Are your finances your fault?

Posted on September 3, 2020September 8, 2020 by Danielle

Many of us tend to blame every disaster on ourselves. Except for the few who think everything is the other guy’s fault. Even in this pandemic, I hear a lot of people blaming themselves for losing their job, or making bad investment choices, or not seeing it coming.

If you’re making a financial plan, it’s very important to be realistic about what you can control and what you can’t. For example, you can certainly take advantage of all the job training offered you, put together a crackerjack resume, keep up your networking contacts, and try to do the best job possible, all things you can control. Yes, you’re allowed to feel a tiny bit guilty for these things, because you can control them, but you aren’t perfect.

You can’t control getting an unreasonable or sadistic boss (yes, some people are unreasonable or sick), have a change in supervisors and the new one wants their own team. You may have attained an age or pay level where the company concludes it makes sense to get rid of you and get someone cheaper. Your employer may be taken over, lose business, the university may not be able to re-open, or you’re in an industry that suffers in a pandemic. None of these events have anything to do with you, personally, and there’s little or nothing you can do about them.

Let’s look at it another way. Things you can generally control:

How much you spend.
Where you choose to live.
How much you save.
Whether you contribute to savings.
Whether you have an emergency fund.
Whether you continue to develop your job skills.
Whether you maintain your home well enough to prevent little problems from becoming big ones.
Whether you’ve established realistic goals and made a financial plan to address them.
What investments you choose.
Whether you have enough insurance to prevent catastrophe.
Whether you have an estate plan that preserves wealth and takes care of your loved ones.

Things you can’t control alone:

Whether unemployment benefits are adequate.
Accidents and illnesses (except for doing what you can to lead a healthy lifestyle)
Whether Social Security will be there for you.
Whether your employer operates fairly.
What “the market” will do in the future.
Whether you will have the perfect kid.
What college will cost.
What taxes will be.
What your home will be worth.
Whether you can depend on adequate care if you are disabled or elderly.

I’m sure either of these two categories could be expanded for many more points, but I want to make the point that the first group is things you can make individual, hopefully good, choices about—or your own individual mistakes. The second group is societal, and can only be addressed by groups of people banded together: parent/teacher associations, unions, consumer-group pressure and regulations, and political action.

You Star Trek fans will understand what I’m after. In Star Trek, individuals can still make poor choices, or rise to their highest capabilities, or be kind or cruel. But that society has organized itself economically so that no one goes hungry, everyone has access to education and housing and leisure time (and there still seems to be plenty of scope for personal expression). Perhaps most startling is the issue of disability. Technology has developed system-wide responses to most handicaps, whether blindness, injury, personality volatility, or mobility issues. Thus, although people may have handicaps, they are not disabled from fully functioning in society.

So, when difficulties arise, try to distinguish whether it’s an individual decision (or error) you’ve made—because those are often in your power to control and correct. Or is this an issue with the society you live in, and is the only solution group action or policy change?

That other retirement account: Financial planning for HSAs

Posted on June 18, 2019June 18, 2019 by Danielle

Health Savings Accounts (HSAs) may be the best deal out there, if you can get it. All of us like to beat the tax man, right? HSAs are what’s known as triple tax free: you get a deduction when you put money into the account, the account grows tax free, and as long as you make withdrawals for allowable health care expenses (pretty easy to do), you don’t pay any tax on that either. They’re like a traditional IRA or 401k going in, and a Roth coming out.
But like many good things, there are a few problems and things to watch out for:
1) I’ve probably repeated this for the millionth time now, but you don’t have to pay yourself back for the medical expenses in the year you spent the money. You can accumulate the receipts (and carefully file them so you can find them) and withdraw them in any year, as in when you actually retire. You’ll have to be able to pay your deductible and out of pocket costs out of pocket, but if these are fairly low, you can keep the HSA invested.
2) As with every financial account, watch the fees. Some accounts ding you heavily if you don’t keep a minimum balance. Some charge you a monthly fee. Some employers will pay fees while you’re employed with them, but if you leave they stop paying the fees and the account starts getting bites out of it. If this is the case, you can rollover your HSA into a servicer with different (hopefully, better) rules.
3) It doesn’t do you any good to park it in a savings account paying half a percent. In this case, woohoo it’s growing tax free. But the growth is infinitesimal. You want an HSA that allows you to transfer the bulk to a brokerage, or at least invest in mutual funds. Even if you still work for the same employer as when you deposited the funds, you can rollover the account (or most of it) to a provider of your own choosing. Be sure you carefully check fees and options at your current account, and at the one you are thinking of opening.
4) If you are working with an investment advisor, you may want to consider whether the HSA should be invested as part of your overall portfolio strategy. If it’s going to be untapped for years, it should be managed to build wealth.

Once you’re retired, it’s probably a good idea not to hoard that HSA. If you leave it to your spouse, it becomes their HSA. But for any other heir, it’s a lump sum distribution that they will have to pay taxes on.

So, how do you use it up? Well, of course you can submit those hoarded medical expenses you’ve saved. You can also use it to pay premiums for long term care insurance, premiums for Medicare Part B and Part D (drug), vision and dental care not covered by Medicare supplement insurance, and any copays and deductibles. You cannot use it to pay supplemental or Medigap premiums.

Since these accounts do not usually grow extremely large, it seems to me that it would be pretty easy to use it up during a normal retirement. It’s a nice way to build up a war chest for unexpected medical expenses that crash retirement budgets. Too bad I can’t use it for veterinary bills.

Why you need an emergency fund–20 reasons

Posted on February 27, 2019June 14, 2019 by Danielle

Read any financial advice article (including mine) and you’ll be told you need an emergency fund. Usually this is attached to some number (like 3- or 6-months’ salary or expenses) that will make you feel hopeless that you’ll ever achieve it. I’m here to say that even having $1,000 or $5,00 stashed is going to help out a lot, and help you avoid a lot of bad results. And, if you don’t have an emergency fund you’ll never get out or say out of debt: we don’t know what the emergency will be, but unexpected things occur regularly. Having some emergency is definitely predictable. Here are a few reasons you need something.

You lose your job. This is the first thing everyone thinks of—and probably requires the largest emergency fund, since being without any income (even if you collect unemployment) is pretty scary and can last more than a few months.
You have a health issue and have to cover your deductible and out of pocket expenses. Depending on when this occurs in the year, you may need to cover more than one year’s deductible. Let’s say you get sick in November, but it lasts into February—2 years’ worth of deductibles and out-of-pocket.
You slide in the snow, doing damage to your car (bad), or to someone else’s car (worse) or both (worst of all). Neither of these expenses is worth claiming to your insurance company know, but given the electronics in cars nowadays, one came up to $700, and the not very happy person whose care you hit cost $500. Damages to your home and car that are near the deductible are probably not worth claiming (because they’ll raise your rates or drop you.)
You have a fire. Even if you have homeowner’s or renter’s insurance, moving immediately to a hotel, eating out exclusively for any time period, or even couch surfing at a friend’s is going to cost something.
You have a fire and it only wrecks the kitchen. You’ll immediately incur higher food costs.
Your refrigerator, computer, or other appliance suddenly goes kaput.
If you’re a homeowner, the list is almost infinite: tree falls, sewer line gets clogged, hot water heater’s bottom drops out, furnace or air conditioning die, dog destroys couch or bed, cat decides they prefer your wall to wall carpet to their cat pan and you don’t discover it for a while…
Pets need veterinary care.
Someone dies and you have to travel to the funeral, or you have to bury someone.
You lose your job and have to buy temporary health insurance.
You lose your job and need assistance (coach, networking groups, lunches out, etc.) in helping you find a new one.
A loved one needs immediate residential care or home assistance not covered by insurance.
You or your child need a divorce.
You need to hire a lawyer for any reason.
Your child needs special testing or tutoring not covered by insurance or the school.
You have to buy a car, unexpectedly.
You have to move.
You need dental work, glasses, or a hearing aid (which are not usually covered by insurance). Check your insurance, especially if you have children who need any of these.
You have an accident or illness that requires you to pay others for services you routinely did for yourself (grocery shopping, rides, home maintenance and cleaning).
You work for the federal government.