Drown out the White Noise and Smile

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This is what most financial talk shows should look like.

This is what most financial talk shows should look like.

In my 401K, I currently have a mutual fund that invests in and tracks all of the companies in the S&P 500 (hereafter referred to as just the S&P).  For those of you unaware, the S&P is a stock market index is based on the market movements of the 500 large companies contained in it.  These include behemoths such as Amazon, American Express and Coca Cola.  It’s also fodder for talk radio and TV.  If you listen to the stock updates on the radio or watch it on CNBC, they will always report on the results of the S&P.  And herein lies the problem.

Whether I’m driving home from work or to the supermarket, every so often the news will report on the goings on of the stock market.  “The Dow was up 120 points because of new consumer spending numbers.”  “The S&P was down 20 points because of the latest unemployment numbers.”  Or my favorite, “The market is in complete flux today because the Fed chairman sneezed 3 times in a row.”  For something so essential to the world’s economy, the US stock market is a very sensitive thing.  I always try to keep an ear for the S&P numbers because I’m directly invested in it.  But I shouldn’t.  Because I know that short term fluctuations have no real bearing on a retirement account.  That’s considered “white noise” and it can be hazardous to your finances and to your sanity to continue to listen to it.

Wikipedia defines white noise as “a random signal with a flat (constant) spectral density.”  That sounds too physics-y to me so I will provide an alternate definition.  White noise is that stuff you hear that doesn’t really effect you but you can’t help but listen to.  When you sit in a coffee shop to read a good book but are transfixed by the conversation behind you about someone’s latest medical issues, that’s paying attention to white noise.  Having a conversation with your friend but paying attention to the crazy man on his cell phone, that’s paying attention to the white noise.  And watching shows on CNBC to hear the latest stock trends from the latest talking (screaming?) heads is paying attention to the white noise.  It’s easy to do and seems fun at the moment, but it does nothing for you in the long run.

CNBC and Fox Business have empires to run.  They have people to pay and need lots of money to pay them with.  They need something to fill the airwaves with.  This is why there is an endless stream of talk shows and stock analysts telling you to do something different with your investments.  The best thing you can do is to NOT listen to them.  Investing is like a marathon.  It involves a lot of diligent work over a long period of time.  Trying to speed up the process with a hot new tip will only hurt your long term results and can be harmful to your health.  There is a great post about how much more happier and successful you would be by following a low information diet.  I couldn’t agree more with this premise, because if we humans are given more choices, we agonize over it and sometimes rush to the wrong decision.

There is usually one right choice when it comes to investing for most people.  And that is to set it and forget it.  It requires some diligent work and soul searching up front, but once you decide on how you want to invest, the battle is already won.  Remember to focus on what you can control, your contributions and fees.  You can’t control the market’s ups and downs.  Some think they can predict it, but they’re usually wrong.  Just check back on your investments every year and so and make any adjustments as needed.  Repeat the following year.  That’s all there is to it.

Drowning out the white noise does not mean that you should get complacent.  We should always be looking to expand our knowledge and broaden our horizons.  This can be done by reading well written financial blogs and magazines and classic books that have lasted the test of time.  You can obviously start with this humble blog, but a quick Google search will lead you to many great financial resources out there.  That won’t try to sell you stuff.  And that won’t make you feel like you’re missing out on something big.  So don’t pay attention to all the financial fluff.  Stick to your long term goals and values and keep trying to improve on what you know.

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Filed Under: Investing, Self Building

Keep Up to Date with Eye Exams

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Many of us are very proactive when it comes to our medical needs.  We get yearly physicals, go to the dentist twice a year, and some of us even make sure to get our monthly massage.  One area, however, where many people wait until a problem arises to see a professional is their eyes.  I can say this because as an eye doctor it is a daily occurrence to see patients who haven’t had their eyes checked in 5 or more years.  Our eye are one of those we take for granted.  We will not fully appreciate them unless we lose them.  And while blindness as a whole is pretty rare, there is no reason to get the eyes checked regularly to screen for any conditions that could affect your vision in the future.

As mentioned before, a lot of us are very proactive with our health nowadays.  Medicine is starting to realize that prevention is better than treatment so preventative exams are highly recommended.  Yet this is generally not practice in regards to eye care.  In a survey by the American Optometric Association, 35% of Americans have never been to an eye doctor in over five years.  That is a staggering number considering that in the same survey close to 60% of people said that vision is the sense they would least like to lose.  Whether this is because of a misinformed public, a poor job of education by practitioners, or lack of insurance coverage, the fact remains that people are not getting their eyes examined as often as they should.  A NY Times survey even found that a whopping 86% of people with diagnosed eye disease do not get yearly exams.  If public health is such a big concern to this country, the eyes seem like a good place to start.

Another problem lies in the public perception about eye health.  Many people feel they do not need to go to the eye doctor if they can see fine.  This is a dangerous notion because there are many conditions such as glaucoma, diabetes, high blood pressure, multiple sclerosis, brain tumors and macular degeneration, just to name a few, which can be detected by an eye doctor at an early stage and possibly be prevented.  When the symptoms occur, such as blurry or dark vision, this can represent the end stage of the condition in which it becomes very difficult to treat.  And this does not just apply for older people.  Many eye conditions are genetic and if a family member has a condition, it would be a good idea to get yourself checked out.  Finally, even if there is not any eye disease, many people who say they can see well in reality could see much better, because they never knew what clear, crisp vision was in the first place!

Nutrition and lifestyle can also play a big role in eye health.  It is a commonly held belief that eating carrots is good for your vision.  While it certainly doesn’t cause any harm, beta carotene has not been found to have much of an effect on vision or any of the structures on the eye.  It has been found that spinach is packed with antioxidants and vitamins that are very good for the eye, especially for certain eye conditions.  In general, a healthy balanced diet is all the eye needs to function properly, and the lack of one can cause problems down the road.  As if smoking wasn’t bad enough, it was found that it can also increase the chance of glaucoma, cataracts, and macular degeneration.  It can also cause irritation and dry eyes, especially for those who wear contact lenses.  So just as nutrition and lifestyle can affect our general health, they can also affect our eyes too.

Here’s an example of why getting regular eye exams can not only help your vision, but your finances as well.  I recently had a patient who I saw for her last exam about 4 years ago.  At that time I noted that she had some early signs of macular degeneration, which can lead to central blindness.  I had advised her to see a specialist for a consult and get her eyes checked at least once a year.  Long story short, she never saw a specialist or anyone in the past 4 years and she came in complaining of blurry vision.  Looking inside her eye it was obvious that her condition had worsened, and she definitely needed to see a specialist for treatment.  She know needs to get monthly injections in the eye which her insurance doesn’t cover.  If she had gotten her eyes checked every year, there are certain preventative measures that could have been taken to slow down the condition.  She was grateful to me for finding the condition, but really regretted not following up on it.   Now her vision and her wallet are taking a hit.

So my recommendation is for everyone who hasn’t gotten their eyes checked in a while, to go make an appointment, if you are doing it regularly, keep it up.  Most people should be getting their eyes checked at least every 2 years if not sooner depending on your doctor’s recommendation.  Prevention is better than cure so let’s all be proactive with this most important sense of ours.  If there are any questions, please leave them in the comments and I will answer them to the best of my knowledge.

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Filed Under: Money Savers

Looking at the Big Picture

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Getting your finances in order is a great feeling.  From making more money, cutting out non-essential costs, getting great credit card bonuses, paying down your debt and seeing your investments grow, there are so many things you can do to improve your financial situation.  And it feels really good when you do.  The process itself can become fun, so you constantly look for more and more ways to get ahead financially.  This is all great.  Your life is MUCH better when your finances look good and the money is rolling in as opposed to when it’s not.

Yet, there are so many people around the world who have trouble keeping up and can’t even get food on the table consistently.  This is a terrible situation to be in and those of us who aren’t in this predicament should be counting our blessings.  Because of this we should also be looking at the big picture and figure out WHY we’re trying to save so much money.  It is very important to look at your income and find ways to increase it.  It’s very important to look at your expenses and debt and try to decrease it.  But it’s also important not to get lost in the sea of numbers and calculations.

Why is this important?  Because money is simply a means to and end.  And that end is whatever we define it to be.  Some people want to be able to give their kids a great life.  Some people love the experience of traveling.  Some people have hobbies and sports that they love.  And some people just want to take it easy at the end of their lives.  Whatever is most important to you, it is vital to keep that in mind.  Many people, especially young people in debt or trying to build wealth, constantly have their foot on the accelerator trying to find ways to make money and make it grow.  But over time, it’s easy to lose sight of what we really need the money for and get caught up in the process.  Find a way to remind yourself of your “end” point, whether it be traveling or just chilling.  As the analogy goes, don’t lose sight of the forest when you’re amongst the trees.

Coincidentally enough, a personal finance lesson can be had from these philosophical musings: automate your finances as much as possible.  Find what your goals are, how much you have to save/contribute to get there, and just automate it.  It’s so easy to do that with today’s technology so there is no excuse not to.  Automate your checking, savings, bill payments, credit card payments and investments.  Adjust along the way as needed.  It’s that simple.  This will allow you to take a step back once in a while and remind yourself of the real reasons you’re trying to get wealthy.

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Filed Under: Self Building

Building a Strong Credit Score

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There are so many financial magazines and blogs out there with all different types of advice to save/make money.  Cut down on your lattes!  Get this stock for 2014!  Find cool rocks and give them to people as gifts!  But not everyone drinks lattes, is into the stock market or collects pretty pebbles.  Certain things works for certain people.  But one thing that can time and time again save you the most money possible throughout your entire life is having a good credit score.

The importance of having a good credit score is sometimes overlooked because of two main reasons.  One, it can be boring as heck to read about.  Just hearing the word “credit” can male people eyes glaze over.  Then they wonder what a credit score is, the difference between a credit report and a credit score, followed by the “No way, I have to pay for my score??!!”.  The other reason credit scores can be overlooked is because it takes time to get a credit score.  We’re talking about months to years.  People want results NOW, not a few years from now.

I previously wrote about how quickly a credit score can be ruined.  It is usually harder to build good things than it is to destroy them.  So this post will be for those who have little to no credit history and want to build a nice solid credit score.  For people whose credit is a mess and are on the edge of bankruptcy, this post is not for you.  It’s for those who have a blank credit slate and would like to take the smart move and have a good credit score that will serve them during their whole life.

FICO, the company that determines your credit score, has a neat little chart on their website that tells you what effects your score the most.  Being a credit newbie, the factor that is most against you is your length of credit history.  The longer you have a history of good credit practices, the better your score will be.  But this only makes up 15% of your score, so you still have an opportunity to get yourself a good score rather quickly.  The two major factors, payment history and amounts owed, are something you can work on right away.

The best way to start?  Get a good credit card.  Not one of those secured or student ones with $250 credit limits.  Just do a simple search with Chase or Citi, for example, and find a good solid rewards card to use.  Some rewards cards are usually reserved for high rollers, but if you opt for a simple cash back card with no annual fee like the Chase Freedom or Citibank Dividend, you should have no problem getting approved for one.  Plus you’ll get some cash back for your trouble.  Your credit limit will probably not be that high, but that’s okay.

Once you get approved for the card, just make some everyday purchases like gas and groceries, but watching that you don’t get too close to your credit limit.  You want to keep your “amounts owed” well below 50% of your credit line.  If you have a $1,000 credit line for instance, try not to charge more than $300, or 30% of your total credit.  Now when the bill comes due, make the full payment before the due date.  Rinse, lather and repeat for the next months.  After a while, most companies increase your credit limit.  If you have had 6 months of on time payments and haven’t seen a credit increase, just call and ask for one.

While that pie chart is good as far as telling you what constitutes your credit score, everything else is kind of muddled.  Should you wait 6 months before applying for your next card?  Or a year?  Exactly how many points does a credit inquiry cost you?  It’s almost impossible to find the exact answers to these questions, but if you’re just starting to build your credit, I would err on the side of caution.  Maybe wait 9 months before applying for a new card instead of 6.  Keep that credit utilization ratio at 20% instead of 30%.  A credit score is something that will help you for a lifetime, so it’s worth taking your time with it.

And that’s pretty much it.  Keep making on time payments (and full payments to avoid credit card interest), and you will be on your way to a great credit score.  A final note, there is a little 10% piece of that chart that is for types of credit used.  Essentially, they are saying the more varied types of credit you have (credit cards, mortgages, car loans, student loans etc.), the better your score will be.  This does NOT mean you should go out and finance a car if you can’t afford to.  This is only 10% of your score, so it won’t affect it that much.

The most important thing is to look at the big picture.  Pretty much everyone will have a mortgage or car loan at some point.  They’re not going anywhere anytime soon.  But to get the best rates for a mortgage, you need a good credit score!  So after years of paying your bills on time, check your credit score.  If it’s in the category that will get you the best rate for your mortgage, and if you can afford the mortgage of course, that may be a good time to get one.  The difference in interest paid between an average credit score and a great one can be tens of thousands of dollars!  That is real savings.  So if you keep that credit utilization ratio low and don’t miss any payments, you will be on your way to a great score.

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Filed Under: Banking, Money Savers

Diamonds in the Rough Roundup 1/31/2014

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Looking forward to the Super Bowl in the cold.  Here are some enjoyable posts for the week:

–Best Tax Software for 2014 by Mike Jelinek:  There is a lot of good tax prep software out there.  This post goes into a good amount of detail and tells you which one is the best.

–Good Systems Can Make Your Finances Boring…And That’s a Good Thing by Planting Our Pennies:  This post gives a good example of the powerful effect of systems in personal finances.  If you don’t have systems in place, every day can be a hectic mumbo jumbo of bills and missed payments.

–Poverty, Perpetuated by Control Your Cash:  The President spoke about a new account in his state of the union address called a myRA.  Despite sounding very gimmicky, looking at the details of this account shows that it is not really all that useful for the people it is marketed for.  This post does a great job dissecting it.

Thanks to the Carnival of Personal Finance for featuring my post!

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Big Tax Refunds are Great! Right?

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There are all sorts of unending debates in the world of personal finance, with rabid followers on each side.  Rent versus buy?  Emergency fund or no emergency fund?  Paper or plastic?  Yes, some personal finance writers will go into a strange amount of detail about that last one.  One other burning question:  Tax refund or no tax refund?  Or big tax refund?  Or little tax refund?  There are actually more than one answer and as with many things in personal finance, it can depend on your situation.  But let’s talk about it and find out who the winner is anyway shall we?

The 2014 tax season (for the 2013 financial year of course) is in full swing.  People are waiting for the steady stream of tax papers in the mailbox (luckily you can download a decent amount of them nowadays) and deciding how they want their taxes done.  You can go to a local accountant, a big box one like H&R Block or just do it yourself with tax prep software like TurboTax.  I usually use a local accountant but am heavily leaning towards doing it on my own this time since computers make everything so easy.  There are lots of choices to make during tax season.  And there are two main things Americans want to accomplish after doing their taxes:  make sure the IRS will not be breathing down their neck in the future and to get the highest refund possible.

You can see it in advertising everywhere.  “We will get you your highest possible refund!”  There are promises of getting you your refund the quickest.  There are even some less than reputable establishments that will give you money even before receiving your actual refund, as long as you pay them back with your actual tax refund money.  Along with a big fat interest rate.  The fact is, getting a nice big refund and getting it fast seems to be the ideal situation according to the ads.  The average tax refund for 2013 was around $3,000.  That’s nothing to sneeze at.  I mean, who doesn’t want a big wad of cash delivered to them all at once?  That just sounds awesome.  But it’s not THAT awesome if you look at it objectively.

Getting a tax refund is nice, but it just means the government is giving you back money you rightfully earned in the previous year.  They thank you for the free loan.  Getting an average refund of $3.000 means that you could’ve gotten that money throughout the year.  That averages to $250 a month.  This can be helpful in paying down debt, especially high interest debt such as credit cards or student loans.  This is the main benefit of not getting a large refund.  If you can funnel that $250 every month towards debt or even just an online savings account, you will be ahead, maybe even far ahead, compared to just having that money held by the government until it’s time for your refund.

What about the case for getting a large refund?  Is there even a case?  There might be when psychology comes into play.  Emotions and psychology SHOULDN’T interfere with personal finance decision, but they do.  Some people are savers, and some people are spenders.  If you don’t do anything positive with that extra $250 a month and just let it sit in your checking account and increase your spending, then maybe allowing yourself to get a nice refund will be a kind of “forced” savings (though an automatic contribution to an online savings account would work just as well).  In any case, if you’re the type that might spend $250 a month without thinking about it but will be sure to spend your $3,000 refund on reducing debt or increasing savings or investments, then getting a big refund might be for you.  Ramit Sethi wrote a pretty good post a few years ago about this.  Though he assumes a tax refund of $600, well below the average.

My take?  I would opt for a refund as close to zero as I can get, but that’s because I have student loans to pay and it’s easy to tack on that extra $250 to my highest interest loan.  I would much rather use that increased monthly income to cut down on the amount of lifetime interest I pay on those loans.  But I won’t shout down those people who like big refunds and spend it on positive financial actions such as paying off debt or increasing savings.  I will, however, shout at those people who spend that big refund on a vacation or consumer goods.  If that vacation was something you wanted to do anyway, just stash that money into an online savings account.  You’ll at least earn some interest on it and will be able to use it in case an emergency happens.

As usual, this discussion on a hot personal finance topic ends…inconclusively.  Though I would lean towards having a smaller refund so you can use that money on something positive throughout the year, it’s not a HUGE deal if you go the other way.  People can do stupid things with large amounts of money, so be very careful when you do get that nice refund.

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Filed Under: Investing, Money Savers, Student Loans

Diamonds in the Rough Roundup 1/24/14

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Everyone’s talking about Richard Sherman’s awesome post game interview.  In honor of that, here are some not so sorry posts I came by this week:

–Investing Your Health Savings Account in the Stock Market by Eyes on the Dollar:  I recently wrote about HSA’s here.  One thing I mentioned is the ability to invest or at least gain interest with the money in your HSA.  My plan doesn’t currently have the ability to invest, but this article goes more in depth into that.

–Why Young Adults Should NOT Choose Catastrophic Health Insurance Plans by Young Adult Money:  Interesting post on reasons why young adults should not opt for the so-called catastrophic health care plans, the ones the government wants them to get.  These plans have very high deductibles.  I say if you have the savings to cover up to the deductible, getting a cheap health insurance plan may be worthwhile.  You can also contribute to HSA’s.  It’s all about your tolerance for risk and your income potential.

–6 Low Cost Ways to Improve the Value of Your Home by Stumble Forward:  While we’re not looking to sell anytime soon, it’s always good to know ways to increase the value of your home.  This post talks about specific short term fixes to get done a year or so before you sell.  Good to remember.

–Big wins:  The quickest way to wealth by Get Rich Slowly:  Not all financial moves are created equal.  Cutting coupons for a week and preparing for your salary negotiation might take the same amount of time, but will definitely not produce the same results.  We only have a limited time on this planet, so make your moves count.

–Why Interest Rates May Go Up This Year and What it Means For You by Ready For Zero:  Nice overview of the inevitable rise of interest rates and how it can affect you.  The last few years have seen record low mortgage interest rates, but that will probably change in the next few years.  Learn how it may effect you and plan accordingly.

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Filed Under: blog

Turn Lifestyle Inflation into Savings Inflation

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One term that has been getting a lot of exposure in the past few years is “first world problem”.  This refers to problems that only people of privilege have, such as your fries not being salty enough or not having a phone charger that’s long enough to allow you to browse your phone while in bed.  This is opposed to third world problems, such as not having clean water to drink, which unfortunately a frighteningly high amount of the world’s population suffers from.  While “first world problems” are made in jest, there is a real first world problem that afflicts many in America.  And that is lifestyle inflation.

Seeing your co-worker or neighbor with that new car (which costs them $400/month) or a new sweet Macbook (even though they bought a perfectly good one last year) can bring about many feelings.  Some feel jealousy, thinking that we deserve that as much as they do.  Some get angry, thinking that my neighbor has no right to have that since I work so much harder than him.  These negative feelings can usually lead to negative actions, such as buying the same things for ourselves when we don’t need them and/or can’t afford them.  Doing this once or twice may not destroy your finances (but it may get close).  The big problem starts once we make this lifestyle inflation a habit.  This can put a major hurting on your finances, leaving you deep in debt with little to no savings.

This is a big problem in this country and can really destroy your finances and your happiness.  Few people will ever say, “Gee I’m so glad I got that iPhone 5 20 years ago.  It really fulfilled me”  Stuff is just that.  Stuff.  We enjoy it for a while, it gets used, and we move on to the next thing.  However, once we realize how dangerous lifestyle inflation can be, we can turn it right on its head.  And it’s actually very simple to do.

First, make a list of all of your expenses and get rid of or minimize the stuff that’s not important to you.  If you feel everything is important to you, just pick your top 5 things and get rid of the rest.  It can be surprising how many monthly bills we have for things we rarely use.  If you found a way to shave off $200 from your monthly payments, you’re in a WAY better situation than before as this will be savings that last you a LIFETIME.  Use that savings towards various actions that will help your finances, such as paying off credit card debt or starting an emergency fund in an online savings account.

Now once you get a make some more money in the form of a raise, bonus or side income, put that towards your savings goals.  You already learned to live without that money, so you won’t really be missing it.  It’s okay to use new money to celebrate once in a while, but the majority of it should go towards helping your finances, not hurting them.  For example, I have a boatload of student loans.  When I pay one off, I just use the minimum payment I had on that loan and apply it to my next loan.  I already lived without that money before and I can do it again.  This will get me debt free even quicker.

Continue this pattern for years and years, and not only will you be much better off financially, you will most likely be happier as well.  Who knows, you might even be able to retire early and do whatever you want, while others continue working for things that ultimately don’t fulfill them.

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Filed Under: Self Building

Diamonds in the Rough Roundup 1/17/14

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Though the matchups in the AFC and NFC title game were surprisingly predictable, they both look to be classics in the making.  Can’t wait until Sunday.  In the meantime, expand your financial mind with these great posts:

–5 Ways to Bring Out Your Inner Sherlock Holmes by AYoungPro:  Interesting list of different characteristics of Sherlock Holmes that we can apply to our lives.

–Retirement Planning:  The Yin and Yang of a Secure Retirement by Green Money Stream:  When it comes to retirement, many people focus on contributing, and rightfully so since most people don’t contribute nearly enough for retirement.  But the other side of the coin is withdrawing money, with the hopes that it will last throughout your post working years.  There are a lot of unknowns from now until retirement, but focusing on increasing contributions and being able to live on less will increase the chance that you will outlast your money.

–Real Financial Advice.  No Bullcrap by Control Your Cash:  A humorous breakdown of a really complex answer for a really simple question.  Don’t get into credit card debt.  Ever.

Check out some great financial posts at the Carnival of Financial Independence.  They were kind of enough to include one of mine as well.

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Say hello to the HSA

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Healthcare in America is controlled by all sorts of levers and dials.  From insurance premiums, doctor co-pays, hospital visits and costs of medicine, there can be a lot to remember.  There are also different types of accounts which the IRS allows us to fund tax free for our healthcare expenses.  Previously, I wrote about the Flexible Spending Account (FSA), which allows you to set aside a certain amount of money before taxes towards your healthcare expenses.  This is a great benefit for people who usually pay a lot for doctor visits and medications or have a planned procedure in the upcoming year.  These funds are gone at the end of the year, so you definitely have to plan accordingly.

Another type of account is the Health Savings Account (HSA), which is similar to the FSA in that you set aside some money before taxes for healthcare costs, but it is different because that money is yours for life because the account belongs to you, not to your company.  There are some other differences between the two accounts that are worth noting.  My company started offering HSA’s in 2013, but I didn’t sign up for it then because I didn’t fully understand it.  I signed up for it this year (specifically, I signed up for the health plan that ALLOWS me to sign up for an HSA), and am pretty excited about the possible benefits.

HSA’s are accounts you can sign up for in conjunction with so called “High Deductible Health Plans” (HDHP’s).    These insurance plans are being offered more and more lately and will probably become the norm in a few years.  These plans don’t pay for pretty much anything until you meet the deductible amount, which is higher than most other plans.  Hence the name.  For 2014, a plan with a deductible of at least $1,250 for single and $2,500 for family will qualify as an HDHP.  The plans promote and fully cover most annual visits, like your yearly physical and recommended exams for kids.  By promoting yearly “maintenance” exams, the hope is to bring healthcare costs down in the long term.  Time will tell if this works or not.

Once you sign up for one of these plans, which I recently did, you are eligible to sign up for an HSA.  Most companies have a certain bank’s HSA they are associated with and some will even contribute some money into your HSA if you decide to sign up with them.  If your company offers that, definitely sign up with them.  They will take care of setting aside your pre-tax money into the account along with depositing their portion.

For 2014, you can contribute a maximum of $3,330 for an individual and $6,550 for a family.  The portion your company may contribute counts towards this portion, which is different from a 401k company match as only YOUR contributions count towards the maximum.  You can contribute as little as you’d like or up to the maximum.  This money is yours and yours alone to use.  There is no “use it or lose it” rule and some accounts offer investment options or a small amount of interest paid.  This is a huge difference from FSA’s as you actually stand to benefit by leaving your money in the account to grow, rather than scrambling to spend it all in December.

HSA’s are very tax friendly.  They offer a triple whammy when it comes to tax advantages.  First, your money is set aside pre-tax, so you don’t pay any taxes on the money you contribute.  Second, as I mentioned before, some accounts have investment options or pay some interest.  Any gains from this grow tax free inside of your account.  Third, any money you decide to withdraw and use for eligible healthcare expenses is not taxed either.  As a bonus, if you have money in this account when you turn 65, you can use HSA money for ANYTHING, but you will have to pay income tax on it.  But no 20% penalty (ouch!) which you would get if you used the money for non eligible expenses before 65.  In a way, your HSA can serve as a kind of retirement account once you turn 65.

What’s an eligible expense with an HSA?  Doctor visits, surgeries and prescription medications.  You can also use it for glasses, contact lenses and dental work.  You can click on the IRS website for specifics.    You would want to use HSA for those expenses which count against your deductible, like doctor visits and medications.  Once you meet your deductible amount, your insurance plan will start to cover almost everything.

Many young people are hesitant to sign up for High deductible plans and HSA’s because of the perceived high cost of doctor visits.  True, you will probably pay more for a doctor visit on the new plan, but you will probably go to the doctor more when you get in your 50’s or 60’s than you will now.  So it’s a good idea to contribute as much as you can to your HSA while you’re young so you have the money later when you or a family member inevitably need more care.

HSA’s in conjunction with HDHP’s are definitely something to consider, as they are becoming more and more commonplace.  A lot of the plans under the Affordable Care Act are HDHP’s, so you will probably see private companies following suit.  Talk to your human resources department and weigh the benefits of your different plans to see if an HSA would be right for you.

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Filed Under: Investing, Money Savers
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