Health Care Flexible Spending Accounts

How Much is Too Much?
Since taxes are our biggest expense, we’re all looking for ways to reduce them. If your employer offers a flexible spending account you can reduce your taxes by setting aside pre-tax dollars from your paycheck for health care use. The question I fight with every year during open enrollment, “How much money should I put into my flexible spending account?”

Is a Flexible Spending Account Worthwhile?
For many of us, flexible spending accounts are the only way to get a tax break for medical expenses since they are only deductible to the extent they exceed 7.5 percent of our adjusted gross income. If you contribute to a flexible spending account it will reduce your adjusted gross income in the eyes of the tax man, which lowers your federal, FICA and, frequently, state taxes.

The current annual maximum contribution allowed by the IRS is $5,000 if you are a single parent or married and filing jointly; $2,500 if you are married and filing separately. (The regulations also allow your employer to cap the maximum contribution amount below the IRS numbers). Of course, your expenses may be lower than these maximum but if you can reduce your taxable income a few thousand each year that’s more money in your pocket.

The Dilemma
Due to current IRS rules you lose any money you contribute in a plan year that is not spent for approved medical expenses by the end of the year. An article by Bankrate.com highlights this is a problem that many people face:

“Studies by benefits specialists regularly show that employees typically forfeit more than $100 each year in flexible medical accounts.”

So we have to weigh the cost savings against the amount we could potentially lose by over contributing. It seems to me the big question becomes, “How sick will I be next year?” A rather absurd question, isn’t it? Obviously, if we could predict the future, we would be rich beyond belief and wouldn’t need to worry about setting up a flexible spending account. Next article I’ll talk about the process I go through to come up with the “magic number” to contribute.

[tags] Taxes, Flexible Spending Account, Health Care [\tags]

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Ghostly Profits, Opportunity Costs, and Inflation

Golden Ghosts
The ghosts should make me around 141% return on investment. I went against my own advice from a previous post, and made an investment in Halloween decorations. The positives and negatives I discussed still apply BUT I ran across an opportunity to buy at a 75% discount to the market price. How could I pass it up?

Halloween Profits
I spent $121.25 for decorations that normally go for $485. Based on the formula I use to price all my eBay investments, I should net around $171.41 when they are sold. Even if I was 20% high in my estimates, I’ll still net $84.99, about a 70% return on investment.

Sitting On Cash
You don’t care about how well ghosts will sell on eBay, but what you should care about is the brief thought I had while making this investment. Typically, I expect to sell my eBay investments 1 day – 3 months after buying them. Obviously the price for this investment was discounted so heavily because Halloween products are a cyclical item and I bought at the end of the cycle. (Too bad all cycles aren’t as easy to predict as “always buy on November 1st”). Which means I don’t expect these items to sell until about a year from now.

Time Value of Money
So now I have $121.25 worth of stuff sitting on a shelf for a year with inflation and opportunity costs eating away at the value of my investment. The important thought I referenced earlier is as follows. “If I’m investing this money now and won’t see any return on it for a year, would it be better invested in another way?”

The reason this is so important is that opportunity costs and inflation are so easy for us to overlook when making financial decisions. Investopedia has a good illustrative article that explains how the time value of money can affect our pocket book based on different decisions we make. The decision for me was easy, had I bought shares of stock or a mutual fund I might have expected a gain of 5 – 15% over the next 12 months. Compared with a 70 – 140% return on investment the choice was simple.

Tax Time
“But I don’t sell things on eBay or invest in stocks”, you say. It doesn’t matter; this principle still applies to you. A Kiplinger Personal Finance article tells us that “the average taxpayer is having nearly $185 too much withheld from his or her pay every month.” That comes out to $2,220 a year you don’t have working for you. While the government is holding onto your money, missed interest income and inflation are eating away at the value of the dollar you worked so hard to earn!

The Point
So what am I saying?

That you should reduce your withholding if you’re withholding too much tax?
YES!

That you should invest your money?
YES! Whether it’s selling on eBay or investing in stocks, make your money work for you.

That you should be aware of the impact that inflation and opportunity cost have on your financial decisions?
YES!

That doing these things will help you live a Money Smart Life?
YES!

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Financial Procrastination

401k Overachiever
I contribute the maximum amount to my 401k each year. Earlier this year I updated my withholding percentage to 25% of each paycheck. The plan was to contribute the maximum as quickly as possible. Once I had hit the cap on annual 401k contributions, I’d use the money for other investments outside of the retirement account.

I was discussing my plan with a friend at work, who I think lives a money smart life, and he mentioned that my strategy had a flaw that would cost me hundreds of dollars. Our company matches up to 3% of each 401k contribution. If my contribution percentage was too high and I maxed out the 15,000 cap for 2006 by the fall, then I’d miss out on the 3% match for the remainder of the year’s contributions.

Procrastination Sucks!
I thanked him for his insight and put it on my list of things to do. It made sense to lower my 401k contribution percentage but I had plenty of time and would get around to it. Wouldn’t you know, time passed faster than I hoped and I’ve hit the max. I’ve missed out on the matching for the rest of 2006, money down the drain. My loss. If you take it to heart, it could be your gain.

The Cost of Procrastination
A Google search on Financial Procrastination led me to an article from the newsletter of Richmond Financial Associates that discusses the potential costs of procrastinating financially.

One of the things that rang true is that taxes, inflation, and procrastination are three main barriers to accumulating wealth. While taxes and inflation are almost a given, procrastination is of our own doing. We have enough trouble meeting our financial goals as it is why self inflict financial injury?

Procrastinate No More
Obviously financial procrastination does not lend itself to living a money smart life. I’m going to come up with a list of all the financial matters for which I’ve managed to delay action and get started on them this weekend. Has financial procrastination bitten you in the past? How do you avoid putting off your financial maintenance and decisions?

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Halloween Profits

Night Before Halloween
It’s the night before Halloween and you are without a costume! You show up at the Spirit Halloween store and can’t believe how much they are charging for this stuff! A Captain Jack Sparrow outfit for your son is $30, the little Little Bo Peep costume you’re eyeing is $60, and to make your husband a Ghastly Goul it’s $50! If you think the costumes are scary, just look at their prices!

Big Business
An article on about.com gives the numbers collected by the National Retail Federation (NRF) on the business of being scary for a night. With a projected $4.96 Billion to be spent by consumers in 2006 on Halloween decorations, candy, and costumes; Halloween is currently the sixth-largest spending holiday of the year.

Spending Trends
The NRF 2006 Halloween Consumer Intentions and Actions Survey found the following trends:

• 63.8 percent of consumers will celebrate Halloween this year, compared to 52.5 percent last year
• The average consumer celebrating Halloween will spend $59.06 on Halloween, compared to $48.48 last year

Spending Amounts
The article breaks out the 4.96 billion between decorations, candy, and costumes:

• $1.31 billion on decorations, an average of $15.63 for those planning purchases
  67.0 percent of consumers plan to purchase Halloween decor
• $1.57 billion will be spent on candy, with 95.7 percent of consumers buying. The average consumer plans to spend $18.72
• Total spending on costumes, including children’s, is expected to reach $1.81 billion. Consumers plan on spending $21.57 on average and 34 percent plan to dress in costume

Scary Money
Why am I telling you this depressing news, that Halloween is getting more expensive every year? Because with the right timing you can use it put money in your pocket! The markups on costumes and décor are huge and with the seasonal nature of the products, the markdowns begin quickly. Already, on the night before Halloween, the Spirit Store has discounted their items online 50% or more. You can find $80 decorations on sale for $30 and $130 costumes on sale for $50!

If you have extra cash and somewhere to store the loot, now is a great time to score some great bargains. Following the time tested strategy of buy low and sell high, I’d say now’s the time to buy. Load up on the deals and next Fall sell it on eBay.

What to Buy?
Since candy has a shelf life and the margins are pretty low I’d stay away from that. Decorations net a fair amount but they are harder to ship and take up more storage space. I’d go with the costumes. Statistics show they have highest total amount spent yet the smallest percentage of consumers are buying costumes. This translates to the highest per item per consumer, $21.57, and means higher profits for you. Plus they are easier to ship and people need new ones every year. Good luck shopping!

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Making a Difference

Hello Hong Kong
Based on the information from sitemeter.com, I have my first piece of circumstantial evidence of making a difference in someone’s financial journey. A search on Yahoo Hong Kong led a reader from Hong Kong to MoneySmartLife.com. They read the post “Achieve Financial Independence Week” sponsored by American Century Investments and left the site by clicking on the “Declaration of Personal Financial Independence”. This document is basically a contract with yourself, committing to follow the basics of personal finance.

One Small Step
I don’t know whether they printed it, signed it, or have started to follow through. You can lead a horse to water….. My hopes are they signed it, stuck it on the fridge, and are starting with the first bullet point this week. I do know that this person may never have found the contract were it not for MoneySmartLife.com. Here’s to many more Declarations of Personal Financial Independence!

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Financial Checkup – Influence

Principle 3 – Influence
What is the number one determinate of someone’s attitude towards their health? The family and environment they were raised in. Think about some of the common bad habits that people pick up from their family such as smoking, unhealthy eating, or lack of exercise.

The influence of our environment also determines our financial health. Do you talk about money with your family and friends? If so, is the conversation a learning experience or is it usually an argument or complaint session? If we want to improve our finances, we have to surround ourselves with positive financial influences that will help us learn the ins and outs of our money.

Principle Applied
So how do we apply this principle? Start by looking forward. Don’t worry if you haven’t had great financial influences in the past. Start surrounding yourself with them today!

However you learn best, that’s where you should begin. If you’re a visual person, read finance magazines (Smart Money, Kiplinger’s Personal Finance), or blogs (PFBlog, Blueprint for Financial Prosperity, All Things Financial). If you’re an audio learner, listen on the radio or to an audio book (Dave Ramsey, Suze Orman). If you need human interaction, find a friend or relative. If you don’t know anyone you’d trust financial advice from, join an investment club (Better Investing) in your area, and ask lots of questions!

Read about the next principle of Finding a Mentor.

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ING Direct Bright Spots

What Bright Spots?
We keep our emergency fund in an ING Direct account and are emailed the ING quarterly newsletter called Bright Spots. The October 2006 edition contained an article titled, “Don’t let debt get the best of you”. Although it does include 7 tips on how to combat debt, the article paints a bleak picture, one that does not seem to offer many “bright spots”:

“The Federal Reserve Board just reported that American consumer debt is now at a record $2.17 trillion. For the first time in history average Americans owe more than they make. ABC News recently reported that in the last decade, while the average family’s income grew by 9 percent, credit card debt has increased 81 percent.”

Forget the Joneses
The newsletter does follow this up with a motivational message from President and CEO Arkadi Kuhlmann titled “Forget the Joneses”. It emphasizes the virtue of saving vs. spending and congratulates ING’s customers on opting for the saving route. The concept is similar to Dave Ramsey’s message, “Live like no one else, so you can live like no one else”. Basically take care of your finances now so you can reap the rewards in the future. At that point, the unfortunate Joneses will be seeing the error of thier ways, and you’ll probably be enjoying life.

Positive Takeaway
I suppose the “bright spot” I take away from this newsletter is that a large company is attempting to raise financial awareness about saving vs. spending and debt levels. The question to ask ourselves: What can we do individually to inform others of the dangers of debt and motivate them to avoid it?

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Home Prices Drop

The Commerce Department reported today that September 2006 saw the largest year-to-year reduction for median new home prices in 35 years. An article in Business Week gives the details:

“The median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970.”

The author labels this as a sign of the “correction in the once-booming housing market” and questions whether the decline will summon in a recession. Only time will tell where the housing market is headed but I feel for the thousands of people whose stomachs drop as the tide of real estate wealth runs back out to sea. Another example of Tulip Mania, in action.

The real estate craze reminds me of two good investment principles:

• You’re not “up” any amount of money on an investment until you sell
• An investment is only worth what you can sell it for

Remembering these principles will help us keep our head in the days of future bubbles that are sure to come.

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The Biggest Saver

The Biggest Loser
I caught the end of a reality TV show tonight called “The Biggest Loser”. People on the show learn to change their lifestyle in order to lose weight and regain good health. With a simple plan of diet and exercise, they change their lives. The person that loses the most weight, wins the competition.

The Biggest Saver
What if there was a show called “The Biggest Saver”? What if we had someone weighing us in financially every week on national television? How much more accountable would we be with our personal finances?

Healthy Appearances
The unfortunate thing about financial health is that unlike being overweight, you can’t always judge a person’s wealth by looking at them. If someone can’t fit into their pants, it is obvious to everyone. However, someone could be spending every penny they earn to pay for nice clothes, expensive cars, and a big house. To others, they come may come across as well to do, when in reality they are two weeks away from a financial heart attack.

Internal Motivation
Appearances can be discouraging for those that decide to make a change and get financially fit. If you lose weight, it shows. People offer compliments and ask how you did it. However, if you hit your savings goal 3 months in a row, no one knows. There are no compliments; you don’t feel any different physically. For this reason, the journey for financial health is often driven largely by internal motivation.

Keys to Success
Why are the people on the show able to lose 30-40% of their weight in a short period of time?

• They have a mentor. Someone encouraging them and keeping them motivated to push on when things get tough
• They follow a system. They’re shown a simple system of diet and exercise.
• They have the support of a team. It’s not them against the world. They have others to turn to for motivation and advice

If you can incorporate the above keys to success into your financial journey, I guarantee you will make great strides towards your financial goal; you will become the “Biggest Saver”!

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Financial Checkup – Motivation

Principle 2 – Motivation
This principle actually helps determine our application of the Behavior principle. We need something to motivate us to change our behavior. Often, the reason we do the little things in life is to help achieve the big things.

We need motivation to get up and exercise every day or to avoid unhealthy foods or habits. We also need a motivation to avoid over spending and promote savings and investing. This all comes from some type of vision. For physical health it may be fitting into our swim suit next summer or lowering our blood pressure. For financial health it could be buying that boat we’ve always wanted or quitting our job.

If we can find our “Why”, our Motivation to change our Behavior, then we’re on the right path. One warning, a goal is not good enough. It inspires us until the goal is met, then we flounder. What is required to continually motivate us is a vision.

Goal vs Vision
For example, a physical health goal might be to lower our blood pressure. A vision would be to live a healthy life so that we’re around to meet our great grandkids. A financial health goal could be to save up enough to pay your kid’s college tuition. A vision would be to create a foundation that would fund the continuing education of the next two generations of your family.

The goal is reachable. What will keep you motivated once it is reached? The vision has a much larger scope and may even seem unattainable. However, this challenge, this dream, will keep you striving towards success. It will motivate you to change your Behavior to achieve your vision. Stay tuned for the next principle, Financial Checkup – Influence.

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