Is it just us, or does the calendar seem to fly off the wall once October comes around? The weather gets a little colder, the new season of American Horror Story starts up, you start thinking about the holidays, and then BAM! the New Year is on you like spices in an Emeril Lagasse gumbo. And it doesn’t hurt that Halloween is our favorite holiday of the year. And yes. It’s a holiday.
This week’s note is about WABBITs. Have you heard of this? It stands for Weighted Averaged Bond Builder Interest Treasuries. They are a great way to add some noncorrelated performance while reducing overall volatility within portfolios and limiting the various….hah. Yeah right. We just made that up. We’re talking about these kind of wabbits:
While the holidays are a great time to reflect on the year that was and start making plans and dreams for the year ahead, it’s actually not the best time to take a look at your finances. The best time to do that is...now, for most of you. October and November. Open enrollment is about to start - the time of year where you make elections for workplace benefits for the next year - and we would suggest it is the perfect time to step back and look big-picture as well. We’ll highlight a couple things to pay attention to...and of course, are more than happy to help you work through some of these decisions as we move into the New Year.
Be vewy vewy quiet...we’re hunting wabbits
Wabbit #1 - 401(k) Contributions
Most of you probably contribute to some sort of 401(k) through your retirement plan at work (or 403(b) for the teachers out there). How much are you contributing? If it’s not enough to take full advantage of a company-offered matching contribution, bump it up for next year. If you already get the full match, good for you! But consider that most people will be needing to save 10-15% to reach their retirement goals...so consider bumping your contribution up 1-2% for next year anyway. We can guarantee you won’t even notice a 1% difference in your paycheck every week (closer to 0.75% or so after the tax savings, if you’re contributing to a traditional 401(k)), but will be very appreciative down the road when it’s time to retire.
Don't believe us? Here's an example: Say you're 45 and make $60,000 a year. 1% of $60,000 is $600. Assuming you get a paycheck every two weeks, that will be right around $20 less per paycheck. But by the time 65 comes around, 20 years of $600 contributions at a 5% return means that you have almost $20,000 more in your retirement account. Not bad for $20 a paycheck.
Wabbits #2-5 - Insurance
Health insurance. This is one of the larger expenses that gets taken out of your paycheck, and one with the most options available to you as well, usually. PPOs, HMOs, HSAs, FSAs...lots of acronyms to toss around. A lot of deciding which healthcare plan is right for you comes down to personal preference rather than strictly following any given healthcare calculator for saving money based on estimates for how often you go to the doctor. Some things to consider:
Looking at a new plan? Make sure any doctors you currently have or prefer going to are in-network for the new plan. It will be a requirement for an HMO plan and save you a boatload of money on a PPO plan. (Personal anecdote - I chose my health insurer based on who my sports medicine specialist accepts).
HSA? A big trend in workplace healthcare plans recently has been towards offering more or incentivizing high-deductible healthcare plans with a HSA (Healthcare Savings Account). These plans are significantly cheaper month-to-month, but the tradeoff is that you will pay for everything (albeit at lower negotiated rates) out of pocket until you reach the deductible amount. To compensate for that, you have the ability to contribute to a Healthcare Savings Account, where your money can be withdrawn tax-free for qualified medical expenses. And in this case, qualified medical expenses is a very broad category. Need to buy band-aids? Contact solution? Great, those are qualified. And, money in a HSA will roll over year to year, unlike a FSA (Flexible Spending Account) which disappears at the end of the year if you don’t use it.
Generally, HSA plans will be cheaper over the course of a year, even if you have to pay the entirety of the deductible. However, there is a significant psychological difference between paying a $25-$40 copay to see a doctor and getting a bill for hundreds of dollars that you need to pay. Like we said...personal preference.
Obamacare? Open enrollment for the healthcare exchanges under the Affordable Care Act begins in November. If you qualify for subsidies on premiums, make sure you going for a silver plan - those are the ones that are subsidized. Otherwise you have a similar decision to the one outlined above with HSAs - bronze plans will be cheaper month to month but you will be responsible for paying most things out of pocket up to the deductible. Gold plans will be more expensive month to month but usually only require a copay for most services. As an alternative to the exchanges, you can also buy insurance directly from the various companies (be sure to look into this if you are considering just carrying catastrophic insurance...the exchanges won’t let you do it if you’re 30 or older).
Life insurance. Many companies offer life insurance for relatively very little. What looks like a few dollars per paycheck can get you a couple hundred thousand dollars in life insurance. But...do you need it? Do you already have life insurance coverage from somewhere else? If so, why pay for something you don’t need?
Speaking of, when was the last time you looked at what your life insurance is actually covering? Did you buy life insurance 5-10 years ago so that if something happened to you, at least your partner would have peace of mind? Maybe you wanted to be able to pay off the mortgage, take care of college expenses, and provide replacement income for 10-20 years - all very good ideas that we wholeheartedly approve of! But if it has been 5-10 years...you've paid down some of the mortgage, you don’t need to cover as many years of replacement income, and maybe your kid is through college now or there is a 529 plan or prepaid tuition to cover college expenses, so you don’t need that covered by life insurance anymore. If that's true, you can put a little extra money back in your pocket every month by reducing the amount of life insurance coverage you carry.
Disability insurance. Very similar to the life insurance consideration above - are you paying for an unnecessary policy through work when you have it covered elsewhere? Or conversely, do you have a policy elsewhere that could be gotten more cheaply through your company? Are you paying for inflation benefits or cost of living adjustments that sound good but might not be necessary? (Hint: in our opinion they’re rarely worth it).
Other insurance - auto, home, flood, umbrella, etc. These don’t have an open enrollment period, but since you’re already reviewing your insurance policies, you might as well throw these in as well. How old is your car? Take a look at the blue book value - it might surprise you how much your collision insurance costs every year. It’s probably not worth paying $800-$900 a year for collision insurance on a car that is only worth $2,500-$3,000.
Also worth considering: most insurance companies offer a discount for paying the premium all at once instead of monthly, so if you have the cash available this is basically a 5% return on your money.
Wabbit #6 - Budget
Speaking of monthly payments...how did your budget do last year? Any changes coming up in the new year that will require an adjustment? If you don’t have a budget, use the remaining three months of the year to keep track of your expenses. Get an idea of how much of your money goes where every month, and then use that as a starting point for putting together a budget for next year. We can’t emphasize this enough, so it is going to get its own paragraph, complete with italics and bold font (comic sans was briefly considered but ultimately rejected):
A budget is the single best tool for reaching your financial goals
Now, somewhat frustratingly, there isn’t a one-size-fits-all budget we can roll out for you. Because if there was, well, more people would probably stick to one. And we would approve of that. But we’d be happy to help you put one together that’s tailored to your specific situation, that takes into account your goals, your priorities, your needs.
In fact, if you have questions about anything related to your personal finances headed into the new year, give us a call. In the spirit of the season, think of financial planning as a lifelong trick-or-treating adventure. We want to make sure your bag is filled with all the good stuff. Nobody wants to get a rock.
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