How we saved one year’s salary in Roth IRAs in grad school
This reader story is from Emily, a graduate student living in North Carolina who blogs about transitions in young adulthood and living well on less at Evolving Personal Finance.
My husband, Kyle, and I recently reached our first retirement savings milestone — we have one year's salary in our Roth IRAs! Since joining the PF blogosphere, we have seen many bloggers and commenters with high incomes and modest lifestyles reach that kind of milestone in their 20s. But we're ecstatic that it has only taken us six years post-college to do the same because we've been in graduate school this entire time, each earning about $25,000 or so per year.
We easily could have let ourselves off the hook by saying that our income was too low to start saving during school, or it wouldn't matter in the long run because our incomes will increase so much after we graduate. But I'm pleased with what we have to show for our efforts, even if we're set way back from the “one year's salary” milestone once one of us gets a “real job.” The money we have in our Roth IRAs (contributed while we were in the 15 percent marginal tax bracket) has the advantage of those few extra years to add to its time value. We could have just kept our heads above water over the last six years but instead we saved consistently and now have something substantial to show for it!
We haven't killed ourselves to reach this goal, either — our budget is quite reasonable and we have many little luxuries and splurges. We are simply reaping the benefits of “paying yourself first.” The purpose of this post is to convince those of you with lower incomes (and those with higher!) that it is possible to save for retirement and quickly build a nice nest egg.
Who Are We?
Kyle and I graduated from college together in 2007. He immediately started working on his PhD, whereas I had a post-baccalaureate fellowship for one year before enrolling in a PhD program at his university. We are in STEM fields so our tuition and health insurance are paid by our departments and we are given stipends for living expenses. I like to say that grad students are expected to work for free and our universities pay us just enough to enable us to do it! We are not allowed to have outside jobs to supplement our stipends, and we don't have access to workplace-based retirement plans.
Kyle expects to finish his PhD this fall and I have about a year left. We were married in 2010; prior to our wedding we had separate finances, and after it, we moved in together and started keeping completely joint finances. We live in Durham, N.C., which has a cost of living that closely matches the country's median. As we grew up in high cost of living areas, Durham feels very affordable to us.
Where Were We?
I'll give you a quick rundown of our financial situations in the summer of 2007 so you know what our starting point was.
Kyle had a few thousand dollars in cash savings from summer jobs and graduation gifts from his relatives when he moved to Durham. His parents formally gifted him the car he had been driving since 2004. His starting stipend was about $25,000 per year.
I had close to zero cash when I started my post-baccalaureate year and about $17,000 in student loan debt from my undergraduate degree. I was paid about $24,000 per year for my fellowship in the D.C. area. For the first half of the year I lived with my parents (I paid them $500 a month for a rent-equivalent) and in the second half of the year I lived independently. In August 2008 I moved to Durham to start grad school and my stipend was again about $24,000 a year. At that time I also bought a car with a $3,500 car loan.
Where Are We Now?
We have received cost-of-living increases to our stipends yearly and are now earning about $27,000 and $26,000 per year. We have approximately $57,000 in our Roth IRAs. I still have $16,000 in student loan debt, but we have $18,000 set aside in taxable investment accounts and CDs to pay off the debt as soon as it comes out of deferment. We also have between $14,000 and $18,000 in checking and savings accounts, depending on the day of the month. We have no additional debt except what happens to be on our credit cards, which we pay off monthly. All in all, our net worth is around $75,000, not counting our cars and other possessions.
How We Got Here
Starting early and saving consistently
Right after I graduated from college in 2007, I read a few personal finance books and was convinced to start saving for retirement. (I guess I missed the part where most 20-somethings think they are too young to start saving!) I set transfers to my Roth IRA to be 10 percent of my gross income or $200 a month, just like the books told me to. I didn't convince Kyle to start saving until 2009, but when he did he went big and maxed out his Roth IRA each year, in a lump sum in the first year and with weekly transfers in subsequent years. I was inspired by his example and slowly increased my savings percentage, even though with each increase I couldn't predict how I would be able to swing it. We now save about 17 percent of our gross income, which falls somewhat short of maxing out two Roth IRAs.
Tracking and Budgeting
Kyle is naturally a fairly conservative spender, while I have to put systems in place to keep me from blowing all my cash. I started off tracking my spending using Excel, but Kyle preferred letting Mint do the heavy lifting, and that's what we switched to after we got married.
Our budget puts first things first. From our gross pay, we have taxes withheld, we tithe and give offerings to our church and other charitable organizations, and we transfer money to our Roth IRAs four times per month (we are very into dollar-cost averaging!). Then we take care of our necessities such as rent, utilities, food, and gas. We also have a little bit of money in our monthly budget for going out to eat. At the end of each month we zero out our checking account, rewarding ourselves by putting the excess money into a savings account for a fun purpose like travel.
Most of our fun, discretionary spending comes from our targeted savings accounts. Every month we divvy up about 20 percent of our pay into various accounts for irregular expenses. Some of the accounts are boring necessities like car repairs, insurance, and dental and eye care. But we also have accounts for travel, entertainment, electronics, and clothes purchases. We started this system right after we were married when we were hit with more wedding invitations than we could accept and needed to pay for some season tickets all in the same summer.
I like this budgeting system because the savings parts are so automatic and unthinking — we don't have to make the decision each month of how much to put into each of the categories, including retirement. The aspect that does change every month, and therefore captures more of our attention, is how much leftover money we'll have to put toward something fun (currently a DSLR), which keeps us feeling positive about the whole process.
Living Well on Less
We made a few key choices that have helped keep our monthly expenses in check.
- We own outright two older used cars. (I paid of my car loan before we got married.)
- We always lived with roommates until we were married. We chose safe but modest apartments and townhouses and have actually decreased our rent with each of our last two moves (while keeping the same square footage).
- We learned to cook and stopped eating out for convenience. We only eat out for dates or group social events.
- We continually strive to find ways to improve. We both used to spend money in ways that didn't provide much value, but over time we have found and reduced many of those instances so we're using our money for more and more high-value purposes. For example, we stopped spending money on fast food and chose to buy a CSA.
Success often comes from a mixture of hard work and good luck: I made a mistake when I started my Roth IRA that actually turned out to be a boon. I never actually implemented my decision of which stock fund to invest in, so all my saved money was going into cash-equivalents. I didn't realize my mistake for about a year, and then I chose to not make any changes for about six months until I had enough savings to open an IRA with Vanguard. I finally got my Roth IRA into the stock market in January 2009; Kyle also maxed out his Roth IRA for the first time in 2009. Basically, we got in at the rock bottom of the stock market, and its incredible growth over the past few years has made a huge contribution to our balances. An additional but less tangible benefit from that mistake is that now we are much more on top of our investments and balances — I'm too embarrassed about my oversight to completely “set and forget!”
What Else We Could Have Done
I would love to be able to say that we maxed out our Roth IRA contributions every year, and if we had been we would definitely have a higher balance! It took us years to refine our spending and budgeting to get to our current savings level.
If we had decided that nothing in our life was as important as maxing out, we could do it. The areas of our budget that we could cut back on are: renting a 1 BR place instead of a 2 BR, traveling only once or twice per year, buying cheap food, and using less expensive electronics for longer. But we believe in striking a balance between our long-term goals and our daily lifestyle, so enhancing our day-to-day experiences is important to us as well.
Our success in saving so much for retirement is largely due to consistently applying quintessential Get Rich Slowly advice and putting systems in place that make it automatic. Even though we are in a unique time in our lives and don't have “real jobs,” we choose to live within our means by sticking to our percentage-based budget and are already seeing the benefits.