Health Savings Accounts (HSAs)

Traditional health insurance is the type of health insurance that most people carry. Traditional insurance includes monthly premiums paid by yourself, your employer, or, in most cases, both. To deter frequent doctor and hospital visits, you are also required to pay a copay of $15 or more per visit. Annually, it may cost you $6000 pre-tax ($500 per month * 12 months) for the monthly premiums, plus your co-pays.

Health savings accounts are a relatively new form of health insurance. Like traditional insurance, you pay a monthly premium (mine is $80 per month) into a high-deductible health plan (HDHP). You also have a set amount, pre-tax, withdrawn from your paycheck and put into a special savings account. Much like a flexible spending account (FSA), you can use the money in this account to pay for office visits, prescription drugs and other qualifying expenses.

Advantages and disadvantages of HSAs are below.

Advantages for employees:

• Money not spent within the year carries over to the next year
• You only have to worry about expenses up to the limits defined by your HDHP (for example, my limit is $3000 for my family, so if I reach my limit of $3000 in September, my HDHP pays the rest of my qualifying expenses the rest of the year)
• If you add more money to the HSA every year than you spend, when you retire you will have pre-tax money already set aside to pay for health insurance and health-related costs during retirement
• You lean to shop around for the best care and cheapest health-related services
  

Disadvantages for employees:

• At the beginning of the year, you could pay more out of pocket than you have available to withdraw from your HSA
• The full amount for office visits and prescription drugs must sometimes be paid, whether it is directly from the HSA or out of pocket and then reimbursed at a later date
• If you prefer or can only afford the $15 office visit, the HSA is not for you
  

Advantages for employers:

• It's cheaper for employers to sponsor HSAs with HDHPs. When I switched to an HSA in January of 2008, my employer's contribution to my health insurance dropped hundreds of dollars a month.

Advantages for insurance companies:

• Most employees won't meet their deductible, which means far fewer claims that must be paid to health care providers or drug companies (the cost of care is on the shoulders of the employee, up to their HDHP limits).

If given the option to choose between traditional and an HSA, consider your options. If you have an HSA, post your comments below.

Dave Ramsey's Baby Step 2

Pay off all debt, not including the house. That's Dave Ramsey's financial fitness baby step #2. Rather than explaining why it's a good reason to get out of debt, my wife and I have already decided that it's a good idea, and I want to explain how we're working on it.
On the right-hand side of this blog is a list of the 7 baby steps. Let's talk about step #. Over the last five years, we have accumulated nearly $31,000 in debt ($14,500 on a school loan and $16,500 on our Jeep Liberty). As of June, 2008, we have paid off the school loan, and have $13,000 remaining on the car loan.
Because we would like to move on to step #3, we have three options:

1. Continue to pay off the car loan, making the regular payment ($344 per month). The loan would be paid off in January 2012.
2. Make additional payments on the principal (adding $320 per month would shorten the length of the loan to March 2010).
3. Make additional payments and sell the car ASAP.

We've decided on option #3. We're planning to start paying nearly $700 per month on the loan. We'll also put it in a couple of classifieds websites, and when an offer meets or exceeds what we currently owe on the car, we'll sell it.
Now, we'll still need two cars. Once the Liberty is gone, we'll need to figure out how much we have available to spend on another car. It may be that we'll need to take out an auto loan for$2000 or $3000, which we would pay back in a few short months.

Conclusion
Our goal is not only to get out of debt, but to create a self-sustaining account that allows us to buy newer automobiles the rest of our lives.

The True Costs of Car Ownership

My wife and I have two cars: a 2000 Plymouth Neon, and a 2005 Jeep Liberty. We paid off the Neon back in 2001 or 2002, and it's been a dependable commuter car for me to drive to work. Our Liberty, on the other hand, is a nice vehicle, but we've decided to sell it. Why? Well, for one thing, we're upside down in our loan.

On the Liberty, we took out a 5 1/2 year loan for just over $18,000 back in 2006. We've paid it down to $13,500, but it's only worth about $11,000. We're upside down in the loan. Not only that, our newer, larger automobile has been more expensive in the following areas:

• Gas / fuel economy
• Maintenance
• Registration

Gas / Fuel Economy
According to Kelly Blue Book, our Neon is rated for 25 mpg for city driving. The Liberty is rated at 17 mpg for city driving. That's a difference of 8 miles per gallon. In other words, I could drive the Neon 100 miles on four gallons of gas, but it would require almost four gallons of gas to drive the Liberty the same 100 miles.

Maintenance
Both of our cars are gas-powered and in the four to six cylinder range, so costs the same to have the oil changed on either automobile. Tires, on the other hand, are larger and more expensive for the Liberty. At my local tire shop, I recently paid $100 per tire for the Liberty. Last time I put tires on the Neon, they only cost $70 per tire (not including wheel balancing, labor and alignment). For new tires alone, it's $120 cheaper for the Neon.

Registration
Our Neon only costs $118 for its yearly registration. Our Liberty, on the other hand, costs $188 per year. That's a difference of $70. State automobile registration is based on the current market value of the vehicle.

Conclusion
If you're in the market for your next car, remember to weigh in the true costs of ownership. These costs (new tires, alignment, etc.) are usually incurred when registration and inspection are due. Factor in these maintenance expenses, and you'll be able to make a better decision on your next car purchase.

Lease or buy your next car

Lease or buy? Looking through the dealership advertisements in my local newspaper, it looks like the only option nowadays is to lease. But is leasing best for the consumer?
First, let's consider the facts about leasing:

• Leases only apply to new cars
• New cars depreciate quickly the first 2-3 years (the car is no longer worth its retail value once you drive it off the lot)
  
• Leases include mileage and modification restrictions
• Penalties can be assessed at the end of the lease for wear and tear, excess mileage
• A lease consists of two parts, a depreciation charge and a finance charge (money that you will never see again)

Now, let's run some simple numbers. If you lease a car for the next 3 years, with an average monthly payment of $349. That's $12,564 that you paid over the three years. At the end of the 3 year lease, you have no car. Many people then sign another lease. Do this for 10 cars (30 years), and you have spent a minimum of $125,640 on car rentals, not including penalties and down payments.

What is the alternative? Buy a car you can afford. Most cars today last 10-15 years and over 150,000 miles if properly maintained. Many of these cars with 5+ years left are cheap enough that you could save for a few months and purchase one without a loan. Once you purchase a good, used car, put away some money equal to a car payment every month for your next car. For example, if you save for and buy a $4,000 car, after this initial purchase, save $400 a month. In 10 months, you will have $4,000 saved plus your $4,000 car. Sell your car and you will have $8,000 available for your next car. Continue to save, and 10 months later $12,000 will be available for your next car. Continue down this path, and you will be able to drive nice, paid for cars the rest of your life.