According to the APA's Center for Psychology Workforce Analysis and Research, the average psychology graduate student will accumulate thousands of dollars in debt over the course of his or her education and will make less than $45,000 the first year after graduation. Clearly, a career in psychology is a labor of love, not one we went into for the money. Nevertheless, right after graduation when we're probably just trying to scrape by, we need to think about our financial futures, even our retirements. That can be difficult because few, if any, of us learn about financial planning during graduate school. If we did, we would uncover a little-known secret: Our money is worth more the earlier we start saving it. It means that planning for our financial future should begin right now.
Thanks to a financial phenomenon known as compound interest, our money works harder and better for us over time. Compound interest is the interest you earn on an initial investment, known as the principal, that accrues over time. That's why the money you save in your twenties, for example, is worth much more than the same amount of money you might save in your forties. It's because your money is earning interest not only on the principal, but on all of the interest accrued in previous years as well. The later you begin saving, the less time you have to let your interest work for you. As an example, if you invest $2,000 at age 25 and assume an annual interest rate of 8 percent, at age 65 your money will be worth $43,449. If you begin investing at age 45 and want to make the same amount of money by age 65, you will need to invest more than $9,000. The differences in interest accumulation are even more staggering if you were to continue to make small monthly contributions to your initial principal.
But how can cash-strapped graduate students even begin to consider saving for a retirement? For starters, we need to educate ourselves about what it takes to plan for our financial futures so that we can take full advantage of opportunities available to us. For example, did you know that many students employed by universities, such as teaching or research assistants, may be eligible to contribute to a retirement savings account known as a 401(k) plan through the school? These plans offer tax advantages, and many universities even offer matching funds—essentially free money toward your retirement.
In addition, financial planning may require you to reorganize your priorities. For example, we all have monthly expenses that we simply cannot overlook—food, rent, insurance, transportation costs, etc. But what about investing in ourselves for retirement? Shouldn't we include that among our top priorities? In fact, if we pay ourselves just $41 per month over four years of graduate school, we will have saved $2,000 that can be invested toward retirement. Although it may not seem like much now, in 40 years it is likely to grow to more than $40,000.
So, how can we save even a little every month? The key point to remember is that small changes can make a big difference. Some relatively easy ways to save money might include packing versus buying lunch, buying a water filter rather than bottled water and putting a coffee maker in your office instead of spending money on a latte. You might also be able to save by renting DVDs versus going to the movies, inviting friends to a potluck dinner at home instead of eating out, or checking out books from the public library instead of buying them at Borders. Always remember that you are your biggest asset, and investing in yourself will reap big rewards now and long into your future.
By Rachel Casas
FURTHER READING, RESOURCES
APA members and student affiliates can access the Committee on Early Career Psychology Financial Planning Book online or request the print version by e-mailing Kraig Scott.