With all the crazy amounts of analysis about the recently passed health care plan, I thought you might find this interesting. It does a decent job showing the multitude of phases the plan will begin to affect your life.

Infographic by HealthInsuranceProviders.com: Compare health insurance options from many different providers!

You: Wait a second. This is a personal finance blog. Why are you weighing in on health care reform?

First, I’m not actually weigh in on what plan should be followed.  Rather, I am reporting some observations about our behavior. Second, health care reform is very much a financial planning topic.

You: How so?

In several ways. Here are just a few:

• The largest issue concerning health care reform is health insurance. While the debate about health insurance is both variable and plentiful (e.g., its affordability, administration, even its very existence), health insurance remains the number one issue of health care reform.  Long time readers know that insurance is a cornerstone personal financial planning topic.

• Health care reform is extremely likely to cause changes in what we pay for medical services.  This is both a cash-flow issue (changes in co-pays, deductibles, and premiums) and a tax issue (since surtaxes, to help pay for reform, and penalties, to ensure compliance, are under discussion). Again, cash-flow and tax are major components to sound financial planning.

• Changes to flexible spending plans (like the elimination of their use for non-prescription medicines) are also under consideration.  This gets at benefit planning, yet another key financial planning topic.

I could certainly go on.

You: I get the point.  Health care reform will definitely affect most people’s finances.

Right.

You: So you’ve explained how health care reform is a personal finance topic, but not why are people so rude when discussing health care reform.

As was reported in Friends Don’t Let Friends Bring Up Health Care, a wonderful article first appearing in The Wall Street Journal earlier this week, causes for overtly rude behavior include the Internet and our role models.

You: The Internet?  Why?

As the article reports and you may have observed, people write things online they would never say to a person’s face.

You: Did you see the town hall meetings on TV?

I sure did and point taken.  Now multiply it by a million and you have some idea of the scale of rudeness permeating sites like Facebook (supposedly, and quite ironically only connecting you with friends), and Twitter.

You: Is it really a problem?

I think so.  I do my best to stay apolitical except among my closest friends and family.  I don’t participate in political discussions with people I don’t know, let alone potential clients or supporters.  But not everyone else checks themselves in that way.  (Not to say my approach is better, but it has its merits.). Have you ever hid someone’s comments on Facebook or stopped following someone on Twitter because of their relentless one-sided presentation of their opinions?   I have – and not just those I’ve disagreed with!

Other reasons for the rude behavior, in my opinion, include:

• Health care reform is going to affect our pocketbooks, no matter the final outcome. Most people must very work hard for their money and want it choose how to spend it.  No matter which course is taken, we will cede some control of our money as a result of health care reform.  (We may also cede greater control of our medical care, but I don’t get the sense we’re as upset about that possibility as the possibility of losing more control of our money).  Feeling like one is losing control can often lead to rude behavior.

• Health care reform is really complicated. Health care reform touches nearly every part of the government and our personal affairs.  It simply cannot be addressed adequately in a four minute cable news interview, let alone a sound bite on the 6PM news.  Yet the media’s desire to give us what we want (quick one-liners we can both repeat to our friends and help us convince ourselves we actually understand the true complexity) leads an endless sea of frustration.  After all, every sound bite can be countered with another.  True philosophical conversations around health care reform are much harder than they were about responding to the attacks on 9/11 or Pearl Harbor (though there were critics of our action following both of those events as well).  Things seemed easier to understand, no matter which side of the issue you were on.  When people are more confused yet feel forced to take an opinion, they are more likely to become rude when challenged.

• Most people don’t like uncertainty and we have a lot of that already.  Due to the economic meltdown and related rise in unemployment, there was growing unease well before the health care reform debate really got going. Now we’re forming opinions during a time when we’re a bit less unsettled than we were a couple of years ago.  At best, it’s a bit uncomfortable  At worst, it’s stressful. People are more likely to be rude when they’re stressed.

You’ve just read Pandora’s box. Feel free to open your can of worms and place your comment below.  Bonus points if you can keep it civil.

On Friday, I blogged about the importance of maximizing your match in December.  Year-end tip number two concerns flexible spending accounts (FSAs).  Like a 401(k) match, paying attention to your FSA makes sense 12 months of the year, yet still presents some critical opportunities as the year winds down.

Here’s a refresher on the benefits (and risks) of Flexible Spending Accounts.

The end of the year matters for FSA because many plans require that you completely use the funds you set aside by December 31 (Some plans have extended the deadline slightly, but even stil, the deadline is nearing). Those funds that you don’t use are lost forever.  Financially, allowing this to happen is never a smart move.

Don’t do that.

If you have a health care reimbursement account and you accidentally overestimated the amount of medical expenses you would have and are now sitting on a couple of hundred bucks that you will lose if you don’t spend it by December 31, now is the time to stock up on long shelf-life over-the-counter products that are covered by your FSA (ask HR for the guidelines).

Don’t wait until the last minute to take care of this. This is a good use of your time.

The American Payroll Association founded National Payroll Week in 1996.

You: There’s a week for everything.  What about National Paid-Off Week?

Looking forward to that one, eh?

You: Who isn’t?

Easy: those who are already living Beyond Paycheck to Paycheck.  To that end, I had the opportunity to chat with Robert Wagner, Direct of Communication for the American Payroll Association about the importance of our paychecks.

You: The importance of our paychecks?  That would seem kind of obvious. Hello? Paychecks are how we get paid.

Thanks, but I went for something deeper:

Beyond Paycheck to Paycheck:  A big part of National Payroll Week is emphasizing better ways for employees to manage their paychecks. Can you give me an example?

Robert Wagner: I’ll give you three.

Beyond Paycheck to Paycheck: Even better.

Robert Wagner: The first opportunity for many people is to adjust their W-4 to ensure they have proper withholding.  By doing so, they may be able to get an instant raise. Otherwise, those who are getting large income tax refunds are giving the government interest-free loans.  For those who receive a refund of more than $1,000 a year, we suggest that they adjust their W4 to give themselves a raise the very next payday. You can adjust their W4 at anytime, you don’t have to wait for annual enrollment.

[Beyond Paycheck to Paycheck note: You can visit our Can I change my tax withholdings into retirement plan contributions? calculator which helps you with the withholding allowance calculation and may assist you in increasing your retirement contributions in the most pain free manner imaginable.]

Robert Wagner: The second way to manage your paycheck is to take advantage of pre-tax programs like your flexible spending account (FSA).  Using the dependent care FSA is a compelling case if you have dependent care expenses, which could include child care (even summer camp if you go to work while the children are at camp) or even expenses related to caring for elderly parents (if you claim them as dependents.)  Not only could you save up to 35% of the cost (depending on your tax bracket), but participating in an FSA might also bring down your total taxable income into a different, lower, tax bracket.

If your company has such a program, you can sign up for a FSA through payroll or HR. At most companies, open enrollment is November and December.

Beyond Paycheck to Paycheck: What’s behind door number three?

Robert Wagner: The third key is to take advantage of any retirement savings accounts offered to you.  You have to take advantage of your match. Every dollar you don’t contribute that would be matched is like throwing money away. Einstein said “compound interest is man’s greatest invention.”

Beyond Paycheck to Paycheck:  What do you recommend to the average paycheck-to-paycheck worker who doesn’t have these programs? You’ve indicated that many of these programs can be offered at little or no cost to the employer, so how does one get this to be something that their small business owner/employer cares enough to do something about?

Robert Wagner: Emphasize that it costs very little, a truly negligible amount to run these kind of programs.  Plus, it will help their employees to save money on very important expenses. Many people can’t not do child care if they want to work. Child care expenses have increased faster than inflation and employees need help dealing with it.  Providing a child-care flexible spending account is a way to offer an effective raise to their employees without it actually costing the employer any more money.

Plus, employers know they need to be competitive in order to attract and retain the best employees.  Our survey results show about 60% of employers are no offering such programs.

Beyond Paycheck to Paycheck:  What do you think about the communication of these benefits from employers to employees?

Robert Wagner: We find the best way to communicate is for the employer to tell the employees how much they could save by giving examples.  In New Jersey, where I live, may people spend between $3,000 and $5,000 per year on child care, meaning they you can save $2,000 per year by simply signing up for the flexible spending program.  When an employer points out how much an employee can save, then the employees will stand up, take notice, and begin participating.

Beyond Paycheck to Paycheck: Of course, people are still concerned about the possibility of over-estimating their expenses and, therefore, the risk of forfeiting some of their money.

Robert Wagner: Forfeiture is a consideration. You have to estimate pretty carefully. But child care costs are pretty similar year to year.  A few years ago, the government extended the date by which you have to file and spend all your money to March 15.  An employer would have to have changed its plan to make that an allowable deadline for its employees to make the extended deadline effective (or employees might otherwise lose those funds.)  In my family, if we haven’t spent all the medical money by the end of November, we’ll buy contact lenses for the next year, aspirin, band-aids, the everyday items, even a new pair of glasses so that nothing is actually wasted.

Also, employers can take any money left in the plan and distribute it to the plan members.

Beyond Paycheck to Paycheck: Really?

Robert Wagner: Yes.

Beyond Paycheck to Paycheck: How do they decide who gets what?

Robert Wagner: An employer has three options:

1. They can split it evenly between all of that year’s FSA plan participants
2. They can split it evenly between all of the following year’s FSA plan participants
3. They can spend the money on the employer’s administrative costs for maintaining the FSA. This provides another incentive for employers, and can make such plans virtually free for an employer.

Beyond Paycheck to Paycheck: Thanks, Robert. This was great.

Robert Wagner: Thank you.

#    #    #

To me, this kind of thing is a good reminder to take advantage of the benefits your employer is already providing you (or you’re being kind of dumb.) In tough economic times like these, many of the raises out there aren’t as good as what we feel we’ve earned.  Bummer.  But be careful to ensure that you get the maximum from what your total compensation package already provides. Too many people focus exclusively on gross salary and don’t spend the time necessary to ensure that they get the most from their benefits.  And it’s maximizing your total compensation that helps you to create wealth for your long-term financial future.

You: And that’s the reason I’m here.

Me too.

Let me know what else you think.

You: Which funds should I pick?

What?

You: In my 401(k) account. . .I have like a dozen funds to choose from. Which ones should I pick?

I can’t give you specific investment advice.

You: Right. I knew that. Well, then, how can I pick the right funds?

There aren’t any “right” funds.

You: Okay, I think you’ve got this financial education blog all wrong. You’re supposed to be helpful.

I’m trying to be.

You: Excuse me for saying so, but I’m not quite seeing it yet today.

Fair point, but I’m just answering exactly the questions you’ve asked.

You: Where’s the issue then?

You said “right” funds. There’s no such thing. If there were, taken to its logical conclusion, there would be no “wrong” funds and then, paradoxically, there would be no funds that were especially “right.”

You: What is this, Waiting for Godot?

Love the 8th grade English reference. Classic. But unlike that play, we’re going to get somewhere today.

You: When, today?

Now.

You: Okay, good.

While there is no “right” fund, there are funds that are more likely to be “right for you.”

You: Why?

Because you have specific investment needs and a specific risk profile. In the case of a 401(k) plan, your specific investment need is (or, at least, should be) to provide for a comfortable retirement. If you’re more than, say, 20 years from retirement, you have a very long-term horizon for retirement.

You: Rubbing it in?

Not at all. Rather, I’m emphasizing that you ought to consider a long-term philosophy when you select your investments. Someone looking that far out (20 years) can afford the normal gyrations of the stock market and therefore should be invested primarily in stocks. For my best guess as to how you should invest your 401(k) account (by asset type, not fund type), visit my unbelievably simple asset allocation tool.

You: Unbelievably simple?

There’s only one question.

You: That’s true of some blue books.

True enough, but the one questions in this case is demographic in nature.

You: Oh.

Yeah.

You: I can do that.

Indeed you can. There are other asset allocation calculators out there which are more robust (google: asset allocators), but I prefer simplicity.

You: Okay, but how do I convert this asset allocation information into fund selections, especially if I don’t know how to pick the “right funds for me.”

Now that’s a good question.

You: Don’t tell me it’s my first one.

It’s definitely not. There was an excellent article a few days ago called “Five Ways to Pick Mutual-Fund Winners” which provides a great summary of what you should consider. Check it out. Not enough time?

You: Maybe.

Here are the top 5 methods, according to writer Jonathan Burton, along with my italicized comments.

1. Expenses – the lower your expenses, the easier the job the fund manager has to do to in order for you to end the year with more money.

2. Risk-adjusted return – Check out the fund’s volatility. In any one year, a manager can get a higher return (as well as a lower one the following year) by taking additional risk.

3. Results vs. peers - Classic apples and oranges analysis. Make sure your gala isn’t next to your naval.

You: That’s what she said.

Wow.

4. Portfolio Yield – Yield is the current rate of income (think dividends) divided by the value of the holdings. (think stock price). The point here is that yield can increase for two reasons: a) because income paid out by the underlying stocks has increased, or b) because the value of the stock holdings has decreased. Only one of those is a “good” reason, so you can’t get too excited about a higher portfolio yield.

5. Manager Tenure – When you’re looking at the records of funds over the last 3, 5, or 10 years, make sure that the current manager has been there at least that long. Otherwise, it’s like saying that Joe Girardi is a great manager because of all the World Series the Yankees have won.

You: Those happened before Girardi become the manager. He just started this year.

Exactly. Irrelevant. He may be a great manager, he might not be, but the evaluation period is mostly in front of him, not behind him.

# # #

What other factors do you consider when selecting a mutual fund from your 401(k) plan?

Although I am often asked to speak to recent grads, I have never been asked to speak at any graduations. But if I were, I imagine I would deliver something along the lines of this speech.

Today is part 7. To see the entire speech released so far, click here and read from the bottom up.

Rule 6: Take advantage of your benefits or you’re being kind of dumb.

Don’t like total candor? Sorry, wrong number.

Every company in America that pays you a wage will withhold Social Security taxes. They have to. It’s the law. Theoretically, Social Security is a retirement plan. I hope that works out for you.

As you’ll quickly learn, the Social Security tax you pay each paycheck isn’t actually saved for your retirement, it’s used. Immediately. Shocked? This doesn’t have a thing to do with Democrats or Republicans—this is the U.S. federal government we’re talking about. Bipartisan silliness.

While most of the Social Security tax money you pay goes to current retirees (likely including your grandparents), so far there’s been plenty extra for the feds to spend on things like bridges to nowhere, interest on the national debt, missiles, farm subsidies, and so forth. But way before you retire, Social Security taxes paid by workers in a given year will be far less than the benefits promised to retirees during the same year. Like I said, good luck with your retirement benefit from Social Security.

Many employers offer a 401(k) plan. A 401(k) plan is also retirement plan. But it’s very different than Social Security. With a 401(k) plan, any money saved goes into an account with your name on it. It’s there for your future. If it’s not there, it’s because you took it out, not because of government mismanagement.

Ironically, you must choose to participate in a 401(k) plan. Social Security, that the government make you do (I’ve looked for the opt-out form but can’t find it). The 401(k) plan though; your participation is up to you. Be sure to take advantage of your 401(k) plan. You can end up at retirement with a ton of money if you do. With Social Security, I don’t know. Do you?

[To be continued]

Yesterday, I posted a question about the Roth 401(k) plan. While this follow-up question was written about a Roth 401(k), the truth is that the same logic holds for both Roth 401(k) and a regular 401(k):

You: I have another question. Or maybe it’s just a matter of ethics. I’m not sure how much longer I’m going to stick around this job. It’s just getting to the point where it’s hard to pull the long hours for something I don’t really care much about. However, I’d like to get the matching $2000 that my company offers. I’d like to condense my payments into the next 6 months instead of the whole year — do you know if that’s done?

Accelerating your 401(k) contributions

There’s no ethical dilemma here. Even without the intention of leaving, it’s always a wise financial move to get money sooner (time value of money, chapter 1). Most companies will match as you contribute (each paycheck) and stop doing so when you hit the annual limit. However, there are some companies who will do it straightline throughout the year. Obviously, I don’t know where your employer falls. However, you may be able to tell simply by looking at some of your December paystubs and 401(k) statements if you exceeded the matching amount in 2007.

It’s your money. Go get it!

“personal finance” “financial education”

Entering 2008, the “new” Roth 401(k) is a hot topic lots of people want to talk about. Although this plan has been around for a couple of years, most employers did not decide to make it available to their employees until some recent additional Congressional tinkering made its existence permanent. I recently had a conversation about the Roth 401(k) that I thought you would enjoy.

My employer recently opened an option for employees to opt into a Roth 401k. It seems to make sense for me, as a young newish employee, to do Roth over traditional (i.e. tax along the way rather than at the very end). What do you think?

Roth 401(k) vs. Regular 401(k)

Like the Roth IRA, contributions to a Roth 401(k) are post-tax. This means that you can’t deduct your contribution from your taxes. On the other hand, that’ the only tax you’ll ever pay with regard to that money. Both the growth and the eventual distribution of the money in retirement are tax-free.

My only caution is the possibility that Congress decides it needs the money some day and decides to tax the previously tax-free growth.

You: Can they do that?

They’re Congress.

You: Have they done that before?

Tax something that was previously not taxed?

You: Yes.

Yes.

You: Wow. That sucks.
Indeed. Personally, I believe in diversification amongst the tax categories. In other words, you’ve already contributed to a 401(k) in prior years (and possibly traditional IRAs as well). Having Roth money provides another form of tax protection. While you never know what the government will want to take from you someday, the truth is you really never know. Still, absent law changes, the Roth is a no-brainer for someone young. It’s a smart move, even with my crystal-ball lacking caution.

But wait, there’s more!

If you are able to save the same $2,000 in a Roth 401(k) as opposed to the $2,000 you would have otherwise saved in a regular 401(k) AND you overall other spending/saving is unchanged, you would effectively be saving more as a percentage of your income because your net income went down (to the loss of your regular 401(k) tax savings). That’s a huge step towards living Beyond Paycheck to Paycheck, don’t you think?

“personal finance” “financial education”

Even if your employer doesn’t match your contributions to your 401(k) plan, saving money in your retirement plan is still a solid financial move. First, there are the well-documented advantages of an automatic savings program (Saving Strategy # 9: You won’t spend what you don’t see!)

In addition, the moment you make a contribution, your net worth increases by the amount you save in income taxes. These tax savings are a direct result of your decision to move money from your right pocket (where your wallet is) to your left pocket (your 401(k) plan, where the money is still very much yours but from where it is far more difficult to spend).

If you contribute $100 to your 401(k) plan, your paycheck will decrease by an amount less than $100. This is because you would have paid tax on the money had you received it in your paycheck. (For example, if your withholdings rate is 25%, your net pay would decrease by only $75.) Yet, at the same time, the full $100 contribution amount is deposited in your 401(k) plan.

So, you gave up $75 to get $100.

Pretty good deal, right?

You: Indeed.

And though it almost sounds to good to be true, it’s a chief benefit of a 401(k) plan. It’s also why your net worth goes up by $25 simply by making this contribution—with no risk. As regular readers of this blog know, a guaranteed return with no risk is pretty much fiction. But this is one of the rare exceptions.

And remember, this net worth increase is before any of your investment earnings. Once the $100 is in your retirement account, you can invest the money for the long term and watch it grow over the decades. By the time you retire, it may be worth many times what you originally put in, all for a one-time $75 sacrifice.

Given how easy it is to save money on taxes while growing your net worth and retirement savings, take advantage and start living Beyond Paycheck to Paycheck today.

“personal finance” “financial education”

Most employers now allow you to make changes to your 401(k) plans throughout the year. Still, annual enrollment is one of the precious few times people tend to review (even if briefly) their benefit decisions.

In addition, it’s also nearly the end of the year.

You: I knew there was a reason I read this blog. That’s real helpful. What gave you the insight? Christmas music?

Okay, okay. I make the point that the year is nearly out because certain opportunities will pass you by if you don’t take advantage soon.

You: The Black Friday sales? Darn it!

No, fortunately, that is not what I’m talking about. Rather, think about your employer match. We’ve talked in the past about the importance of an employer matching program–regardless of the calendar.

Yet December brings up some interesting opportunities. because your employer match is typically capped as a percentage of your pay per year.

You: Huh?

For example, your company may contribute 50 cents to your 401(k) plan for each dollar you contribute, up to the first 6% you contribute of your gross pay each year. In such a case, the most the employer will contribute equates to 3% of your gross pay.

You: That’s it? Just 3%?

Look at it as a 3% raise for no additional effort (i.e, more projects, getting in early, kissing up to the really weird guy in HR, etc.). Just an instantaneous 3% raise. You wouldn’t turn that down.
You: True enough. But where are you going with this? I haven’t been taking advantage of the 401(k) match as much as I could have been so far.

Usually the cap (the maximum matched) is per calendar year. So those who contribute aggressively see their matching contributions stop at some point during the year, not to begin again until the following January.

You: As I said, that’s not me.

I know. But the concept of the cap also presents an end of year opportunity if you have yet to take maximum advantage of your employer’s generosity. You can still receive enormous benefit from your employer’s matching program by aggressively saving between now and the end of the year.

Let’s take an example. Say your gross pay is $50,000 and you have a 50% match, capped at 6%. By contributing 10% of your gross pay for the month of December, you’ll save about $417. Your employer will chip in a matching contribution of $208, so $625 will be added to your 401(k).

You: But I don’t have $417.

You don’t need $417 because this strategy won’t cost you $417.

You: How so?

Remember, a 401(k) contribution saves you taxes, as that $417 contribution would have only been about $313 had taken it in your paycheck. (Perhaps less, depending on your state). So the “cost” is far less, perhaps half, of what you wind up adding to the account?

You: Half?

Half. Your cost is $313, yet $625 is added to the account.

You: Wow.

Keep in mind that the most your employer would have matched all year long is $1,500 (that’s the 3% maximum of your $50,000 salary). While you won’t get that much money for one month’s effort, you’ll actually get 14% of your maximum possible match just by participating aggressively in December.

If you can afford more than 10% for the month, you’d claim even more of that “free money.” So, if you’ve just recently started a job and are thinking about taking care of this retirement planning concept in January, don’t delay! Take some of your 2007 matching money right away.

You: But what about me? How am I going to be able to save 10% when I haven’t been able to save anything so far? Plus, the holidays are coming. Isn’t this the most difficult time of year to save?

You could argue that. It’s also one of the easiest, since more of your expenses this time of year are discretionary (wants) vs. non-discretionary (needs). You choose to spend more this time of the year rather than being truly compelled to. Think of buying tickets for someone to see “Rent” vs. paying rent).

For one thing, look at The Top 10 Saving Strategies if you haven’t already done so. Many people tell me after they understand how much free money they are turning down, saving becomes much easier.

In addition, if you are one of those folks who is always getting a big tax refund, consider temporarily lowering your tax withholdings for the rest of the year. Do so at the same time that you raise your 401(k) contribution. This calculator can help you with your numbers.

You just might find that you can actually increase your net pay, increase your 401(k) contribution, and get the free money a match provides — all at the expense of an income tax refund you shouldn’t want anyway (a dollar today is far better than a dollar a few months from now).

There are so many opportunities at the end of the year — with or without annual enrollment. Take advantage. Choose to live Beyond Paycheck to Paycheck.

“personal finance” “financial education”