A Health Savings Account (HSA) is a tax sheltered account that allows you to buy healthcare with pre-tax dollars. They have to be glued to a high-deductible health plan. They’re really all the rage in personal finance circles. It’s easy to see why. Anything that transfers financial control over your life from business, government, or whomever to you usually gets a good review. In this case financial decision-making is transferred from insurance companies to you. Rather than pre-paying via insurance premiums for that doctor’s visit you seem to end up taking every year. Instead you pay for it out of your HSA. If you read our previous article, you know how great a deal this can be. There are a few questions you should *strongly* consider before making the swap however.
Is the “fully loaded” plan on offer from my employer a good deal?
This is really dependent on your employer, but your enthusiasm for a high deductible plan if you don’t end up seeing very significant premium savings should certainly wane. The point here is to save money, you don’t want to be assuming that you don’t need to spend money on healthcare in the future year. If you’re only saving $20 or $30 per month, unless you have a very special situation, you should likely consider giving the High Deductible plan a pass. Again, this all depends on your situation. Reading a blog online doesn’t absolve you from doing the math.
Am I prone to magical thinking?
A really great way to lose your mind is to sign up for a High Deductible Health plan (HDHP) and then when you have a new health related event say to yourself, “Of course this would happen now. With my luck now that I pay directly for my healthcare I’m having all sorts of health issues!” You should keep in mind that you, right now, are the oldest you have ever been. Likely situation is more bad health stuff will happen to you this year than last year. It isn’t the HDHP’s fault.
Do I take good care of myself?
Yes, anecdotally we all know that chain smoker that lived to 100. We all know a health-nut that dropped dead for no reason at 40. Maybe that’s your excuse to eat a non-stop smorgasboard of bad food. More power to you. The fundamental financial question is always, what is likely. You need to figure out if the fully loaded plans are losing money on you or making money off you on average. Take stock of your health, if climbing the stairs winds you, play with house money. If you’re the healthiest of your co-workers, it shouldn’t take a lot of math to figure that you want to be paying your own medical bills.
Another note on this subject is that you could be the healthiest fellow in the world, but if your idea of a hot Saturday night is base jumping in the dark, load up on all the health insurance they’ll sell you. Don’t just figure that your resting heart rate is 45 bpm so you’ll never see a doctor. Clinging to a rock wall 20 feet up counts as a lifestyle disease for our purposes.
There’s no judgement on any of these things. Just make sure that you’ve weighed the odds when buying your health insurance, not your hopes. With any luck all of our health and life insurance premiums will be wasted money.
Will I cut the “health” budget to the bone?
There are plenty of dumb ways to die that start with refusing to go to the doctor. My problem is that I tend not to notice when I spend money. That’s the personal finance problem I work on. Some people have the opposite issue. They see a $200 price tag on a doctor’s visit, they remember the last time they went, the doctor only told them to go home and drink soup, they figure the money was wasted. If you know that you aren’t going to see a doctor when you’re ill to save $200, a High Deductible plan probably isn’t a great idea. You don’t go to a primary care doctor to fix your illnesses, you go to the doctor so they can flag you if you have the dyin’ flu.
Do I take preventative medicine seriously?
One of the great things about the HDHP/HSA is that you get to capture the benefit of preventative medicine. When you get the flu vaccine and as a result, spend the winter not sick. You saved yourself a substantial amount of money there. Money that will now compound tax free in your HSA. If you regularly ignore doctor’s recommendations, turn that around or stick to your fully loaded plan. If you’re going to play Russian Roulette with your health might as well make your co-workers pay for it. If you think that vaccines cause autism, the HDHP is probably not for you. Also, you should probably take some time out of the day to meditate on how you got that crazy. Unfortunately this could also apply if you can’t use preventative medicine for legitimate reasons (like allergies). People who don’t use vaccines are putting you more and more at risk and you probably should give that risk to the insurance company rather than bearing it yourself.
The tax advantages of an HSA and HDHP are huge. I love mine. That doesn’t mean that it’s a great idea for everyone, and like every other major financial/health choice, you should weigh the money, your health, and your psychology carefully before you commit to it.
As we’re gearing up for election season it seems like a good time to remind everyone what unemployment statistics are and how they work. I’ve heard entirely too much uninformed discussion on the subject. First off, regardless of your party affiliation you should take a moment and realize that the economy is doing good right now. The economy is rarely doing this well, and in some sense, standard of living has never been so high in the history of the country. We should also note, the same thing happened during the Bush years. For some reason people only seem to want to believe progress is happening when their guy is in office. In general the history of the American economy has been an upwards march of awesome tempered by the occasional recession, with the large exception of the great depression.
It’s also important to remember that recessions are not a recurrence of a crappy standard of living, they’re a brief (half-year) long pause in an otherwise upward march. Usually recession means returning to a standard of living last seen a couple years prior. Some people do lose their jobs during recessions, and it is bad. Some people also lose their jobs during years when the economy is good as well. I recognize that average standard of living doesn’t mean that everyone is doing better, just that folks are doing better on average. It is important to recognize good things when they happen despite the fact that some bad things still happen.
Official unemployment rate
The unemployment rate (the headline number currently at ~5%) is computed by dividing the number of unemployed folks by the number of people in the labor force (this is the number of unemployed folks + the number of employed folks). The definition of unemployed, are people who want a job, are looking for a job, and don’t have a job. This doesn’t include people who have given up looking for a job (sometimes called the “discouraged”). It also doesn’t include folks who are stuck working part time when they’d rather be working full-time.
This number has had some criticism over the years. I’ve found a really easy method of guessing the political affiliation of these critics. It’s simply the opposite of whatever party holds the white house at the moment. There is a quite simple reason for this. After a recession, the economy recovers (shocker). During a recession, however, partisans spend a lot of time claiming that the opposing party’s policies will extend the recession indefinitely, cause a depression, or simply sink into the ocean. When these claims fail to materialize (double shocker), partisans have become so invested in the story that they were telling they have to save face somehow. Therefore, rather than acknowledging that a recovery has happened, they call it a “jobless recovery” (or “precursor to inevitable catastrophe”). Since they can’t acknowledge that unemployment has gone down, they simply claim that it isn’t a good measurement by nitpicking what goes into the data. Enter the U6 unemployment rate.
U6 unemployment rate
The U6 is simply a version of the unemployment rate that also includes “discouraged” workers (people willing to say they want a job, but unwilling to take any measurable actions to get one in the last month), “marginally attached” workers (people willing to say they want a job, but haven’t had one in a long time, they have also looked for work at some point in the last year), and underemployed workers (in this case, meaning workers who work part-time but want to work full time). Naturally, since this rate includes more people on the “unemployed” end of the ratio it is always larger. A common way to use it to deceive folks is the following:
Partisan A: Clearly this president is awesome, the unemployment rate is down to 5% from 10%!
Partisan B: Well, it isn’t a true recovery. The only reason the number has gone down is that the unemployed have gotten discouraged, or got just part-time jobs rather than good full-time jobs. The recovery isn’t real. You just can’t see it because you’re in the tank for your guy. You should look at the U6 unemployment rate, it includes these extra fellows and is 10%!
The implication is that the unemployment rate hasn’t changed. That, somehow, it went from 10% to 10%. Of course you can’t compare the headline number (which is lower) to the U6. But, it’s a good way to imply that no progress has been made. If someone says something like this to you, look up the trend of the U6 rate over the last few years to get a good idea of what is actually going on.
So what do I use?
Personally I think the headline number is most useful, but it probably depends on what you’re using it for. If you’re trying to prove that your party is better at managing the economy, I’d suggest doing something more useful, like digging a big hole in your backyard. When you’re done you can fill it up again. If you must, then the partisan answer to the question is U6 when it’s their fault, and the headline number when it’s our fault.
If you do find yourself unemployed the important thing to remember is that you need to be taking active steps to find work. Looking for work isn’t something you do by virtue of being unemployed. It is an activity you have to literally undertake. You have to make actual phone calls, and go to actual establishments of employment. Online simply doesn’t cut it. Until you find your next job I recommend taking a look at some alternatives you might not of considered. Even making a little money helps, and it helps keep you focused. If you’ve been reading personal finance blogs like this one, you hopefully have an emergency fund or some liquidity that you can tap in the meantime. Most importantly, don’t spend your time arguing about unemployment statistics online.
Real Estate, in my view, is probably a worse investment than the stock market. The transaction fees are massive, the amount of work required is onerous, the amount of leverage required makes me nervous, appropriate diversification is hard for Thousandaires. I don’t like any of these things. There are surely benefits, for example the lack of diversification and amount of leverage allowed can make you rich very fast if you’re good or lucky. The main benefit of real estate, in my view, is behavioral. I suspect that if an investor treated his stock investments, they’d no longer consider stock investing riskier than real estate and they’d make a great deal more money. (No, I don’t mean that you should get an 80% loan on one stock and hold it for thirty years, don’t be an idiot.) How could you treat your stock investing more like real estate investing? What are the behavioral advantages?
Huge transaction fees
This means that you don’t jump in and out of real-estate. You buy some land or building and sit on it for years. In the stock market the average holding period of a stock is 5 days. Sure, some of this is downweighted by computerized trading, but you shouldn’t be trying to make money from a stock purchase after a month.
Long Buying Process
Buying a house takes about a month. During this period you have a long due diligence process. You inspect the property to make sure you’re getting what you’re supposed to be getting. You appraise the property to make sure its worth what you intend to pay for it and you spend weeks doing this.
Rare Price Quotations
People get the impression that housing prices are really stable, simply because they only see the actual market value of their house twice, when they buy it and years later when they sell it. If someone told you the exact value of your house every second of every day I suspect the illusion that house prices were stable would be utterly shattered. Imagine this story if you will, your friend comes to you having very recently bought a house. He says, “After only a month of owning my home the price has dropped $4,000! A similar home in my neighborhood just sold for $4,000 less than I paid for mine. This is a big investment for me, I couldn’t afford to lose that $4,000, and I certainly can’t afford to lose any more money! I better sell my house today before I lose any more money.” Clearly your friend has lost his mind, and you would know that you need to talk him out of doing anything drastic, sure maybe house values in his area will keep falling and he’ll lose all his money and hate you forever, but you still know the “right” thing to do in his situation. For some reason when it comes to stocks, all that clear thinking goes out the window.
Treat Your Stocks Like Real Estate
If you bring the behavioral advantages real estate has over to the stock market, I’d bet that you’ll make more money with less work and stress. The rules here are: never sell (because you pretend your transaction fees are huge), do careful research (a month on any stock before you decide to buy), and never look at the price (which doesn’t matter until you sell, which should be never). If you do that, and mix those advantages with the advantages from stocks: simple diversification, very little work required to upkeep a stock (no one from Coke will call you at 3 AM expecting you to solve some problem with the business), and tax advantages (Much easier to own in tax shelters like IRAs + dividends and capital gains have a top tax rate of 15% rather than ~40% for rental income).
Real Enemy: Sloppy Thinking
Real estate can make you rich, plenty of people have also gone bankrupt in real estate because of the leverage present. Lack of diversification sometimes causes a problem. For example, your rental property can get flooded, most flood insurance policies don’t cover garden level units. One bad tenant can wreck your investment. You can mitigate these risks, but ultimately having the majority of your net worth tied to one investment seems like a recipe for a lot of variance (here variance means wild riches or financial catastrophe). My biggest gripe with real-estate is my interaction with folks on the subject. The numbers they estimate for income are inevitably rosy and important costs are often left out, the benefit of stock in a business is that someone has already done all the accounting for you to figure out if the business is profitable.
The other bit that drives me nuts is when discussing the risks the possibility that the price of the real-estate might fall, or that rents might fall is often treated as totally impossible. Looking at the last five years of price/rent appreciation and drawing a line through it is completely insufficient. Prices include all known information generally. People wouldn’t be selling if they thought that they were getting a bunch of appreciation in the near future. The best response I’ve ever found to this sort of sloppy thinking is a lecture given by Robert Shiller entitled Irrational Exuberance – As Relevant As Ever:
If had I mic to drop…
I’m quite certain that many of you have realized that it is Christmas today. That doesn’t mean the Thousandaire takes a day off! There’s money to save, invest, and earn or what have you. (Full disclosure: I wrote this earlier, but you’re probably reading it after Christmas anyway.) So what in the personal finance world is special about Christmas? Well today, unfortunately, is the day that people spend money sub-optimally, and let me be the first to say, that’s OK! Our goal in life isn’t to optimally spend every penny we make. However, it does create an opportunity because the Market abhors inefficiency.
What do I mean when I say sub-optimally? Well, basically on Christmas people buy each other things they wouldn’t have bought themselves at a price they wouldn’t have paid. That’s not to say that people don’t enjoy their gifts. They surely do! They just often don’t enjoy the things themselves as much as they would have enjoyed the cash. Apparently folks are willing to pay about 71% of what the gifts they receive actually cost. That extra 29% is economic inefficiency (if this were thermodynamics you might call the inefficiency “excess heat” AKA a “warm glow”, but economists are a humorless bunch. They call it “dead-weight loss”. )
So what? Well this inefficiency results in people returning gifts (perish the thought). Some of those gifts that people would like to return are gift cards. You might not be as into Knit ‘n’ Yarn Emporium as your grandparents thought you were. So what are you to do? Well you go somewhere like raise.com and sell that gift card. This has the effect of depressing the price of third party gift cards right after Christmas.
That’s exactly the perfect time for Thousandaire’s to strike. While I rarely advocate spending money to save money this is an instance where it might work out just fine. If you know that you spend a certain amount on average at a particular store from year to year (guilty secret: Noodle’s & co obtains far more of my paycheck than is truly conscionable), you can go ahead and purchase say, half the amount you normally spend in a year, and thereby save something like 20% off of your regular spending.
This is the easiest thing in the world to give into temptation and screw up. Sometimes when people have a gift card they treat it as an excuse to spend money they otherwise wouldn’t have. You decide to go out to eat when you weren’t planning on it. You decide to make an extra shopping trip to use it up. This will do the opposite of what we want. Seriously Obi-Wan will be upset:
An idea I have toyed with but have yet to attempt is to mix these discount gift-cards with the envelope budgeting system. For those of you who are unfamiliar with the system. Normally you have a bunch of envelopes at the beginning of each month with cash in them based on a budget that you create. Each of these are marked for a certain expense. You might have a “groceries” envelope, and a “eating out” envelope. When you run out of cash in the envelop that’s it, you’re out, no more Applebee’s until next month.
So instead of cash, buy your steeply discounted gift cards today (or heck, maybe tomorrow) then build the spending of them into your regular envelop budget, removing cash in exchange for the gift cards on a $1 to $1 basis. This way you’ll actually experience the cash savings that the gift card discounts are getting you. Take that money and buy yourself something nice, like shares of Berkshire Hathaway. (Drool, productive assets).
The stock market is risky!
You’ve probably heard this from a dozen different people in your life. That’s because its extremely true. If you needed a way to legitimately lose your life savings in a couple days I have some bulletproof stock market strategies to recommend. The stock market is like a car, it is extremely dangerous in the hands of someone who has no idea what they’re doing, and even if you do everything right something bad can still happen and wreck your life. However, sometimes it is the only practical way to get from A to B, and after you understand what you’re doing it can substantially improve your life for the better, and its risks can be mitigated. Generally, folks are unfamiliar with how the stock market works, and understandably nervous about the concept.
The concept of a “stock” is probably an over-broad term as it is. People regularly categorize some of their investments as “stocks”. When budgeting for spending however, no one budgets a certain amount of money for “services” and a certain amount of money for “goods”. If the discussion on personal finance never got more specific than making sure that your spending allocation was your age in percentage for services and the rest on goods, I’d probably go crazy, yet people routinely recommend the same sort of breakdown for investments. A stock is a pro-rata ownership of a company.
In the US companies can own all kinds of things. Let’s take two companies that everyone is familiar with as an example, Facebook, and McDonald’s. If you told someone that you own a website that makes money from ad sales as well as the employment contracts of some of the smartest people in the world they would realize that it is very different from owning some of the best real estate in the world along with franchise agreements for a burger chain. It’s obvious in this case that owning each of these things are very different propositions, for some reason when you call them both stocks, the nuance goes out the window and all people seem to care about is that they, as Will Roger’s put it: buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it. If you own a stock, you are part owner the underlying business. This is what separates the stock market from gambling, the owner of a stock makes money from the profits of the underlying business, and could make money even if there was no one else trading stocks. The gambler makes money only from other gamblers.
Are stocks gambling?
People like to equate any risk with gambling. They love to compare the stock market to a casino. It’s fun to compare these rich Wall Street folks with gamblers. There is one important difference, gambling is a zero-sum game. Stock ownership is a positive-sum. What’s the difference? In any gambling, for each dollar won there is a corresponding dollar lost. If you and I play poker, one of us ends the night with less money and one ends with more. We can’t both show up with $100 and both walk away with $400. that’s because when gambling you make money from other gamblers, therefore in aggregate gamblers make no money. Investors, on the contrary, make money in aggregate. The average dollar invested in the stock market earns about 10% annually.
But, but I read this book and there’s all of this fast trading…and I’m getting cheated!
Yes, there are people doing some suspicious things on the stock market, but is it going to make any difference in your returns? Not unless you trade in huge blocks of millions of dollars worth of stocks. The effect high frequency traders will tend to have on you is make your trades a couple tenths of a penny cheaper (Yay?). Let’s play with the idea a little though.
Trade less, own more
The real likely situation isn’t that you’re going to lose money to people “cheating”, but simply because you have no idea what you are doing, however, the only time someone else can get the better of you in the stock market is when you buy or sell a stock. This is also when you encounter mosts costs involved with the stock market. The broker charges you a fee, you have to pay some portion of the bid-ask spread, and you might trigger taxes. The average company in the United States makes money or expects to make money in the future, that is, after all, why they exist in the first place. Whenever you trade a stock you cost yourself some of the profits from the underlying business that the stock represents. Some of that might be from taxes, some because you’re selling too cheaply or buying too dear and the guy on the other end of the trade knows more than you. The optimal solution if you don’t think you’re the smartest guy in the stock market (you aren’t) is to buy a stock and only sell it years and years later if you need the money.
All businesses are exposed to some kind of risk, so don’t buy just one stock, you should probably buy a bunch of different stocks. Make sure that the businesses that you own are exposed to different risks. It might make sense to own some of Apple, some Proctor and Gamble, some Exxon-Mobil, and some McDonalds. Generally the benefits of diversification tend to trail off after the first 25 stocks or so.
How not to gamble
This has left us with a couple simple rules that we could use to construct a portfolio.
- Pick 25 companies from a list of companies that you can buy on the stock market. (Maybe from this list)
- Make sure that they are in different industries, sell to different geographic areas, etc.
- Buy them every month with your investible savings.
- Don’t sell them.
If you follow these four rules I’d happily bet that you’d end up richer in ten years.
People are capable of coming up with all kinds of excuses to go ahead and do whatever they wanted to do in the first place. This is especially true in situations where there are a large and financially motivated contingent of folks trying to help you justify nonsense to yourself. Car dealerships come up with all kinds of chicanery to convince you that you’ve gotten the deal of the century. The reality is, that on a per mile basis you will pay less driving a used car than a new car. Despite the preponderance of $1,000 used cars floating around folks twist themselves in knots trying to explain why taking a 50% depreciation hit on day one with a $20,000 car is financially sensible (spoiler alert: It’s not).
How big a deal is $19,000?
Digging yourself out of that depreciation hole takes a long time. You may be inclined to make the argument that better mileage, or less maintenance makes up for it. That very well could be the case, but the fact of the matter is that I expect to earn an annual 8 to 10% return on that $19,000 I don’t spend. That means that I can spend $1,520 extra on gas and maintenance before we even talk about you catching up. Can you grasp how huge the difference is? I can buy a new $1,000 car every single year, and still save more money than someone buying that $20,000 new car. A brand new Honda accord gets 27 mpg in the city, a 1996 Honda Accord gets 26 mpg in the city. You aren’t going to beat me to the tune of $520 per year on gas with that amount of difference. If some serious maintenance is required you just sell it for scrap and buy another.
Ultimately a car, what is the cost of comprehensive insurance on our $1,000 used car? The correct answer to that, is $0. If the car gets dinged up, you probably shouldn’t care, it’s a 20 year old car, get over it. If you crash the car, don’t worry about it. You just go buy another one, out of the thousands and thousands of dollars you’ve saved. Cost of comprehensive car insurance on a new car? It’s somewhat difficult to find. The best estimate I could find was at minimum $30 per month, or an additional $360 per year. If anyone with a new car pays less, I’d be very interested to know more about it. This kicks our annual differential up to $1,880 per year. For gas, we can get an order of magnitude by figuring an extra 20% spend on gas (far more than our Honda example above), I spend about $75 per month on gas. Therefore, you’re looking at about an extra $15 per month, and that makes our differential an even $1,700.
Not a need
My pet peeve here is that people claim that their car is a need. You need transportation (debatable), you don’t need to spend $20,000 on it. Maybe you aren’t going to spend $20,000 on your new car, after all the average amount a person in the US spends on a new vehicle is…
I just looked up the average amount that American’s spend on a new car. Holy crap! You people have gone insane. Apparently, the actual price folk actually pay is $33,500. It’s easy to see that this could really drive wealth inequality. If I drive a cheap car for two decades and you drive a $33,000 car for two decades, our savings is simply going to diverge. So the purely financial conclusion is buy used. Now to be fair, I’m certainly guilty of this too. The car I drive is worth $4,000, which is far more than what I really need. Yes, you’re car will be ugly. Maybe it’s important to you that you drive a nice or comfortable car. Like every other luxury, you pay for that.Don’t go around telling yourself you need a new car, that’s a load. The financial difference is massive. If you’re a Thousandaire please, don’t keep 50% of your net worth in depreciating asset, you’ll make Franklin cry.