Darwin's Finance » Saving Tips

5 Reasons Why You Should Consider Using a Health Savings Account (HSA)

Guest Author — Mon, 26 Jul 2010 12:00:49 +0000

Unlike many financial planners and personal finance bloggers who tout the benefits of a health savings account (HSA) – I actually have one. That is not to say of course that just because someone does not have a Health Savings Account that this somehow precludes them from talking about the benefits of HSA’s but as someone who has studied HSA’s, runs a consumer health insurance website, who owns a Florida health insurance agency that sells HSA’s, and also as someone who has personally had an HSA for close to 4 years I can say without reserve that I think there are many benefits to having an HSA. Here are 5 reasons why you should consider using an HSA yourself (and then please let me know your thoughts on HSA’s via the comments below):

#1 Tax Savings, Tax Savings, Tax Savings

When I began to make this list I quickly realized that I could fill up even a much longer list of HSA benefits strictly from the tax savings category. I love Health Savings Accounts because they enjoy in a sense a triple benefit of tax savings goodness. What do I mean by that?

1) Contributions to an HSA are deductible as an “above the line” deduction on the front of your 1040 personal income tax return with NO AGI phaseouts (Bill Gates can take the same HSA contribution deduction that you or I can – incidentally, if Bill Gates saw a $1,000 bill on the ground it technically would not be worth his time to pick it up according to this estimate – just something to think about )

2) All of the money in an HSA grows tax free and rolls over from year to year (note that I said “tax free” like a Roth IRA and not “tax deferred” like a traditional IRA)

3) Money in the HSA that is used for qualified medical expenses OR for retirement past the age of 65 comes out 100% tax free.

This triple tax benefit is rarely seen in the tax code because quite often if you get a tax deduction for a contribution to something then you end up paying taxes on the back end (and example would be a traditional IRA) and if you pay taxes on the front end then you may be able to take out money on the back end tax free (an example would be the Roth IRA). The beauty of the HSA is that you get tax benefits for contributions (up to certain annual IRS limits), annual growth in the account, and even when you use the money in the HSA.

#2 High Deductible Health Plans are CHEAP

While an HSA is strictly the savings account portion of the “HSA health plan” the true health insurance plan component (required in conjunction with the HSA by the IRS) is the high deductible health plan or HDHP. The beauty of the HDHP is that since they are by definition health plans with high deductible then the monthly premiums are much lower than traditional health plans with low deductibles and copays. The higher the deductible the lower the monthly premium. After all, even if you are typically a fan of low deductible health plans don’t you think that monthly premium savings of $100 or more a month to accept a deductible that is $1,000 or so higher (in some cases) is well worth it? Why not put that monthly savings into your HSA and let the money accumulate from year to year and simply use the funds in your HSA should you have a large medical expense?

#3 HSA Setup is Simple

If you can set up a savings account or a checking account then you have all of the necessary expertise for setting up a health savings account as well. If you should decide to set up an HSA for yourself be aware that when you apply for your required high deductible health plan from a health insurance company that although almost every health insurance companies will attempt to steer you into also setting up your health savings account with the bank that they recommend (or in many cases own) then you are certainly able to (according to the IRS anyway) set up your HSA at a different bank altogether that may offer you a higher interest rate, lower fees, the chance to invest some of your HSA funds in the market, etc. HSA setup is simple but just like you should shop around for the best online savings account rates and also just like you likely shopped around for the best insurance quotes before choosing a health plan you should also shop around to find the best HSA bank for your needs.

#4 HSA’s Help to Bend the Health Care Cost Curve Down

Rising health care costs in the US is a certainly a concern almost regardless of who you ask – from either political party (wow – consensus across party lines on something!). When you use an HSA and act as a price conscientious shopper for your health care – in fact, even if you are 1/10 as price conscious as you are at the grocery store shopping for groceries then you likely are much more price conscious than the average US consumer, you help to drive health care costs down for everyone.

Essentially, when the system is set up so that 100% of the costs are borne by a 3rd party payor (i.e. the insurance company) starting at dollar 1 then people have no incentive to price shop or even care one flip about the cost of their physical, colonoscopy, pap smear, etc.

However, if you are responsible for paying for your health care bills out of your HSA (until you reach your deductible and then your HDHP kicks in) then you will likely be much more price motivated then someone with a copay plan and no deductible or a very low deductible.

#5 HSA’s are a Great Savings Vehicle

As I alluded to earlier in the tax savings section you can use an HSA as a very attractive vehicle for accumulating retirement savings. You not only get the great tax benefits all along the way along with a nice growing sum of money that can be used for medical expenses but you also get a great vehicle for accumulating some retirement funds if you should (hopefully) not have to use the money in your HSA for medical expenses. This is also contrasted to a flexible spending account where you have to use the money in the flexible spending account every year – with an HSA the money rolls over from year to year all the while growing on a tax free basis. Compound interest + no taxes = HSA bliss.

What do YOU Think About HSA’s?

Do you have any other reasons for why you think HSA’s are a good idea (or a not so good idea for that matter)?

This is a guest article by Joel Ohman, a Certified Financial Planner who loves writing about various personal finance topics online. He has started a number of different websites that include a car insurance comparison website and a website with an easy to use credit card finder.

Results: Energy Tax Credit Toward New Efficient Central Air Unit is Surprisingly…Inefficient

Darwin — Tue, 25 May 2010 03:45:13 +0000

Last month, I shared my analysis on my considerations for taking advantage of the Energy Tax Credit and getting 30% off the cost of a new Central Air Unit since our house if 15 years old and we’ll eventually need one anyway. Well, there are various ways to look at large purchases like this, ranging from breakeven to “savings” to Net Present Value (NPV). NPV is my favorite method and I’ve outlined the results below.

After obtaining quotes on various models from the most reputable and widely used service in our area, I figured this one would be a no-brainer. Verbally, we were bouncing around concepts about variable frequency drives, efficiency ratings and all kinds of other engineer-jargon. I figured this thing would pay for itself within a few years and be well worth the up front investment since our current unit will die eventually anyway. However, upon reviewing the actual annual savings calculation estimates, it’s not entirely clear to me that we should jump on this tax credit opportunity and buy new equipment at this time.

The units, specs and pricing I had in mind were the following:

95% Gas Furnace & Performance 2-Stage A/C
Installation of 95 percent efficient, natural gas hot air heater with 3-stage gas valve and variable speed blower
Installation of 48,000 Btu, 17-seer, air conditioner at 4 tons with 2-stage compressor and infinity thermostat
Installation of 48,000 BTU encased a-coil, which will be mounted directly on top of new gas heater
Note: A rebate of $1,600.00 is available after installation (Utility and Mfg)
PRICE $9,985.00

- With the $1500 Tax Credit and $1600 in rebates, and no taxes required, final price would have been: $6,885

Now, this is a new furnace and air unit and the pricing was comparable to or better than other local services but these guys had the best recommendation. So, I don’t question whether this was a good “deal”, but I do have doubts as to whether it’s an appropriate expenditure for our situation.

Once he came back with estimated savings, I just wasn’t that impressed:

My annual savings were estimated to be a mere $329. On an annual base of about $2500 between gas and electric, that’s only 13% savings. I figured some nifty new unit would be saving me 20-30% with all this high efficiency and new technology.
Using a discount rate of 6% and a 10 year model (see NPV link earlier to see how easily model in excel), this purchase was still NPV NEGATIVE to the tune of $4000. Now, that assumes our current unit lasts that long, but too complex to model probabilities of replacement in a hypothetical future.

Here are some other considerations:

Moving or Staying? We’re not entirely sure we’re staying in this house forever – or even more than the next year or two. While the house is fine if we did stay, there’s another area we’ve considered for varying reasons from family proximity to school district. So, we’ve toyed with the prospect of moving for years, but never pulled the trigger. That being said, if the new unit was going to bring substantial savings annually and might make for a decent selling point as well, it may have made more sense.
Opportunity Cost - Aside from the assumption I used in the NPV model of reasonably earning say, 5-6% long term with money invested in more aggressive assets, if we DO decide to move, that money would be put to much better use in being able to afford the home we want as opposed to losing a substantial amount upon resale. For instance, when you put in a new kitchen, the claim is, you’ll recoup say, 80% of that investment at sale. A new deck might be 50% and a pool is debatable (check out those comments!). Surely, a new Central Air unit doesn’t rank high on the scale of recouped investments. It’s probably up there with a roof or new windows – high cost house maintenance items that just aren’t viewed as that “sexy” at resale. Back to that opportunity cost – so if we did decide to move and our dream home was 7-8K outside our budget after I just put in this new unit, I’d be kicking myself.
Pay Now or Pay Later – Contrary to my current direction though, is the notion that our current unit will die eventually. If it dies right after these tax incentives and manufacturer incentives evaporate, well then, I’ll feel badly. If it holds out another couple years, or especially if we move while it’s intact, great. I do have to contend with the notion that it may die next year though and in retrospect, I may have missed a decent deal.
Are Prices Artificial? – Any time the government intervenes with artificial incentives, free market pricing goes out the window and subsidized pricing comes into play. We just saw it with the homeowner tax credit expiring and subsequent reduction of home sale prices in May (glad you didn’t rush to buy that house now?). Well, I question whether installation services and manufacturers are able to jack their pricing now because their units and installations are “in demand” and subsidized by the government, but say, next year, with no artificial incentives, the prices will just naturally come back down anyway. In many ways, these various government stimulus projects are just a money grab for particular industries and this may be no different. I just don’t have years of pricing data and trends to back up this suspicion so for now, it’s speculative. But I do question whether I’d really pay full pricing in 2011.

Decision: At this time I don’t intend on moving forward with the purchase. We have the money. And I’m all about making positive NPV investments and improvements to either our home or personal finances. But even with these seemingly enticing incentives, the purchase just doesn’t seem justified at this time.

Anyone Out There in the Same Boat?

Simple but Important Calculation: How Much Should You Have Saved for College Today?

Darwin — Thu, 13 May 2010 01:48:27 +0000

While not all parents agree on which type of college their kids should attend, how much of the cost they should front, or whether a college degree is even worth the immense upfront expenditure at all, what is virtually unanimous is that given recent trends in tuition it’s a terribly expensive undertaking that will likely worsen over time given other developments in the economy, endowment investment losses and other economic factors.

According to the inflation trends at the College Board, the average annual increase over 10 years was 6.5% for a 4 year public college while increasing 5.2% at private colleges. Meanwhile, core inflation, wages, or whatever other measure of purchasing power you consider to be relevant was much lower – in the 1.5-3% range. Therefore, the cost of college in real dollars has been increasing substantially each year at virtually double that rate, and if you have a child born this year, it’s entirely plausible this painful trend will continue unabated for the next 18 years. Over time, the power of compounding is sure to make the college experience daunting to those who didn’t adequately prepare in advance.

There are myriad assumptions and calculations out there for how much you’ll need to save for college, but given the wild swings in outcomes of various investment classes, assumptions surrounding which college costs to assume and hundreds of other variables, what I’d offer is a very basic high level set of assumptions that will allow you to immediately get an idea of how much money you need either for a new child or how much you should have saved (and will need to make up) for a child approaching college age:

Assumptions:

Child attends college at 18
Child attends 4 year public or private school – for estimate use 2010 average of $15,213 for public and $35,636 for private
Money is invested in a typical tax-advantaged college plan like a 529 or ESA
Returns on investments are roughly equivalent to college cost inflation – This is a key assumption and I’ll explain below why I used it

Now, there are a few assumptions that you are your children need to discuss during the college selection process, and these may change along the way as well. First off, is college even appropriate for your child? For many, the answer is yes. However, let’s say your child just didn’t excel in school, didn’t enjoy it and barely got by…but perhaps they love a particular trade that may provide a decent income in adult life? College isn’t for everyone and there are perfectly successful and content workers and entrepreneurs that don’t have college degrees. Once that question is answered in the affirmative though, the next consideration is what burden of the total costs are to be borne by the child versus the parent. If you tell your kid, “You can go to whichever college you like, but we’re only able to provide for $15,000 per year (in 2010 dollars) and you’re on the hook for the rest”, chances are they’ll opt for a state school. If you want your child to be able to attend any school they want and you’re doubtful they’ll be the recipient of a scholarship or any sort of aid given your income (this is the most conservative assumption), then you’d better plan for the bull $36K/year in today’s dollars.

For the assumption on investment returns, there are a few factors at work here. First off, while the long-term return on stocks is generally touted at 8-9% annually, the reality is that this is not guaranteed, and also, you’ll likely want to adjust your asset allocation to shift into more conservative assets as your child approaches college so as to not see your plan drop in value by 50% in a blink of an eye like we saw across 2008-2009. For instance, perhaps at age 1, your child’s plan is invested fully in stocks, but by 14, you’re down to 65% stock and 35% bonds/money market. Therefore, even with a rosy 8% assumption, given this asset switch along the way, your real returns through the life of the term are probably closer to the annual college inflation costs.

Now, you might say these assumptions are way to simplified, broad and back-of-the-napkin. Well, maybe they are. And maybe you’ll want to spend the next 3 months tracking down a financial adviser who’s going to charge you a lot of money (either upfront or from fees by putting you into investments in which they derive fees) to tell you something different, but at least here, you’ve got a start. You have an order of magnitude wake-up call on just what it’s going to take to put your kid(s) through college. Start today with this goal in mind as opposed to trying to find someone who’s going to tell you something you’d rather hear – that it will be cheaper, how to get scholarships, or whatever sounds better than these large numbers.

What Happens if You Saved Too Much?

While this is hardly a common problem since even these costs are likely underestimated and adjustments could be made along the way, the beauty of the 529 College Savings Plans is that there are several alternatives at your disposal if you encounter that situation ranging from using the money for another child to various options for withdrawal (see 529 Plan Basics for more details on this and which plan we’re using).

How Are We Doing?

In looking at it this way, we’re behind the 8-ball a bit. While we do have several thousand dollars save for each kid, we have three kids and we want the ultimate flexibility (most conservative assumption) of a top private college with no assistance, we’re talking about saving $428,000 in today’s dollars. That’s a staggering amount! It’s another mortgage (way more than our current one by the way) but to be paid in half the time! Our actual plan involves my wife returning to the workforce once our youngest is out of the house and into school and having my wife’s salary to virtually do nothing but shovel money into college accounts. But that’s taking on a bit of risk in assuming they’re hiring teachers again in a couple years and no other lifechanging events occur. So, admittedly, it’s daunting for us as well, but we’ve got a plan, we’ve got a backup plan, we’ve already started investing for each child, and I know what we’re up against.

How Do You Stack Up?

How Stupid (Or Lazy) Do They Think I Am?

Darwin — Sat, 03 Apr 2010 15:00:38 +0000

This month, my Comcast bill came in $10 higher than my previously negotiated 44% Discount. If you followed that ordeal, I posted (copy/paste) an entire online chat session with a Comcast rep on how I saved 44% on my Comcast bill by threatening to leave for Verizon FIOS. Well, this month for some reason, the phone promotion came off and my bill popped up 10 bucks. Not a huge deal, but since I had previously negotiated a lower monthly bill in exchange for my continued patronage I figured it was worth the phone call to see what happened and get it back down. I explained the situation and how I expected to be paying the same ~$110 before taxes and fees as opposed to the $120 that I was assessed this month.

The rep proceeded to try and push me into a “bundle promotion” that was actually more money than I was paying now for the same services!!!

Basically, she was trying to get me into a phone/internet/cable bundle that included the same premium channels (that I get for free), the same HD DVR, etc. for $146 per month. She was very persistent and cited the fact that I wouldn’t have to keep calling back every 6 months after the promotions dropped off. Oh, and that after a 1 year period, the price would “only” go up by $15 per month. I was a bit perplexed.

How stupid did do they think people are? Or I guess, how lazy?

I’ll gladly pick up the phone once every 6 months for the 10 minutes it takes to haggle out a new reduced deal for $110 rather than pay $146.

That’s $432 per year in after-tax dollars!

When I cited my reluctance to enter into this deal and said what I really wanted was for Comcast to honor our prior committed price of $110, she seemed surprised that I wasn’t jumping on this great offer and she actually started talking slower and re-explaining the deal so I could understand it better. After some back and forth, she finally relented and said she couldn’t get the same promotion on the phone, but found one for $5 off, so my new bill is $115 per month. That was close enough and I wasn’t going to get back to the $110, but it beat the heck out of $30 higher. But, I have to envision by the amount of time she spent on the topic and her relentless sales pitch, enough people give up and agree to it.

Here are some very compelling reasons I cited that made my case quite plausible and forced her to consider whether I’d leave or not. I said:

“Virtually every one of my neighbors has switched or is switching now to Verizon FIOS. The trucks are all over the neighborhood installing fiber optic cable”.
“They just sent out another sales rep and a flyer with an incredible deal again”.
“Frankly, the ONLY reason I’m staying with Comcast is because you’ve been willing to retain me at a discounted rate. Otherwise I would be with Verizon right now. It’s a win-win for both of us. If my Comcast rate goes up, I’ll simply switch”.

I know that I’m more valuable to them at a much discounted rate than not at all. It costs very little to service me, an incremental customer, vs. acquiring a new customer or none at all. It’s in both of our best interest to keep this going, but sometimes I just need to remind the customer service rep of this notion.

Again, for more on exact language and tactics used to secure a massive discount with Comcast or any other service where there is competition (sanitation, pest control, security service, wireless, you name it), see this article on my Comcast Bill Negotiation.

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101 Ways to Cut Expenses – The Good, the Bad and the Ugly

Darwin — Wed, 17 Mar 2010 10:55:15 +0000

Every once in a while I come across a list or publication that has some surprising insight that I like to share, like when I found these home energy savings tips from the US Department of Energy. Well, this week, I came across an AARP publication on 101 ways to cut expenses. Since 101 items can result in sensory overload with the result being complete inaction, I parsed through the list and picked out my top picks and pans that I felt were highest impact and most likely to be implemented (or should be avoided). Conversely, I disagreed with several of their recommendations as well. I’ve included my likes and dislikes with comments below for your perusal.

Thumbs Up

If you see something in a catalog that you want to buy, wait a week before ordering to see if you still really want it.

- I don’t buy stuff out of catalogs. But my wife does – for the kids. I wonder how much we could reduce our “plastic toy” junk heap if the family followed this rule. Interesting, never thought about it.

Use the public library to check out movies or books for free.

- I haven’t been to our public library in a while, but it’s certainly worth checking out whether they have worthwhile movies and books. It may save you a few rentals or book purchases. I mean, who reads a book more than once anyway?

Give your time/services instead of “things” for gifts.

- I wish society were more accepting of this sort of gift. As adults, we started giving our parents more gifts like “events” and day trips with the grandkids, etc., instead of buying another shirt and tie. Good times and memories and definitely more useful than more stuff IMO. This hasn’t really caught hold in the mainstream, but it would be nice if it did.

If you must charge, switch to a no-fee or low-fee credit card.

- A big IF…but if you must, there’s no sense in paying interest. Here are some options on dropping or cutting out your interest altogether at least for 6-12 months with a 0% Balance Transfer. There’s no sense in paying interest if you don’t have to.

Take advantage of company-sponsored reimbursement plans. If your company sponsors free retirement advice, take advantage of it

- While not having a good plan or good advice can cost you big time over the long term, if you’re already nearing retirement, many companies actually have surprisingly good financial advice offered as part of a standard employee benefit. It’s worth at least checking out. Perhaps it will prompt you to change course or make a positive move you hadn’t thought of previously.

Take advantage of free health screenings at work (if offered).

- Take it if they’re offering. I get my flu shot at work each year instead of going to the doctor and paying a co-pay/vaccine administration fee. And I’ve never had the flu to boot!

(3 at once) – Pay attention to the expense ratios on mutual funds you buy. Consider using exchange-traded funds (ETFs). Pay attention to mutual fund brokerage fees.

- Simply, ETFs are Better than Mutual Funds. This is true virtually all the time with rare exceptions depending on your circumstances. I’ve listed out several other reasons why there, but over the long term, fees, taxes and transaction costs are killers.

Cook in bulk and freeze.

- This is an obvious one, but the more times I see it, the more times I remember, “It’s time to hit Costco, cook up some big meals (OK, my wife’s the cook), and save some money”

Bring your lunch to work or scout out the inexpensive places to buy lunch. Look for inexpensive items on the menu, like soup.

- I eat out with work buddies occasionally. I never thought about the soup thing; that’s actually a frugal way to eat without looking cheap (if that bothers you). Bringing in your lunch saves a ton of dough. I’m not that great at it, but I have started eating more salads which are like $3 lunches instead of $6 lunches for sandwiches, etc.

Look up phone numbers in the phone book instead of paying for directory assistance.

- I haven’t paid for directory assistance since I was like 19 and too lazy to find a phone book. I don’t know why anyone would EVER pay for this anymore, especially with smartphones, google directory assist, etc.

Shop resale shops or estate sales.

- If you’re not familiar with an estate sale, it’s rather morbid. Someone dies and relatives (usually the children) basically open up the house and let strangers walk through and buy everything left behind. While you should feel conflicted over taking advantage of someone in a fragile state, you may find wonderful antique furniture, wares, collectibles or whatever else interests you at a reasonable price that would cost much more in a planned/controlled sale like a garage sale or ebay.

Sign up for a Upromise account/card. A percentage of your purchases will go into a college savings fund for your children.

- This is one of those no-impact benefits to your family. It takes 5 minutes to sign up and once you register your credit cards and store cards with UPromise, it’s free money every month just for buying what you would normally. No effort and free college tuition help. We use it and I recommend it.

Do your own home improvements. Home Depot and Lowe’s employees can walk you through what you need to know

- While the first part may sound generic and useless, read the second sentence. There are surprisingly helpful and insightful free seminars they give at stores in order to get you to buy their tile, wood, siding, whatever. They’ll teach you how to redo your bathroom tile to how to lay your own flooring. Most of these jobs are easy enough that you simply don’t have to pay for them, especially if you have the time. Try it out!
And bonus! – don’t pay full price when you go these stores or any major retailer for that matter. If you’re going to spend, say, $500 on new flooring, go onto PlasticJungle and buy that $500 gift card to Lowes for $450. I’ve done it. You can buy unwanted gift cards (and sell yours) for nice 10-15% discounts instead of paying full price or hanging on to a card you don’t want. They guarantee the validity of the cards through their online card number check. Check out Plastic Jungle and you’ll be surprised!

Thumbs Down

Check your credit history. Go to FreeCreditReport.com and make sure everything is accurate. Good credit may mean lower interest charges.

- I’m surprised that AARP would direct you to an Experian site instead of the authentic free government mandated site. I’ve previously outlined the ONLY way you can truly get a FREE Credit Report and FREE Credit Score (the FICO score that matters) rather than paying for it or getting a score from a single credit bureau which is of limited utility since virtually all credit score checks rely upon FICO as the gold standard.

Don’t take a loan from your 401(k) plan Ã¢â‚¬â€ you’ll save on double taxation of that repaid interest.

- I’m not advocating for people to go and needlessly take out 401K loans. However, I do take issue with the perpetual myth of the double taxation of interest and its relevance. Read my take on 401K loans here.

Talk to financial planners at no cost. Look for newspaper money shows or local events where this service may be offered

- Whereas I recommended talking to a company provided financial planner, I don’t recommend willy-nilly taking advice from anyone off the street. When your company lines up a planner to speak to employees, you can bet that they’ve been vetted and they are likely to be offering you sound financial advice. Your company doesn’t want to be sued and have angry employees that were duped by a company-sponsored advisor. However, with no background vetting and recommendations, an advisor off the street is possible offering your “FREE” financial advice that is not in your best interest. Perhaps high fee or load funds that have no discernible benefit over investments in which they don’t get a cut. Perhaps they’re not very good at what they do. You just don’t know. I’d look to a trusted friend or relative for a financial advisor recommendation, or check out a fee-only advisor that is a Fiduciary if you are concerned over conflicts of interest and fee structures based on your assets under management.

Don’t get divorced.

- This is just stupid. I think they ran out of ideas. Of course, divorce is expensive. But divorce is usually not purely a financial decision – there’s more to it. You’re either right together or your not. If you’ve tried everything else and there’s no hope, you shouldn’t stay in a bad marriage for money if it can’t be fixed. It’s only money!

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See More Darwin’s Money Saving Tips Here

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If you want to see the whole list, visit the full AARP list of 101 Ways to Cut Expenses.

How Much Could You Reduce Your Budget if You Get Laid Off?

Darwin — Mon, 01 Feb 2010 12:14:51 +0000

In this economy, even if you think your job is safe, you’ve gotta at least have in the back of your mind, “What are some immediate steps we could take to dramatically reduce our monthly expenditures in the event of a layoff?”. While many companies offer severance for several months, there’s no guarantee that you’ll land a new job with similar pay any time soon, or ever. And many are not so lucky to be granted severance when being shown the door – consultants, blue collar, fired for cause, and many more (US Severance Packages are the worst amongst western nations). When severance expires or that day comes where the pay stops cold, unemployment is unlikely to cover your old monthly income, but rather just a portion. That leaves a gap between current income and future income.

Bridging the Gap

In order to bridge the gap that occurs between current income and future income to avoid cannibalizing personal savings, retirement savings, having to leave your home, etc., the first order of action should be to take dramatic action from a discretionary spending standpoint. When considering our finances, I looked at various categories of spending that we could live without and how much we’d save per month by taking aggressive action:

Monthly Savings if Cutting Down to Bare Essentials:

Newspaper subscription $31 - We could totally do without. I justify its existence since I read occasionally and the coupons we receive each week more than offset subscription. But I could probably find replacement coupons with minimal effort on Coupons.com.

Coffee $50 – This is clearly a vice that I partake in because money isn’t tight right now. If I’m dragging at the office, occasionally I’ll grab a latte, so yes, I’m guilty of the “latte factor” and I admit it. However, on weekends and vacations I go without, so I take some solace in the notion that I’m not “addicted” and can quit if needed (do I sound like a recreational drug user?). I save money on the morning cup by making at home and bringing in – buying twice in a day would be overboard for me. Regardless, it would be easy to drop it if financial hardship occurred – especially the premium office purchase.

Phone/Internet/Cable $40 - While I already save major bucks on my Comcast Bill (44% negotiated down!) and get all kinds of free premium channels etc due to the specific negotiation tactics I employ if I were laid off, we could quickly drop several additional services I am still paying for in some way. The HD would go immediately. The DVR? Could probably do without – and cable could go down to the bare minimum. I could probably drop another $40 or so without the premium stuff.

Lunches – $60 I generally eat lunch at my desk after buying from the company caf. I spend about 6 bucks a day for a wrap and a drink or something. If I weren’t working, I obviously wouldn’t be buying lunch everyday. I could reasonably average out a lunch at $3 per day with larger prepared left-overs, salads, etc. So, with a spread of $3 per day, that’s about $15 per week or $60 per month that I’m spending above baseline.

Eating Out $120 While we wouldn’t turn into hermits and forgo society altogether, we would certainly eat out less than the already paltry 2 times or so a month. If it’s the 5 of us, we’re usually at a Friday’s or Friendly’s or something more affordable. On the rare occasion my wife and I get out alone, we usually go somewhere a little nicer and easily drop $60-$100 with tip.

Entertainment/Movies $250 – Little gym, piano lessons, Adventure Guides, YMCA Activities, etc – $250 – While these activities enrich our childrens’ lives (and ours), during a pinch period, we’d have to sacrifice some of these costly activities and find other free/cheaper ways to give them a little something different. I’m a big fan of spending our money on life experiences over material things kids tire of quickly, but for a period of several months to a year, this would also be a prudent area to focus on.

Dry Cleaning $40 - While I keep expenses down by wearing polo shirts instead of business shirts in the spring/summer/fall and yes, I’m guilty of the re-wear on the pants, dry-cleaning still adds up. However, in this scenario, no job=no dry cleaning. For the one-offs that aren’t work related, we have a working iron. We just don’t use it much now, but we could.

Vacation $200 – While we don’t vacation every month obviously, we do go on at least 2 vacations a year and at least one is usually a relatively pricey shore house or lake house we get at a discount from neighbors (which makes the value overwhelming since they’re beautiful houses and memorable vacations). However, in the event of a layoff, it’s totally understandable to drop it down to 1 less expensive vacation. Spreading a few grand across a monthly allocation, we could easily drop an equivalent $200 out.

Groceries $100 - We spend a ton of money on food. I don’t get it sometimes, but it’s with some coupons and timed shopping included. But with much organic, growing children, a wife that loves to cook crazy meals, and with us entertaining friends and family somewhat regularly, we spend several hundred dollars per month on food. We could easily chop $100 out of there by cutting some more corners and perhaps entertaining a bit less given the circumstances.

Gas $40 – Without a job to drive to daily, there would certainly be a lower gas expenditure.

Overall LifeStyle Adjustment $150 – Since I didn’t capture every possible category above, we could easily make some lifestyle changes if necessary – perhaps my wife doesn’t hit the Picture People for a portrait of the kids as often (albeit, she never does so without a steep coupon), we could do without the matching new holiday outfits for the boys, less toys, less mall, things that nickel and dime the budget each month that would be very easy to cut out if mandated.

Summary:

Total Budget Cut = $1081/Month

There are a few ways to look at this analysis. For the extremo-frugals out there, you’re probably thinking, “Well, you could go without all this stuff now. Just cut it out and stop living like a there’s no tomorrow!” On the other hand, there are those of you who would say even if laid off, you’d never do without some of life’s simple pleasures – after all, this is just a passing phase. From my standpoint, this was really just a first pass to give me a rigor level 1 assessment of what kind of burn rate we’ve have if that day did come. Would we need $3000 a month or live or $5000 a month? I mean, this can have a huge impact on what size my emergency fund should be, whether I’d have to consider eating into retirement funds, whether we could continue to pay the mortgage indefinitely, etc. With me at home, perhaps my wife could take up substitute teaching and tutoring since she was teaching before the kids as well. We have options – but it’s always good to know where you stand.

What’s Your Analysis Look Like?

25 Best Personal Finance, Investing & Career Posts of 2009

Darwin — Tue, 12 Jan 2010 13:00:27 +0000

After sharing the best posts from around the blogosphere in Personal Finance and Investing with yesterday’s Carnival of Personal Finance I realized I didn’t do a look-back at 2009 from Darwin’s Finance. In this list you’ll find thousands of dollars in money saving tips, career boosters, investing tricks and tax deduction ideas you may have never heard of. I’ve intentionally selected articles that are still relevant and useful, even if they’re a few months old.

Personal Finance

How to Get a 0% Down Loan Even in 2010 – Amazingly, in the midst of the most substantial housing collapse we’ve seen in our generation, there are still 0% down loans being offered to millions of Americans under a USDA rural loan program. The thing is, there’s nothing rural about many communities that qualify – which means you! Find out more about the program if you’re thinking of buying.

The ONLY way to get your FICO Credit Score for free – Aside from learning how to do this, most people don’t fully grasp the implications their credit score has on their everyday life – from loan rates to employer screening trouble, the FICO credit score is far-reaching and a critical component of a successful personal financial plan.

Net Present Value – It’s not just for MBAs – This article shows how I used NPV to choose between multiple mortgage choices and how you should always perform a simple NPV analysis when confronted with tough financial choices.

What Statistics Really Mean – When someone throws out a fancy statistic, they often either don’t know what they’re talking about or they’re intentionally manipulating you into believing in their agenda. Understand the tips, tricks and implications of statistics and how to apply these concepts to everyday life.

Don’t be a Slave to Energy Prices – Be indifferent. By hedging your energy prices. This article outlines several simple and low cost methods to hedge against rising oil, electric and natural gas prices. Large corporations do this to avoid catastrophic impact to their bottom line, why don’t you?

What Would Happen if the US Dollar Were Replaced? Of late, there has been serious talk of foreign governments getting out of the US Dollar as their reserve currency. Can you blame them? Such an unraveling could have serious implications for all Americans.

Family Money – Fairness and Considerations in Gifting and Estate Planning – This uncomfortable topic is one many families choose to ignore. Do so at your peril. Consider your transparency and equity in how you treat your family members. You’d want to be treated the same way, right?

9 Money Habits to Live by – Check out these basic methods to ensure financial success in your family’s budget. Do you relate to these habits?

Living Paycheck to Paycheck is Costing You Thousands – The hidden costs of not having excess cash on hand every month. Life Happens – and when it does, a hand to mouth financial lifestyle can put you further in the hole.

Puppy Love? Think Twice, That May be a $100,000 Dog Over its Life – I was personally blown away when I actually calculated what our dog Jack will eventually cost us over his lifetime. My wife and I went to college for less than Jack’s expenses over his lifetime. Please make sure you understand and calculate your costs before buying that cute puppy on an impulse buy.

How FSA Plan Account Contributions Can Save You Thousands – If you have a Flex Spending Account at your disposal and you’re not using it, you’re leaving thousands of dollars on the table. See all eligible expenses and how to take advantage of this tax deduction.

Start Investing Today: An Amazing Comparison of 25 vs 35 Year Old Starters – A picture can tell a thousand words. Well, this has words and pictures showing an amazing difference in outcomes if you start investing at 25 vs. 35…even if the 25 year old STOPS investing completely when they hit 35!

Investing

How Stock Options Work – They’re not as complex and costly as you may think. And they’re NOT just for speculation. Options can provide income and hedging in a conservative portfolio as well if used right.

How Covered Call Options Work – Understand how to generate income and smooth out market returns by selling covered calls.

3 Low-Cost Option Strategies for Stock Market Speculation – Using stock options to speculate on a biotech approval or pending court case that could wallop a small tech stock doesn’t have to be expensive. See how these low-cost methods allow you to profit over 1000% on event-driven trading days for under $100 invested.

Investment Club Aspirations? Consider This…While an investment club was a positive experience for me overall, there were significant cost, tax, governance and performance issues that we didn’t consider at the outset. Make sure you understand all the barriers before you embark on a partnership.

Leveraged ETFs are Evil – If you don’t understand daily rebalancing. Please read before you EVER consider buying a 2x or 3X return ETF.

Advanta 11% Yield Notes Sound Great, Right? Find out what to watch for in an investment that seems too good to be true – and what happens to investors that ignored the warning signs.

Structured Notes – How they Work and Why You Might Want One – What if you could attain guaranteed ranges of returns that are MUCH higher than the crappy savings and CD rates out there today? You can, with Structured Notes.

Wall Street Violated Nature’s Laws – A fun look back and how Wall Street violated the most basic laws of physics in their behavior and reaction to the financial crisis.

2009 Returns for Every Country – See what you missed by investing only in the US (or by avoiding stocks altogether in 2009). Some countries returned over 100% on the year, with a financial crisis along the way.

Every ETF on Earth (Over 800 Listed) – If you can think of it, there’s probably an ETF for it. Scan this list of 800 strong to see if there’s an ETF constructed for your strategy.

Want More on ETFs? Visit ETFBase (my latest project dedicated solely to ETFs)

Career

Project Managers – Tips and Tricks – If you’re a current or prospective project manager, check out these tips and practices I follow as a Project Manager.

What’s the Best College Degree for Today’s Economy? It’s no longer Business. See what the up and coming careers are in demand in this new economy.

Your Employee Stock Options Don’t Have to be Worthless – By executing option strategies against your underlying collateral, you can guarantee yourself a hefty return regardless of what happens to your company’s share price.

Make sure to stay tuned via email updates or RSS so you don’t miss similarly themed articles in 2010 and beyond!