Financial Planning for BU Graduate Students

1. Financial Planning forBU Graduate Students (Stuff you really should know) Tuesday, March 3, 2011

2. Agenda • Managing Cash Flow • Basic Financial Planning Strategies • Risk Management • Who’s Who in the Financial Planning Universe

3. Managing Cash Flow

4. Managing Cash Flow • The Budget (a spending plan) • Money In versus Money Out • Needs Versus Wants • Needs • Housing Costs • Food • Utilities • Auto Expenses • Debt Payments • Phone/Cable/Internet • Clothing • Household products/Toiletries/haircuts/other

5. How To Create a Budget • Assemble statements • Identify your specific income • List your monthly expenses • Divide expenses into fixed and variable • Compare your income and expenses • Make adjustments • Review Often Check out www.mint.com

6. Assemble Statements and Info • Bank Accounts, ATM Receipts, Credit Cards, Utility Bills, Investment Accounts, etc. • Where you have been spending money? • Where will you be spending money? • Where you might not need to be spending money?

8. Identify Your Income • Gross Pay minus – • Federal Income Tax Withholding • State Income Tax Withholding • FICA (4.20%) (Normally 6.20% but reduced for 2011) • Medicare (1.45%) • Health Insurance premiums • Other deductions • Life Insurance • Parking • T-Pass • Etc. • Take Home Pay – What’s left to pay bills and spend

9. Example of Gross Income versus Take Home Income Assume gross annual income of $50,000 paid bi-weekly $1,923.08 (gross) every two weeks (Two months of the year have three checks) • Gross Paycheck - $1,923.08 • Federal Tax w/h ( 226.48) • MA State Tax w/h ( 80.77) • FICA ( 119.23) • Medicare ( 27.88) • Health Insurance( 115.38) • Take Home $ 1,353.34

10. W-4 Form • Completed at employment • Determines amount of Federal income taxes withheld from each paycheck • Single Filer • Claims one dependent (You) • Taxes withheld on that basis • Add dependents and less tax is withheld • Withhold too much – smaller paycheck and large refund • Withhold too little - larger paycheck but may owe tax and penalty • Single Filer (no dependents and standard deduction) with 13.09% withheld at $50,000 of income will just about break even

11. Monthly Expenses • Make a list • Housing Costs • Groceries/Eating Out • Utilities • Debt Payments – college loans, credit cards • Car Expenses- payments, gasoline, insurance, parking,repairs • Personal Savings • Cable/Phone/Internet • Laundry Expenses • Personal Items –Hair care, toiletries, dry cleaning • Entertainment • Transportation Expenses

12. Divide Expenses into Two Categories • Fixed Expenses • Always the same each month • Easy to budget • No fluctuation • Examples: Rent, Cable/Internet, loan payments • Variable Expenses • May be different each month or come at different times • Examples: groceries, entertainment, car repairs, etc • Variable expenses can be estimated for the year and then divided by twenty six (our example with payroll being bi-weekly) to provide a monthly estimate

13. Compare Income and Expenses Expenses Income

14. Make Adjustments • If Expenses are too high, prioritize to see what can be reduced, consolidated or eliminated • Double double mocha latte changes to Medium Decaf • Eating out less, brown bagging it more, make breakfast at home • Reduce cable bill (premium channels, etc) • Closely track personal spending – ATM’s and other cash outlets • Cheaper cell phone package • Filtered water instead of bottled water • Increase deductible on car insurance

15. College Loan Debt • During your low income residency or internship • Consider strategies that will allow you to delay the beginning of payments, such as deferment or forbearance (seek legal advice) • Structure loan payments to be less during these years and to increase later when you income rises, i.e graduated payments, income based repayment plan • Try to save something for retirement, even to just get in the habit of doing so. Consider payroll deductions to employer plans like 401(k) or 403(b). Even $25 per check is a start. • Home ownership isn’t likely to happen during this period. If your expenses are kept really low, you could begin to save something towards a down payment. Consider a Roth-IRA. • Try to establish good habits of controlling your expenses. These will lead to the easier achievement of goals when income increases.

17. Risk Management • Risk is either assumed or transferred • Transferring requires insurance • Insurance • Life Insurance – to economically protect loved ones if you die • Disability Insurance – to replace your income if you cannot work • Property Insurance – to protect car, home, personal belongings • Health Insurance – to provide for medical services • Malpractice Insurance – to protect you professionally

18. Life Insurance • If you die today, who suffers economically? • If someone suffers, you need life insurance • How much insurance do I need? • Enough to replace what you will no longer be able to supply. • Pay off debts • Continued income for expenses • Rule of Thumb is often 6 to10 times salary (depending on how many dependents) • What kind of life insurance should I buy? • Death benefit is most important • Term Insurance is cheapest and most affordable • Cash Value life insurance is an asset but needs much more cash

19. Buying Life Insurance • Application made to insurance company • Answers to health questions on application as well as age and amount of insurance requested determine what underwriting requirements • Blood and urine samples, access to medical records for sure • EKG, Stress Test and others if request is substantial • Underwriting determines if policy will be issued Declined Rated Standard Preferred (No Offer) (Higher Premium) (Normal Premium) (Discounted Premium)

20. Term Life Insurance • Term Life Insurance • You pay premiums, insurance company pays death benefit if you die • Similar to car insurance, house insurance, etc • Premiums increase with age • Premiums can be “locked in” for one, five, ten, twenty or thirty years. • Can be “converted” to permanent with no medical questions • Provides pure life insurance protection • Death Benefit is income tax free to beneficiaries • May be purchased individually or through employer group plan $100,000 20 Year Guaranteed - $150/Yr

21. Permanent Life Insurance • Higher premiums than term insurance • Builds internal cash value • Cash value grows tax sheltered • May be accessed through loans or withdrawals • “Variable” policies allow cash value to be invested in markets • Cash value lists as an asset on your balance sheet • Premiums may stay the same for life or may vary • Various Forms • Whole Life (Regular and Variable) • Universal Life (Interest driven, Variable)

22. Disability Income Insurance • Can’t work due to sickness or injury, disability income insurance sends you a check each month. • Group or Personally Owned • Purchase Limits • Premiums After Tax – Benefits Tax Free • Premiums paid by Employer – Benefits Taxable • Premiums and term – based on occupation, income, education, training and experience • Definition of Disability varies – “Own Occupation” is desireable – “Own Occ”

23. Group Disability Insurance • Offered by the employer – various cost arrangements • Short Term Disability • Usually 1st day accident, 8th day sickness • Often replaces approximately 70% of income • Lasts for 13-52 weeks depending on plan • Long Term Disability • May or may not have “own occupation” definition • Begins after 3-12 months of disability • Pay approximately 66% of earnings with monthly cap • Coordinates with Social Security Disability • Ends at age 65 • May be portable

24. Individually Owned Disability Policy • Non-Cancellable and Annually Renewable • Once issued, policy cannot be changed, cancelled or the premium increased • Definition of Disability • Provides Own Occupation definition • Specific Monthly Benefit, Waiting and Benefit Period • Underwriting • Different than life insurance • Income, education, income, health, and morbidity factors • Coordinates with any group or other existing disability insurance

25. Individually Owned Disability (cont) • Riders • Guaranteed Increase Option – right to increase monthly benefit when income rises without any medical underwriting • Partial or Residual Disability Covered – payments may when disability isn’t total but impacts income or duties • Social Insurance Option – provides a benefit if social security disability doesn’t pay, but stops if it does • Premium Step Up – Lower premium for first five years then premium jumps up • Automatic Increase Rider – Monthly benefit increases each year by inflation factor usually for five years • Inflation Adjusted Benefit – Once disabled, the monthly benefit increases each year by an inflation factor (simple or compound)

26. Other Insurance • Property Insurance • Auto Insurance • Apartment Insurance • Home or Condo Insurance • Health Insurance • Through Employment • Malpractice Insurance • Through Employment • Liability Insurance • Through home owner’s or apartment or auto insurance

27. Who’s Who in the Financial World

28. Who’s Who in the Financial Planning World • Many play a role in either delivering products or providing advice – and some do both • Human Resource Personnel • Accountant • Financial Planner • Life insurance Agent • Investment Broker • Investment Advisor • Banker • Mortgage Broker

29. It’s What They Do • Human Resource Personnel • Help explain employer benefits • Cannot offer advice • Do not sell products • Life Insurance Agents • Sell life insurance, disability insurance, long term care insurance, health insurance etc. • May be licensed to sell mutual funds and variable annuities • Paid by commissions • May offer advice in conjunction with product sale

30. What They Do (continued) • Investment Broker • Sells investments and insurance products and may manage assets for a fee • May provide advice in conjunction with product sales • Investment Advisor • Provides investment management and advice for a fee • Fee is often based on percentage of assets • Financial Planner • Fee Based – Advice provided for a fee either billed or based on assets • Commission Based – Provides planning and advice and sells products • Combination- Fee Based on Commission based

31. Financial Planning Designations • CFP® - Certified Financial Planner™ • Bachelor’s Degree or Graduate Degree • Completion of Course Program • Two Day Professional Examination • Three Years Experience • CPA – Certified Public Accountant • Tax Preparation and Tax Planning • PFS – Personal Financial Specialist • For CPA’s who belong to AICPA • Course Study • Professional Examination • Three year’s experience and six references

32. Insurance Based Designations • CLU - Chartered Life Underwriter • Expertise is in life and disability insurance products • Requires passing ten courses • LUTCF – Life Underwriting Training Council Fellow • ChFC – Chartered Financial Consultant • Either ten courses or three with a CLU designation • Three years experience • CLTC – Certified in Long Term Care • Two Day Class or Correspondence and proctored exam

34. Check Your Credit History Check your Credit History Each Year – It’s Free • Fair Credit Reporting Act of 2003 • Order your FREE credit report once annually • Complete ONE form to receive 3 reports (Equifax, Experian and Trans Union) • Annual Credit Report Request Service • www.annualcreditreport.com or (877) 322-8228 • More detailed reports are available for a fee from: • Equifax www.equifax.com (800) 685-1111 • Experian www.experian.com (888) 397-3742 • Trans Union www.transunion.com (800) 888-4213 • Beware of Identity Theft…get a paper shredder anduse it!

35. Wrapping Up • Figure out your budget • Compare projected income and expenses • Fine tune your expenses • Figure best way to structure your loan repayments • Review your insurance needs • Life, health, disability and property insurance • Consider getting individual DI before group • Start saving something • Get any match money offered • Start saving something • Know who you are talking to • Watch your Credit Rating and Score

36. Presenter’s Biography Dan Galli, CFP® Dan Galliis a Certified Financial Planner™ practitioner and Principal of Daniel J. Galli & Associates located in Norwell, MA. He specializes in retirement planning for professionals, small business owners, teachers and other individuals. Dan is a registered representative of Ameritas Investment Corp. with FINRA Series 7, 63, and 24 registrations. Dan also works with PFE Advisors, LLC, of Southborough, MA traveling nationally providing educational workshops for employees of companies such as PepsiCo, Analogic, Axcellis, FM Global, The MathWorks, MasterCard, AARP, Northern Trust and others. From 1997 to 2005, he served as an adjunct faculty member on the staff of Northeastern University in Boston, teaching Retirement Planning and Employee Benefits as well as Insurance and Financial Planning. In 2005, he joined the adjunct faculty at Boston University. He also teaches the preparation course for the CFP® Examination through Boston University. Dan is also a contributing author and editor for the Retirement Planning and Employee Benefit sections of Boston University’s on-line Financial Planning course. Dan often conducts Personal Financial Chats for The Boston Globe’s website, www.boston.com. He has been noted in Boston magazine as a Five Star Wealth Advisor. His email address is dan@djgalli.com

37. Disclosures and Disclaimers • This presentation is intended to be an educational introduction to the financial issues outlined. Every effort has been made to assure the accuracy of the information presented. However, you should consult with your advisors before taking any financial action. • Dan Galli is presenting this workshop and will not accept any financial planning engagement agreements with any student of Boston University Medical School for at least a six month period following the delivery of this workshop.