The other half is paid by the faculty member, but at about $25 per month, it's a good deal for Barton.
Keep up good habits, but remember to have a little fun. Because they've made some good decisions and had some good luck, the Bartons can spend a bit more than they have been without sacrificing their common financial future.