Personal Financial Planning for Graduate Students, Study notes of Financial Management

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Personal Financial Planning

for Graduate Students

Manage Your Money Today

Maximize Your Money in the Future

Guidebook & Workbook

August 2021

Introduction & Overview: Own Your Financial Future

Purpose & Audience

PURPOSE & AUDIENCE

The purpose of this book is to help graduate students – and undergraduate students and even non- students – become more comfortable talking about finance and thinking about personal finance. Ultimately, the goal is to help you become confident and self-sufficient with managing your own finances – from borrowing and budgeting to saving and investing. The primary audience for most of this book is graduate students. Being a grad student is much different from being an undergrad: you may be working, you may be married, you may have kids, you may still have student loans from undergrad, your parents might not be helping pay tuition. Overall, your financial situation is likely to be far more complex as a grad student. But there’s good news, too: you’re older, more mature, more intelligent and you have a much better idea what you want to do with your life. You are in a perfect position to use financial planning to make money issues a source of empowerment rather than a source of stress. This book is for you. There are certain sections in this book that may be more relevant to older readers (such as insurance and retirement planning) and certain content that will be useful to everyone (such as budgeting and saving). In some situations, we ask you to imagine your future self, perhaps 1 or 5 or 10 years in the future; exercises such as these can be useful to readers of all ages, regardless of how experienced you are with financial planning. Try not to limit yourself – challenge yourself to think creatively about your present situation and about your goals and dreams for your future self. This book is about you. There are 6 chapters in this book. Chapters 1 and 6 try to help you think about money and financial planning. We talk about behaviors, emotions and actions; we talk about the philosophy of money; we challenge you to think about your own personal relationship with money. In Chapters 2, 3, 4 and 5, we talk about the technical aspects of financial planning. Chapter 2 is about Budgeting, Income & Expenses; Chapter 3 covers Borrowing & Debt Management; Chapter 4 covers Saving & Investing for your future; and Chapter 5 introduces Insurance, Taxes, Retirement and other Special Topics that you will want to think about, both now and later. The first two chapters are the most critical chapters to taking control of your finances today. Chapter 3, 4 and 5 are more about the future; the sooner you think about them, the better off you’ll be. And Chapter 6 ties many of the previous chapters together, from thinking about money to preparing a budget and thinking about investing. Everything is connected. Anything you can take away from this book will make your future better. This version of the book is written by faculty at The University of Louisiana at Lafayette. As such, there are specific UL Lafayette references and examples in the book, where appropriate. However, the concepts and examples are universal and should be applicable to you wherever you are, whatever your age, and regardless of whether you are in school. This book is a public good. Nothing in here is proprietary. Please print it, copy it, share it, use it.

Authors & Collaborators

AUTHORS & COLLABORATORS

Most of this book was written by Brian Bolton (brian.bolton@louisiana.edu). Brian is a Professor of Finance and the Dwight W. Andrus, Jr. / BORSF Eminent Scholar Endowed Chair in Finance in the Moody College of Business Administration at the University of Louisiana at Lafayette. Brian joined UL Lafayette in 2019 after serving at IMD Business School in Lausanne, Switzerland, Portland State University in Oregon and the University of New Hampshire. Brian earned his PhD in finance from the University of Colorado at Boulder and his MBA in finance and strategy from the University of Texas at Austin. As of 2020, Brian is a CERTIFIED FINANCIAL PLANNERTM^ candidate. Brian has been teaching finance, economics, business and leadership since 1999 and loves his job because he gets to learn from hundreds of amazing students every year. And he loves taking what he learns from his students in the classroom into the finance laboratory for his research pursuits. Most of Brian’s research is focused on the relationships between the different stakeholders – or owners – within a firm and how to design systems that optimize those relationships to maximize the value of any firm. In 2015, he published his first book Sustainable Financial Investments: Maximizing Corporate Profits and Long-Term Economic Value Creation , which studies the short-term and long-term tradeoffs associated with making investments with natural, human, social and financial resources. Brian is currently writing another book titled A Culture of Ownership , studying how organizational culture is created and how it can be managed to create value for individuals, companies and societies. Brian wanted to write this Personal Financial Planning book because all students can learn more about personal finance, financial health and financial planning. All adults and humans can learn more, too. As student loan debt has increased, as various economic and social crises of the 21st^ century have challenged all of us and as the world has become increasingly more complex and more inter- connected, it has become more and more difficult for many people to take control of their finances and to achieve financial independence. Everyone – from high school students to college students to college professors – can learn more and can do better. So that’s what this book is about – helping everyone take control of financial situation and get on a path to financial independence. When you read “I” or “my” in this book, that is coming from Brian’s perspective. But Brian (I) has received significant help in this book getting into your hands. Dr. Bill Ferguson, Professor of Insurance and Finance and the G. Frank Purvis, Jr./BORSF Eminent Scholar Endowed Chair in Insurance and Risk Management at the University of Louisiana at Lafayette, wrote the insurance section in Chapter 5 and provided feedback on other sections throughout the book. Christine Williams, Maria Slater, Rachel Sam, April Jones, Kendall Laster, Mary Farmer-Kaiser, Philip de Mahy, Badar al Hamdani, Elizabeth Green, Monica Long and many others have provided suggestions, content and direction to this entire project. If you ever see them around campus or have them in class, be sure to thank them for their contributions. Consistent with Brian’s passion for learning from his students, as you will note in the Appendix, dozens of former and current students have contributed their thoughts and suggestions on how to best navigate graduate school. And this is the last time Brian will refer to himself in the third person. From now on, he is I.

Table of Contents

TABLE OF CONTENTS

CHAPTER 1: Taking Control of your Financial Future:

Goals, Values & Financial Planning

What Does Money Mean to You? Thinking About Money – The Lottery Mindful Decision-Making What’s Important to You – Your Values Why Financial Planning? Having the Right Mental Attitude What Are Your Financial Dreams?

CHAPTER 2: Budgeting: Income, Expenses & Net Cash Flow

Saving for Your Dreams & Goals Types of Budget Plans Budgeting 101: Income – How Much Money Do You Make? Budgeting 101: Cash Today vs. Career in the Future Budgeting 101: Expenses – How Do You Spend Money? Budgeting 101: Thinking About Spending Less Budgeting 101: The Behavior & Psychology of Spending Money Budgeting 101: Determining Your Net Cash Flow Budgeting 101: Net Cash Flow & Tracking Your Income & Expenses Your Financial Net Worth: Your Tangible & Financial Assets Your Financial Net Worth: Your Short-Term & Long-Term Liabilities The Plan for This Book Chapter 2 Summary – Commit to Improve Your Financial Fitness

CHAPTER 3: Borrowing & Debt Management

Paying Interest on Student Loans Good Debt vs. Bad Debt Student Loans & Financial Aid: The Nitty-Gritty of This Kind of Good Debt Federal Student Loan Repayment Options Student Loan Forgiveness for Certain Careers Credit Cards: Selling Your Future to Pay for Today Your Credit Score: One of the Strangest & Most Important Numbers in Your Financial Life Making Decisions About Paying Debt Having the Right Attitude About Debt

CHAPTER 4: Saving & Investing

Assessing Your Risk Tolerance Saving & Investing: What’s the Difference? Saving & Investing: What’s the Difference? In Numbers Investing – How Do You Do It? Risk: How Much Can You Handle?

Table of Contents

CHAPTER 5: Insurance, Taxes, Retirement & Other Special Topics

Insurance: What Do You Need & When Do You Need It? Property & Casual Insurance Health Insurance Disability & Life Insurance Insurance Summary Income Taxes: We All Have to Pay Them – But We Don’t Have to Overpay Them Retirement: What Are Your Options The Lottery: Tempting, but Dangerous Your Career: A Few Pieces of Personal Finance Advice Your Career: Some Issues for Doctoral Students

CHAPTER 6: Your Goals & Plans

The Psychology of Personal Finance Some Financial Behavior Math What is Money & What Does it Mean to You Some More Financial Behavior Math Your Values Drive Your Actions Goal-Setting & Financial Planning Framework #1 – DECIDE Goal-Setting & Financial Planning Framework #2 – SMARTER Connecting Your Habits with Your Goals Saving – Setting A Goal to Save More What’s Your Financial Fitness

APPENDIX: The Student Advice Wall

Advice from Current and Former Students

APPENDIX: Key Resources – For Now and For Later

UL Lafayette Graduate School Office UL Lafayette Financial Aid Office UL Lafayette Career Services UL Lafayette Internships

APPENDIX: Worksheets for You to Continue Practicing

Chapter 1: Taking Control of Your Financial Future

CHAPTER 1

TAKING CONTROL OF YOUR FINANCIAL FUTURE:

GOALS, VALUES & FINANCIAL PLANNING

KEY ISSUES FOR GRADUATE STUDENTS

• Financial planning is about trade-offs across time: living your life today while also preparing for your future. That’s exactly what you’re doing in graduate school.
• You are currently making the biggest investment you will ever make: an investment in yourself.
• You are in grad school in order to provide yourself with a better future: more impact, greater purpose, more flexibility, more opportunity, more money. But you’re investing a lot of time, energy and opportunity today to achieve that better future. That’s exactly what investing is.
• You are already better at understanding the benefits of planning, discipline, perspective and investing than 99% of your neighbors. The goal of this book is to help you apply how well you already are investing in your education to how your plan for your financial future.
• Personal finance is complicated because it is personal: we all have different situations, goals, values, needs, wants, relationships and emotions that will impact how we plan for your financial futures. Personal finance is about you. There is no ego in personal finance, there is no shame in personal finance. Only you know what is best for you.
• The goals, values and plans you have today will most certainly change in the future. Your situation will change. Plan for this change, prepare for this change, celebrate these changes. And use financial planning help you enjoy these changes. Let’s start with a thought exercise. We will do a lot of thought exercises throughout this book. There are never any “right” or “wrong” answer to these exercises. These are just to help you think about your own personal financial health and plans. As you go through this book, and as you write down your thoughts on these exercises, you may want to write down the date when you responded; your feelings about many of these exercises will change over time, and that’s okay. We want you to explore and grow as you go through this book – and you may want to re-visit many of these exercises so you can think about different issues from different perspectives as you do grow. So, here’s thought exercise #1: What is money? What does money mean to you? On the following page, write down as many words, phrases, song lyrics, tweets, feelings, or stories that help define what money means to you.

Chapter 1: Taking Control of Your Financial Future

1. ________________________________________________

2. ________________________________________________

3. ________________________________________________

Now, let’s say your Lotto ticket was a much, much bigger winner. This time you won $100,000. What would you do with that $100,000? Write down up to 3 things you would do with this bounty:

1. ---

2. ---

3. ---

There are no ‘right’ or ‘wrong’ responses here. Your answers are your answers and nobody else’s. The point of this is to help you think about your values and priorities. As you think about your values and priorities, the following questions may help you refine what your values really are:

• What decisions have you recently made that directly align with this value?
• What did you gain from that decision?
• What was the next best alternative?
• What other options were available?
• Did one of the alternatives better fit with your values and circumstances?
• What was the cost of your decision? Did one of the other alternatives have a lower cost? Sometimes the decisions you make – and the values you express – will have a direct financial cost: maybe you pay $5 for a value meal at a fast-food restaurant or $10 for a movie. Many other decisions will not have a direct and obvious financial cost; in finance, we refer to this cost as the “opportunity cost.” An opportunity cost is the value of doing something else. Think of everything

Chapter 1: Taking Control of Your Financial Future you do as a choice: when you pay $5 for a value meal, you have not only made that choice, but you have also made the choice not to give that $5 to charity or to save that $5. That’s not wrong, that’s not right – that’s simply your choice. Only you can decide if you are making the best choices for your values. You are paying opportunity costs all the time, whether you realize it or not. You have limited resources – both time and money – and you are constantly making decisions about how to spend your time and your money. These choices express your values. Importantly, these choices indicate what is important to you; they also indicate what is less important to you. Every time you make a choice on how you spend your time and your money, you are simultaneously making the decision not to do something else with your time and money. For each of the following activities, think about the benefits and the costs of doing each: Activity #1 – You choose to spend 3 hours studying at the library for an exam in 2 weeks. Benefits: __________________________________________________

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Costs: __________________________________________________

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Activity #2 – You choose to spend 1 hour exercising at the gym. Benefits: __________________________________________________

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Costs: __________________________________________________

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Chapter 1: Taking Control of Your Financial Future Think about your grad school investment. Your grad school education may be the biggest and most expensive investment you will ever make – perhaps even more expensive than buying a house.

• Most of you have to pay thousands and thousands in tuition…plus living, family and other expenses.
• Many of you will be doing this for 1-2 years, some of you will be in grad school for 5-6 years.
• Many of you will not be able to work full-time while in graduate school. So why are you doing this? What are the benefits? I’m a college professor, so I am obviously a big believer in the benefits in education and in graduate school – for you as individuals and for the benefit you provide to society. But only you can decide whether the benefits of this experience are greater than all of the costs and sacrifices you are incurring in order to receive these benefits. When you decided to attend graduate school, it probably was not an impulse decision. You and your family had probably been thinking about it for many years. You analyzed many factors, comparing the benefits and costs of every possibly scenario. This was perhaps the most mindful – both personal and financial – decision you’ve ever made. What if you made all of your decisions with that kind of thoughtfulness? What if you were able to eliminate impulsiveness from all of your financial decision-making? Obviously, that’s probably ridiculous. You’re not going to prepare notebooks of analysis thinking about whether to buy a taco on a Friday night. But how might you add a little more thoughtfulness to many of your day-to-day decisions?
• Only make purchases with a credit or debit card. Don’t use cash. Cash is tangible, but it can be difficult to monitor. Seeing all of your debit or credit card purchases online or in your monthly bank statement can help you manage and analyze your expenses. o Or, if you think differently, perhaps you ONLY make purchases with cash. Some people feel more intrinsic pain when spending cash, precisely because it is tangible. When the mafia invented casino chips, it was precisely to make it simple for us to throw away chips because losing chips wasn’t as painful as losing cash was to people. o You have to figure out which type of person you are and which approach will make you the most thoughtful and mindful…and which approach will cause you the most pain when you spend money. A brief figurative shock can be very helpful if it slows down your impulse purchasing habits – find what works for you.
• Wait 24 hours before making any purchase. Apply this rule even to your Friday night taco craving. That’s right – make yourself wait. And it’s even easier with most other purchases. Take your time and force yourself to think about how that purchase aligns with your goals and personal values. o For purchases over a certain larger dollar amount – say, $100 – force yourself to wait a week or a month before buying it.
• Delete any apps from your phone that enable no-touch or one-touch purchases. The technology is amazing – but that technology is also designed to get you to spend more money, not to help you achieve your personal and financial goals.
• Commit to saving more. For every purchase you make, whether it’s for a taco or something online, commit to moving 50% of the purchase price into your savings account.

Chapter 1: Taking Control of Your Financial Future There are many other strategies and tricks you can play on yourself to incorporate more diligence and mindfulness to the decisions you make with your money. You do not want to become a robot – but you also don’t want to be broke forever. Challenge yourself to find a nice mindfulness balance. WHAT’S IMPORTANT TO YOU – YOUR VALUES Let’s think about your values. We will do this regularly throughout this book, constantly encouraging you to make sure that the decisions you make are aligned with the values you hold dear. We’ve provided you with a list of 12 common values. In the space below the list, add 4 more that you think are important. Then, from this full list of 16 values, rank them. Give the value that’s most important to you a 1 and give the value that’s least important to you a 16. __________ Education __________ Family __________ Friends __________ Saving for the future __________ Charity __________ Personal appearance __________ Travel __________ Entertainment __________ Freedom __________ Creativity __________ Religion __________ Physical fitness

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As with most exercises in this book, this list and the rankings are just for you. You should re-visit your thoughts periodically to see how your thinking evolves as you think more about your personal financial planning and financial health. Let’s put these values to work – it’s easy enough to make lists and claim what we think is important, but it’s an entirely different matter to actually be faced with making decisions to see what we value.

Chapter 1: Taking Control of Your Financial Future Personally, I like to treat myself to nice things and to small indulgences. Most of us do. This might be as simple as a meal at a nice restaurant or a new pair of shoes or an annual vacation. I value these things. I also value donating some of my income to a few charities that are important to me. So, one rule that I impose on myself is this: When I spend money on a small or large indulgence, I commit to donating that same amount to charity. Whether that’s $30 at a restaurant, $100 on a new pair of shoes or $ 5 00 on a nice trip, I commit to donating the same amount to charity. This helps me be more mindful about how I spend my money – it also helps me align what I do with my hard-earned money with the beliefs, priorities and values that are extremely important to me. WHY FINANCIAL PLANNING? Now that we’ve jumpstarted our brains to begin thinking about how we relate to money, let’s take a break and talk about what we’re trying to do with this book. That is…Why do you need to worry about financial health and financial planning? Ø 60% of Americans do not have $1,000 saved up to cover an emergency. Ø 44% of Americans do not have $400 saved up to cover an emergency. Ø 33% of American adults have $0 saved for retirement. Ø 60% of Americans carry credit card debt, totaling over $1 trillion in the U.S. Ø 70% of Americans live paycheck-to-paycheck. Ø The average American has $5,200 in savings. o Men have $7,000 in savings. Women have $2,000 in savings. o Black Americans have $1,000 in savings. Hispanic Americans have $1,500 in savings. White Americans have $7,140 in savings. Ø The average Social Security benefit for retirees paid out $1,350 per month ($16,200 per year). Ø 55% of Americans “always” or “sometimes” worry about their finances – with 40% saying that “running out cash” is their biggest concern. Ø Financial issues are cited as the leading cause of both divorce and stress in America. Ø And, the National Endowment for Financial Education found that only 24% of millennials demonstrate basic financial literacy. This book is designed to help improve those numbers – or to at least help put you on the ‘right’ side of each statistic. We do not mention these numbers to shame your or embarrass you, we introduce these numbers to point out some of the socio-economic dynamics that you will face as you work to achieve your personal and financial goals. We cannot change many of these socio-economic dynamics with this book in the short-term; but we can help you become better prepared to put yourself in a better personal and financial position in the long-term.

Chapter 1: Taking Control of Your Financial Future Now let’s remind ourselves about some of the rewards that come from financial planning: ü Ability to maintain or improve your standard of living ü Controlled spending allows you to live well today AND tomorrow ü Accumulate wealth—Remember, whatever your income, you can spend it or save it ü Hope of avoiding much of the havoc that money problems wreak on your personal life ü Conflict over money is the leading cause of divorce in today’s society. So, what are we going to do – what do we mean by “financial planning?” For better or worse, financial planning is a constant, lifelong process…but it gets easier over time and it gets much more rewarding over time.

1. Set your goals. What do you want to achieve in life? What financial goals will make this happen? 2. Analyze your reality. What is your situation? What is your income? What are your expenses? When can you achieve your goals? 3. Create your plan. Focus on the short-term – the next 3-6 months – and the long-term – the next 1, 2, 5 and 10 years. 4. Execute your plan. Work to decrease your expenses. and to pay off debt. Work to increase your income and your savings. 5. Track your progress. How are you doing? Are you ahead of your goals? Are you behind your goals? 6. Adjust your plan to reflect your progress, your new reality and any new goals. 7. Repeat. Revise. Enjoy. As a graduate student, this may seem very abstract right now. You may not have any financial goals

• you may not even know what financial goals are. That’s okay – we’re here to help. You will get more and more comfortable with the terminology and the process as you go through this journey. You will do a lot of introspection, thinking about your personal values and your personal dreams. You will do a little bit of math, converting your values, dreams and goals into numbers. You will also be converting your actions and behaviors into numbers. Much of this may be uncomfortable for you
• I am always embarrassed to see how much I spend each month on coffee. But dealing with that discomfort is essential for being able to change your behavior and improve your situation. We will talk about income in the next chapter. You know better than anyone that as a student your income if usually much less than you want it to be. But that will change – both as you discover more opportunities for creating income and as your earning potential increases with your degree and expertise. Be patient yet be persistent. You will get there. You will make your dreams happen. Set Goals Analyze Reality Create Plan Execute Your Plan Track Progress Adjust Plan