Planning For The New Year With Last Year’s Income

The end of the year is a very financially stressful time in the Broke Architect household. It is not from any pressure to lavish our friends and family with incredible gifts. What stresses us out are the various financial decisions that need to be made during this time of the year, due to the major impact these decisions will have on our lifestyle in the upcoming year. In this post I will outline decisions we have to make at the end of each year:

Employer Benefits Programs Enrollment:

  • Health Care Insurance
    • Standard Health Care Coverage
  • PPO – Preferred Provider Organization (Healthcare Plans)
  • PMO – Project Manage Office (Healthcare Plans)
  • HSA – Healthcare Saving Account (High Deductible Healthcare Plans)
    • Dental and Visions Coverage
  • 401k Account Contributions
  • Flexible Spending Account Contributions
  • Life Insurance

There are thousands of dollars on the line here. Let’s start with healthcare. As the American healthcare landscape is in an endless state of change, there is one thing that is constant, employers will continue to look for ways to shift more healthcare care costs to their employees. For the last few years, I have watched our healthcare premiums increase year after year. This year was no different; I saw a $20 increase to our healthcare premiums.  So, with that in mind we reviewed our options and this year we had four to choose from:

Healthcare

  • HSA’s
    1. High deductible plan has no monthly cost, but the employee is responsible for the all doctor visit costs up to the deductible amount. $
    2. High deductible plan has a small monthly cost, but the employee is responsible for all doctor visit costs up to the deductible amount which is lower than the first HSA plan. $$
  • PPO
    1. This plan has a higher monthly cost but smaller out of pocket costs for doctor visits. $$$
  • Independent Healthcare Coverage
    1. This option requires looking on the open market to find insurance coverage. We explored this option only to discover that the employer provided options were all less expensive that any options on the open market. $$$$

Comparing the various options, we discovered that there were thousands of dollars of cost difference between the various plans. To make the decision we had to review our medical expenses from of the previous year. What we discovered was that our medical expenses were under $2,500 the previous year. Using this information, we selected the high deductible plan (option #1) saving us thousands of dollars. There were other factors that went in making the final healthcare insurance decision:

  • The funds we place in the healthcare saving account (HSA) are not taxed, which provides a double saving opportunity:
    • Money placed in a HSA is not taxed which means we are effectively lowering out taxable income.
    • HSA’s typically plan allows account holders to invest some of the funds in the account above a certain account minimum and the interest gained on these investments are also tax free. As long as the funds are used to cover healthcare cost. For us that is $2,000. So, because we have more than $2,000 in our HSA, we can invest all our 2018 contributions with maxes out at $6,900
  • Investing $6,900 with an 8% return equals and additional $522 of tax free money.
  • We have an emergency fund that could be used to cover the cost of the deductible if there was a medical emergency.

401k

  • 401k’s are tax advantage accounts:
    • The funds placed in the account are not taxed, which lowers our taxable income.
    • The interest gained from investments in the account are not taxed
  • These are accounts are taxed when withdrawal of funds are made after the age of 59 ½.
  • The 2018 contribution limits have been increased by $500 to $18,500 per year.
    • Last year we maxed out the contribution amount. The $500 increase would mean coming up with an additional $20.83 per payday.

Flexible Spending Accounts

  • FSA are tax advantage accounts.
    • The funds placed in the account are not taxed, which lowers our taxable income.
    • The funds spent from this account are not taxed as long as it is an approved expense, such as childcare/daycare.
  • What is the advantage of paying for something with FSA funds in contrast to funds out of your after taxes paycheck:
  • Let’s say you make $55,000 and your daycare cost are $5,000 per year; you would save over $600 per year paying that cost with FSA funds.
    • The funds in this account has to spent in full each year.

Life Insurance

  • Most employers offer their employees the ability to buy additional life insurance at a very responsible cost. This is a great option if you have a condition that disqualifies you from purchasing insurance on you own .

Salary Increases:

Some years we are fortunate enough to receive a raise from our employers so, we have to figure out how we are going to use the new funds.

  • We could take the money and run – Incorporate the raise into our day to day living aka lifestyle inflation.
    • This is the option most people take—using their raise to increase their buying power and acquiring more, better and bigger items to impress their friends and family.
    • We used to do it and we always felt like we never had enough money to make ends meet. It seemed like a never-ending game to figure out how to stay on top of the payment we had.
  • Place the new funds in a saving/investing account.
    • This is never a bad idea but currently we are focusing on taking advantage of our tax advantage accounts.
  • Use the new funds to do some tax savings and planning.
    • This ties back into the earlier statements regarding our HSA and 401k’s. Placing any funds in these accounts are a saving on taxes and interest growth.
  • HSA – Tax-free when placed in the account, tax-free interest growth and tax-free with spent on healthcare
  • 401k – Tax-free when placed in the account, and tax-free interest growth. These accounts are taxed at withdrawal of funds, which cannot take place until the account holder is 59 ½ year old.

The pay increase that I will start receiving in the new year will not be brought home. Just like last year, this year we have decided to place most of the funds into tax advantage accounts.

  • Healthcare
    • Healthcare Premiums – Due to the increase in healthcare premiums some of the raise went to this cost
    • Health Care Saving Account – Last year we were not able to contribute the maximum amount to our HSA. In 2018, contribution limits have been increased by $250. So, the vast majority of the pay increase went into our HAS to ensuring that we are maxing it out.
  • 401k
    • As stated above, the 401k contribution limits have been increased for 2018 by $500. So, a small portion on the pay increase went into ensuring that we are maxing out the 401k.

Broke Architect Yearly Family Planning:

The next and final phase in our end of year decisions is sit down meeting with Mrs. Broke Architect and myself, to review our spending over the year. We want to learn what categories we over or under spent. We also review the goals we sat for ourselves, individually and together, at the end of the previous year. This meeting typically lasts a couple of hours because we also setting up our new budget and goals for the upcoming year.

Closing

  • Remember that your employer’s benefits open enrollment period is a time to think about you finances. How can you reduce your income exposure taxes? Can you take the 401k, 1% increase challenge? The goal of the challenge to increase by 1% per year until you are maxing out your 401k.
  • If your employer gives you a pay increase, try to figure out how to not bring that money home. Once you incorporate those funds into your lifestyle you will find it difficult to undo it. So, if you can afford to continue living your current lifestyle with our using the fund from the raise. Place all of your pay increase in your 401k or HSA to grow your wealth. If that is too much, try placing half of it in those accounts. You won’t miss the money because you never lived with it.
  • Start the new year off with a strong financial plan. Make time to review your 2017 spending and come up with a plan to improve your financial situation in 2018.

I am not asking you to do anything that we have not done.  As I stated above we are not bringing home any of the pay increase that I received this year. We are placing those funds in tax advantage accounts that will hopefully allow our money to grow quicker.

Tell me how you are taking charge of your finances in 2018.

Remember now one will care about your money more that you, not even your financial advisor.

The Broke Architect

($26,000)

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