Smoothing out income
Question: I just started a job as a professor. I have a 9 month salary. I know many institutions divide a nine-month salary into twelve paychecks, but mine doesn’t: I’ll receive my first paycheck for this academic year at the end of September, and the last at the end of May. I need to save about a quarter of each paycheck for the lean summer months, but I’m not sure where to put the money. Should I send it to my “high interest” online savings account (currently earning about 1%)? Or is there a better place to put money that you don’t intend to use for six to nine months?
Also, while I’m setting up a savings plan for the summer, are there other types of savings I should prioritize? Right now I have no debt, almost no retirement savings (just a couple of thousand dollars in a Roth account), and a little under $10K in that “high interest” savings account. Ursula, Eau Claire, WI
Answer: Congratulations on getting a job as a professor. I don’t know if you’re teaching at the University of Wisconsin, Eau Claire, but I helped teach a finance class there one morning a couple of weeks ago. The students were terrific. They asked good questions.
I would park the money into your online savings account. It’s the safe way to smooth out your income for the year.
An alternative is to park some of it into a 6-to-9 month certificate of deposit. The trade-off is that the online savings account will give you a bit more flexibility with the money while the certificate of deposit will lock in a certain sum for the summer months. I think anything else is too risky.
The other big financial move for you to do is sign up for the university’s retirement savings plan (if you aren’t automatically enrolled). Colleges and university’s tend to have good retirement savings options and getting started now will pay off big over a lifetime of teaching.
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