Archive for Cash flow & Spending

The Affordable Care Act and an alternate future

I’m one of those people who had a policy I liked, and I’ve been able to keep it. Sounds great? Not so fast. Look how lack of regulation has affected the premiums I pay per month:

Year Beginning of year End of year (September increase)
2011 $360.87
2012 $405.32 $437.77
2013 $507.67 $559.99
2014 $588.72 $641.04
2015 $845.35
2016 $934.50 $1,180.95
2017 (notified of increase) $1,669.87

 

I cover my daughter and myself, with a $3,500 per year family deductible, a 100% coverage (no co-pay) after the deductible is met, and the plan is Health Savings Account compliant. Nothing being offered to me via HealthCare.gov is even close—all have co-pays and out of pocket maximums that would double my paid out amount because my daughter has a chronic illness where medications and doctor visits total more than $1,000 per month. No matter the plan, we’ll meet the deductible and out of pocket maximums every year.  None of the ACA plans include the three doctors nor the hospital we most frequently use, and the “best” of them equal or exceed our highest monthly cost.

Yes, it’s dismal. I was and remain a supporter of the Affordable Care Act, because so many friends, family, and clients couldn’t have gotten insurance except in a high risk (and high cost) pool before the ACA, due to pre-existing conditions. In fact, I’ve heard more than one story about people staying legally separated but not divorced, so that a spouse could continue health coverage pre-ACA. But without universal participation in health coverage, rates are exploding. Why?

  • Many more sick people are now getting health issues addressed. This has been a bonanza for hospitals, who can now actually get paid, but a drag on insurance companies who now have to cover these people and payments
  • If you have a non-ACA policy that you’ve had for a long time, you’re aging, and you’re likely keeping it because it covers more than the ACA policies, ergo you’re costing the company more
  • There are no breaks on costs—it’s a “free” market after all.
  • Many doctors are exiting acceptance of ACA insurance. These are doctors who want to be able to bill at an even higher rate, and do. Many are choosing to be completely out-of-network, which means the consumer will bear all the higher costs, making the insurance supplementary rather than full coverage.

 

Actually, I think my premiums are a pretty good representation of what we’ll see if we lose the ACA rather than improve it—after all, these premiums are from the unregulated segment of the market. We’re in a horrible mess, particularly in Illinois. I laugh when I hear that vouchers are the solution. My prediction is that this will drive consumer costs up even further, because the system will become  bill +voucher add on. It’s like selling a house by owner to save the commission—the seller think he’s saving the commission, but the buyer also is expecting a lower price because the seller is “saving the commission”. In the end, nobody saves, but everyone gets less service.

I see the terrible effect of these stratospheric increases. My clients who are self-employed, or run small businesses, professional services, or consultancies are being priced not only out of the market but out of running their own businesses by these astounding increases. If we want a climate of business start up, expansion, or new ventures, something has to be done to contain the nuclear explosions. The inability to get individual health coverage for business start ups was one of the benefits the ACA was supposed to provide, but the current toxic effect of sky high premiums is instead crushing those same entrepreneurs.

We planners struggle to estimate foreseeable costs for retirees, entrepreneurs, and early retirees, but I don’t think anyone in 2011 was contemplating a 462% increase in premiums (which is what mine have increased). Just to put that payment in perspective, my 2017 monthly payment for health insurance would support a mortgage of about $350,000. I’m buying a house with no equity to show, and no term end in sight.

From my point of view, the only way to rein in costs and get a rational health care system is a single payer system, sometimes known as Medicare-for-all. Unfortunately, it looks like the current administration and Congress is hell bent on taking us in the other direction—solving the problem by forcing people off health care, or providing poorer and fewer services, rather than focusing on a way to provide better, more efficient care. Unless you can Pay. A. Lot.  Why can every other Western democracy solve this, but not the U.S.?

 

How will the election affect your financial plans?

What now? It’s very early to make predictions but I have at least as good a chance as the pollsters, right? We really don’t know what this incoming president will do, since his policy statements have been so thin, simplistic, and utterly without actionable detail. Nevertheless, some things seem obvious, so here are my thoughts on possible steps.

Never has saving been so important

One thing that seems pretty clear is that support for the vulnerable, the disabled, the elderly, and the ill will be diminished or eliminated. Even under Republican presidents there was opposition to much of the social support network, but now that the mandate seems to be for the ultra-conservative right wing, social programs and benefits are likely to be drastically cut. Certainly we’ll be unlikely to see any new initiatives. This means:

  • You won’t see any assistance to make education more affordable. If you have school loans, you’re not going to get any breaks. If you have children, saving for college will be critical. Without savings, it’s very likely you won’t see your children in college.
  • The incoming president has absolutely no plan to remedy the problems in Social Security. I can say with near certainty that you won’t see any impetus to bring benefits up to an actually livable retirement income. Without your own savings, you’re going to have a bleak old age.
  • Health care costs will be on you. Since the incoming president is unlikely to favor cost containment, single payer options, or public provision of service, we may well see a free-for-all where service providers scramble to snare the people who can actually pay out of pocket. Same goes for colleges, now that I think about it.
  • Charities won’t pick up the slack. The national mood to support the vulnerable seems to have disappeared. One of the most shocking things I’ve learned as a financial planner is how few people give to charities at all, and how small some of our contributions are. Especially in an economic downturn, charitable donations will lessen. Most charities are not able to float extensive programs for continuing care on their own, and depend on public, government support which is unlikely to continue.

Money, as always, gives you flexibility and protects you even in severe economic downturns. If you have to pay, yourself, for all the services most Western democracies provide their citizens, you must have savings.

Try to arrange catastrophic protection on your own

There is unlikely to be any movement toward increasing protection of the elderly and disabled. Long-term care insurance appears to be a necessity for anyone but the super rich. There certainly won’t be any type of long-term care insurance provision at the government level, and most likely no regulation of the industry. Unless you want to face complete impoverishment in needy old age, you should consider the catastrophic protection long-term care insurance provides. Medicaid, for when you’re completely broke, is unlikely to receive enough funding to provide enough care for enough people.

Similarly, disability insurance becomes even more important. Getting Social Security disability, already extremely difficult, will certainly not become easier or more generous. Even those with some savings could easily be wiped out by a disability.

I can’t comment on health insurance, because all the alternatives look so bleak to me that I have no idea what may still be available in the next years. This is a significant drain on entrepreneurship and small businesses. One of the biggest blocks to people starting new ventures has always been the inability to secure individual health insurance. The insurance safety net now becomes more important while simultaneously becoming more damaged.

Review your employment situation

Even if laws protecting workers are still on the books, the federal agencies still have plenty of options on how to enforce them (or not). A professor of mine once said that the most important thing a president does is make the 250 or so critical appointments to agencies that actually run the government. I think it’s pretty safe to say that anti-discrimination provisions, OSHA protections, affirmative action efforts, and environmental protections will be dismantled as much as possible. If you get in an employment situation where legal protections might be important…well, I hope you have the savings and insurance to tide you over a long legal sojourn with a potentially poor outcome. Don’t forget, a president gets to appoint judges and prosecutors.

Do whatever you can to develop your technical skills. The only way to make yourself valuable in a recessionary economy is to acquire skills that are so in demand no one will care who you are: computer, health care, accounting, and engineering come to mind. These are skills that are valuable world wide.

If you’re in college or have children who are, it is with a heavy heart that I say it appears to be a poor idea to concentrate on the liberal arts. My own daughter majored in Anthropology, and my long-ago degree is in Sociology, and I have (all my life) rigorously defended the value of a liberal education. I still believe in it, because I don’t think education should be job-training; it should be developing the life of the mind. However, with the reality of the current developments, any student needs to think about how to add technical or in-demand skills to their education, at least as a minor or certificate program. This is the time to add pragmatic skills to education, because you can’t count on any help or justice except what you can muster on your own.

If you are part of any vulnerable group—women, minorities, immigrants, disabled, LGBTQ, to name a few—this advice goes double. As Cal Newport has said, be so good they can’t resist you. It didn’t work for Hillary Clinton, but I’m hoping your luck will be better.

Stay with diversified investments

I don’t know what the impact will be on markets as yet. I’m guessing socially responsible investments, green energy, and anything dependent on health care funding are going to take a hit, while military contractors will see windfalls. I doubt that defunct industries can be brought back. Will Europe become more attractive? Will the Fed have any tools left? As always, the only mitigation of catastrophe is to have eggs in many baskets.

It all depends on your personal situation, of course, but this may not be the time to pay off a house (locking up your cash). You may need it—it’s easier to lose a house than to go without critical health care. However, it may be the time to nail down a low-interest mortgage, because rates aren’t going any lower.

Take care of yourself

The future looks stressful beyond anything I have encountered in my lifetime, while the quality and availability of health care is almost certain to be drastically impacted. Try to improve what is in your control: lose weight, eat healthy (and don’t be a victim of the corporate manufactured pseudo food complex), try to get exercise. You’re going to need to try to stay as healthy as possible, as long as possible.

I hope it will be possible to compartmentalize some of this, to get relief by pursuing craft, authentic relationships, the pleasure of pets. I almost said the joys of nature, but the impact on our natural world and climate is likely to be catastrophic.

Think realistically about emigrating

 For most of us, it’s not going to be easy or even possible. Without significant money to take with you, and skills so in-demand that you’d be embraced by any country in the world, you’re probably not going to be obtain residency, particularly if you need to work. And if you own a house, who do you think is going to buy it? Those immigrants that are being deported? It’s going to take a lot of planning and forethought to actually accomplish this.

Darn, tried to keep out that bitter tone. Did avoid naming He Who Must Not Be Named. I’ll do my best to help puzzle through how all this relates to your own personal financial picture. It’s never been a better time to shore up and plan for what is in your control, and take steps to protect yourself. Let’s work on this together.

Financial planning for a freelance or self-employed income

It’s easy to divvy up a paycheck. Freelance income, not so much. The biggest problem with making a spending plan (because we all hate the word budget, right?) is that you’re never sure how much you’re going to get, and when it’s going to show up. This is a huge problem when you’re first starting out, but it’s still an issue even after your established—while you might know your average earnings, you still don’t know exactly when the check will be in the mail.

I’ve long recommended Ramit Sethi’s concept of dividing your income into percentages, rather than amounts. This works whether you get a regular paycheck or intermittent checks from freelancing or a small business. When I work with clients, we focus on constraining fixed expenses, prioritizing different types of savings, and managing discretionary spending. But if you’re a one-or-few person operation, there’s more to consider. I’ve been very happy, recently, to discover Mike Michalowicz’s book Profit First. (Disclaimer: both of these gentlemen sell a lot of products and services. I’d suggest reading their books and being an aware consumer–figure out what’s right for you!)

How much do you need to keep the business running? As a solo, it’s very easy to send nearly all the money to your personal account, then need to loan it back when business bills come in. Even if you don’t have a lot of expensive memberships and licensing requirements (my hand’s up), you’re still going to need to replace computer equipment; update software; print business cards, brochures, etc.; and perhaps pay an accountant or attorney. To this I would add that if you’re truly self-employed, you’re also going to need to factor in the cost of benefits usually supplied by an employer: health, life, and disability insurance; a reasonable amount of paid vacation, sick days, and holidays; contributions to a retirement plan; and the space you need to work. Michalowicz suggests that these operating expenses should be no more than 30%. I might quibble with that a little if we include health insurance, and I’ve been hard pressed to keep them under 35% myself, but it’s a good general principle.

The next big bugbear after keeping the doors open is keeping the wolf (aka, the IRS) away from them. Rather than scrambling to come up with the quarterly payment two days before the end of each quarter, Michalowicz suggests putting 15% of every check in a (preferably inconveniently located) savings account. This actually seems a little high to me, particularly for a start-up where you may not have all that much taxable income, but it depends on how the business is organized, and what you’ve paid in the past. In any case, I’d suggest no less than 10% of each payment/check go to tax savings. If you don’t need it all, there’s always next year (or property taxes).

When do you pay yourself? Okay—next up, owner’s pay. Here, Michalowicz suggests you pay yourself 50% of the gross. This is the amount that I would consider available to apply Sethi’s budget percentages, although where the retirement savings comes from depends on your own business model—just be sure it comes from somewhere!

Finally, Michalowicz points out that it’s absolutely essential to set aside something—5% suggested—for profit. As he rightly points out, without siphoning off some amount, you’ll have nothing to show for your work. Although he suggests using this money to ultimately reward yourself for hard work, I’d be conservative and say this is your business emergency fund until you have enough to keep up with expenses for 3-6 months, tiding you over any cash flow crises or dry spells.

Try out the percentage system. Using specific dollar amounts, and not meeting them at times, makes you feel like a failure and a spendthrift. When you use percentages, you’re always a success.