Are you wondering about the benefits of starting a revocable living trust vs just a will?

For years, my wife and I put off what we know we have to do as responsible adults and parents, and create a will.

Without a will, the courts decide what happens to everything you leave behind: Your kids, your money, the house, the family dog, … everything!

Ask yourself this simple question: If my spouse and I were to get hit by a car tonight, is there anything in place to protect all of those things I just mentioned?

If the answer is “no”, then you absolutely need to sit down and do a little estate planning.

I know … it’s hard.  It’s not fun to think about times when you’re not here anymore.  It took me battling cancer and a few other scary events for us to finally call a lawyer and make it happen.

But it’s done now, and I’m glad we did it.  Not just because we finally created our will, but because we also found out that to really protect your assets, you need take your estate planning a step further and create a trust too.

Here are all the important things you need to know about a living trust vs a will.

Why a Will Doesn’t Do Much for You

This may come as a surprise to you, but a will doesn’t do a whole lot for you.

It’s necessary; don’t get me wrong.  A will tells the courts how your assets should be divided up and where things should go.  But in our modern times (as I’ve come to learn), estate planning is a whole lot more complicated than that now.

The biggest problem with wills is that they must pass through a convoluted process called “probate”.  This is where the courts analyze your will and decide whether or not to follow your wishes.  This presents some major problems:

1. It can take a lot of time. The probate process can go on for months.  3 to 6 months on average.  That’s a lot of lost time for your loved ones.
2. It can cost a lot of money. In order to successfully navigate your way through probate, you’re going to need proper legal representation.  And that’s going to cost your estate or your loved ones whatever a lawyer charges.  Think along the lines of something like $250 per hour!  Multiply this by 3-6 months, and that’s a ton of expense!
3. The will can be challenged. Despite your best and final wishes, your survivors can challenge your will.  These could be your children, ex-wife, other family members, or even business partners who felt like they weren’t getting what they deserved.
4. The will becomes public knowledge. This is perhaps one of the scariest reasons for me.  Once a will passes through probate, it becomes public record.  This means that if you leave one million dollars to your teenage children, guess what?  Everyone knows!  A very real and scary scenario is that every con-artist from miles around will be looking for a way to become romantic with your kids as they come f age; just so that they can get a piece of that inheritance.  It’s disgraceful, but it happens.
5. Little protection for minors. Another thing you may not be thinking about is that if you have minor children, a will really doesn’t do much to protect their inheritance until they’re at an age where they are responsible enough to know what to do with it.  Could you imagine your 13 year old child inheriting your entire life savings?  Even at 18, this could be bad news.  I don’t care how responsible they are.  It’s highly likely that some bad financial decisions will be made.

So if a will doesn’t help us in these areas, then what does?  Enter a “trust”.

Why We Choose to Create a Living Trust Instead

A trust (or more specifically a revocable living trust) is kind of like a “super will”. When you create a trust, it’s officially its own legal entity, just like a business or company. This is a very important difference for a few reasons:

1. Bypass the probate process. In the event that you and your spouse were to pass, the assets in the trust pass on to the beneficiaries according to the instructions of the trust.  This is much different from a will because there is minimal court intervention.  You get to skip all the headache and expense of probate.
2. Privacy. The trust is private, and therefore no one except your lawyer, successor trustee, and beneficiaries know what it contains or what the final wishes are.  For this reason, a trust is also much more difficult to challenge.
3. Harder to challenge. Compared to a will, the content of the trust is somewhat bulletproof. If your survivors wanted to try to challenge it, they would either not be successful or have a much more difficult time attempting to do so.
4. Financial protection for minors. Perhaps for us, the benefits to your minor children add the greatest amount of value.  Again, with a will only, the minor would receive their inheritance all at once. However with the trust, you can leave instructions for how the money can and should be distributed.  For example, you could decide to distribute 1/3 of the money for when they go to college, 1/3 when they turn age 25 (perhaps when they may want to get married or buy a house), and the rest when they turn 30 (maybe when they might start having children). This would help better ensure the longevity of their inheritance.

Protect More Than Just Your Money

Keep in mind that a trust can be used to protect and pass on more than just your savings.

For example, your home is a financial asset that you will want to one pass on as well.  A trust on property will take effect as soon as it is created.  This way you can dictate whether the home should be sold or if it should be maintained until your children are old enough to inherit it and decide for themselves.

The same protection could also be applied to your business, vehicles, recreation vehicles, jewelry, vacation homes, and anything else you own of value.

Do You Give Up Your Assets?

No, not with a revocable trust.  Your assets are all yours, and you can revoke or amend the trust at any time.

(There is another family of trusts called “irrevocable trusts” where you do lose access to any assets you put into them.  But these are used more to help protect against Medicaid “spend-down” – a whole other topic that I will surely write a post about.)

Does A Trust Cost More?

Yes.  From calling around 7 different lawyers in our area, the average price to create a trust was $1,000 to $1,500.  Compared to a simple will at $300, that’s quite a bit more expensive.

BUT, again, compare that $1,500 trust to the price of 3-6 months of probate at $250/hour.  Now which one looks like a deal?

Estate Planning is Part of Retirement Planning

So there you have it.  If you thought retirement planning was the last leg of financial planning that you’d ever have to deal with, as it turns out, it’s not.  There’s a whole other level of estate planning.

However, like retirement planning, if you educate yourself on the basics and take action, it’s not too tough.  You can save your loved ones a ton of trouble and make sure the assets you’ve spent your entire life acquiring get to where you wish they would go.  As a responsible spouse or parent, this is just something you have to do.

Readers – How many of you have compared a revocable living trust vs will?  Why did you decide to go with one or the other?  What advantages and disadvantages do you see to either?

Photo credits: Flickr, Unsplash

The post Why We Started a Living Trust Instead of Just a Will appeared first on My Money Design.

As if the decision in estate planning over whether to create a will or open a trust isn’t confusing enough, I’ve come to understand (on a personal level) that even this may not be sufficient for ensuring your lifelong savings get passed on to your loved ones.

In short: With the way things work now with elder care, there may not be anything left to give!

Here’s my story.  Recently, my wife’s grandparents both developed a very bad case of Alzheimer’s, and somewhat rapidly.  This has caused the family to make a quick decision to move them from their residence and into the care of a nursing home instead.

Do you have any idea how much a nursing home costs these days?  While interviewing a number of various ones, we learned that the average going price is approximately $8,000 per person per month!  Yes, that’s right – $16,000 per month out of pocket for the two of them.  That’s $192,000 per year!  According to the website A Place for Mom, that’s not that far off from the national average.

So how does anyone ever afford a nursing home?  Apparently most don’t.  A lot of elderly people will apply for Medicaid which is effectively where taxpayer money is used to make those payments on their behalf.

Like any government program, Medicaid has rules – lots of rules!  One of the biggest ones is that you cannot own any more than $2,000 in assets (not including your home) before starting to receive your benefits.  In other words, you need to spend literally just about all of your money before the state will help out (hence, they call this process a “spend down”).  And at $16,000 per month, that’s not going to take very long at all!

So how do you like that?  You work your entire life saving and sacrificing only to have private nursing homes take it all away before government assistance will kick in.  In case you’ve ever wondered why you don’t really ever seem to hear about anyone receiving an inheritance any more, I would guess this is probably one of the leading factors why.

As a father who’s thinking about the future of my wife, kids, and family, how can I ensure that the financial legacy I’m building the foundation for right now will make it into the right hands?

The Irrevocable Living Trust

As you might guess, go looking on the Internet and you’re likely to find the answer after a while …

There are plenty of law-oriented websites that talk about how to bypass Medicare spend-down using something called an irrevocable living trust.

Very important! The “revocable” living trust I talked about before and an “irrevocable” living trust are two totally different things.  For regular estate planning where you wish to bypass probate, a revocable living trust will accomplish this while still giving you access to your money at all times.  This is because you can technically “revoke” it whenever you wish.  The same is not true for an irrevocable trust.

As I understand it, here is how one works:

Let’s say you have $1 million dollars.  You decide to move this money into an irrevocable trust.

Once you do this, the money is no longer yours.  You give up the rights to it.  You can never access it again – even in an emergency.  It’s basically gone.

BUT:  You can still collect on the income gained from the principal amount.  So in our $1 million example, let’s say the assets pay an average of 4% in dividends.  This means you could still be entitled to receive the income of $40,000 per year to use as you wish.

Isn’t this kinda starting to sound a little bit like an annuity?  But here’s where it gets interesting …

While you’re living: Medicaid cannot count this irrevocable trust as part of your assets (since technically you’ve given up the legal rights to it).  As long as it wasn’t created within 5 years of your Medicaid application, it basically stands alone untouched.

Medicaid can however collect any income you’re receiving from this trust.  In our earlier example, that means the $40,000 would go to them.

When you pass away: The money goes to your beneficiaries just as you wish.  Because it’s a trust, it skips the probate process.  And because it was an irrevocable trust, Medicaid cannot collect on it to re-coup any money they paid out for your nursing home care.

You’ve done it!  You’ve passed on your fortune as you had intended.

A Potential Strategy

But what if I give up the money too soon?  How do I know when I will go into a nursing home?  I don’t want to cut myself short?

These are all totally valid questions.  If I had to think of a good potential strategy for how all of this could fall in line, it would be like this:

• You retire in your 50’s (thanks to everything you’ve learned while reading MyMoneyDesign no less!). Example: Your nest egg = $1,000,000.  That’s an income of $40,000 using the 4 Percent Rule.
• You enjoy your 50’s, 60’s, and 70’s. Perhaps by now your nest egg has grown to $2,000,000.  (maybe more?).
• Now you’re in your 70’s. You realize looking at your family history and medical statistics that significant health issues could start to develop from this point on, and so you decide the irrevocable living trust may be the way to go.  You’re living comfortably off of your nest egg, and you decide to take half of your $2 million dollars and put $1 million of it into the trust.  Even though you’re technically “giving this money up”, you can still get whatever interest or dividends come from it.  Therefore, from an income perspective, you’ve lost nothing!  You can still enjoy that same $40,000.  And from an “emergency” standpoint, you’ve still got $1 million in the bank.
• Now in the event of your passing, your heirs will inherit this $1 million that you’ve so carefully earmarked aside. Mission accomplished!

Remember: I would only suggest considering this approach for someone who has ample time to clear the 5 year rule AND who has more than enough nest egg built up.  The last thing you want to do is hurt yourself in the process by UN-qualifying yourself for any government assistance.

Readers: What have your experiences been with elderly grandparents and parents in terms of their finances?  What steps did you take to protect their finances?

Featured image courtesy of Flickr

The post Could an Irrevocable Trust be the Key to Leaving a Financial Legacy? appeared first on My Money Design.

Have you ever wondered when to drop collision and comprehensive coverage from your auto insurance policy?

Without a doubt, auto insurance is a must-have when your vehicle is relatively new, higher in value, and you need the financial protection.

But what happens as time goes on and our vehicles begin to decrease in value? What about when you’ve racked up hundreds of thousands of miles, and you know the trade-in value of your car will be next to nothing? Is there a point where full coverage simply doesn’t make good financial sense any longer?

This is a question I struggle with every time I have to renew my auto insurance policy. I commute every day over 60 miles each way to and from work. Traditionally, to get the most bang for my buck, I purchase relatively inexpensive used cars and drive them until my millage is well into six digits.

Conventional wisdom says to drop full coverage if it exceeds 10% of the replacement value of your car. For example, if you stand to receive $5,000 if you’re in an accident, then your insurance shouldn’t cost more than $500 per year.

But does this 10% rule of thumb really always hold true? What if you drop your coverage and get in an accident right away? Honestly, how much savings are you really going to get and how long would you have to go without an accident for it to be financially better?

More so, is there a break-even point where paying for comprehensive and collision coverage would barely cover your car if you were in an accident (if at all)? Or could I be passing up better financial opportunities such as paying off some debt, adding it to my retirement savings, or simply building up my rainy day fund?

In this post, I’d like to explore my options and crunch the numbers. Most importantly, I’d like to see if the benefits really do out-weigh the risks, or if it simply makes more sense to keep comprehensive and collision and simply adjust the deducible (more on that below). But first: What is comprehensive and collision coverage?

What is Comprehensive and Collision Coverage?

What does it mean to have comprehensive and collision? Why is it important to even have this type of coverage on your auto insurance in the first place?

Collision insurance covers the damage to your vehicle in the event that you are in an accident with another vehicle. An example of this would be a typical car-crash scenario where one car hits another.

Comprehensive insurance pays for non-collision related damage. An example of this would be a broken windshield due to a flying rock or hail.

Are comprehensive and collision insurance required by law?

Generally, no. State laws don’t require you to have coverage that protects the physical appearance of your car. However, keep in mind that if you have an auto loan, they might require you to keep full coverage (to protect their asset, of course).

What does the law require? That you are financially responsible for any injuries or damage you cause as a result of your driving. Hence, why you have Bodily Injury Liability and Property Damage Liability. The minimum amounts will vary from state to state.

Then why even buy comprehensive and collision ?

Like all insurance policies, your goal is to minimize your financial risk and protect your asset from unfortunate events.

Imagine you just bought a brand-new $40,000 SUV and get into an accident one mile from the dealership.  Even though no one is hurt, without insurance, you would be on the hook for tens of thousands of dollars associated with repairing your vehicle. So by having insurance, you mitigate that risk by paying a relatively small sum of money for the insurance provider to pay those expenses should anything accidental occur.

Deductibles

Keep in mind that collision and comprehensive coverage costs will vary depending on your deductible. Your deductible is the amount of money you must pay first when a claim is made before the insurance company will pay any benefits.

Example: You are in an accident and have $5,000 of damages. Your deductible is $500. Therefore, you pay the first $500 while the insurance company covers the remaining $4,500 for the repair.

Typically most people select deductibles between $500 and $1,000 depending on a great deal of factors like price, comfort level, accident history, etc.

Depending on your type of policy, you might not have to pay the deductible yourself. If you have what’s called “broad from” insurance and you are determined to be less than 50 percent at fault for the accident, then the other party (or rather their insurance company) will pay for your deductible.

My 3 Possible Auto Insurance Options to Consider

To really determine if keeping collision and comprehensive coverage makes sense, I decided to call my insurance provider to get figures on a few different options. (Yes, these are REAL numbers!)

Basically I see three main options we could choose from:

1. Keep the coverage with a $1,000 Deductible. Right now my auto insurance policy carries a $1,000 deductible for collision and comprehensive.  If I stay this route, I can change nothing and continue to pay the same rate I’ve always paid.
2. Keep the coverage with a lower $500 Deductible. I could reduce my deductible to $500 and pay a higher price of $41.05 more every 6 months ($82.10 per year).  If I get into an accident, then we can assume I’d have less to pay out of my own pocket (assuming I have to pay the deductible at all).
3. No Coverage. I could drop collision and comprehensive from my policy altogether and save $131.46 every 6 months ($262.92 per year).  However, if I get into an accident, then it’s game over!  I would have to pay for all the damages myself (or more than likely start looking for another used car).

Worst-Case Scenario: I Pay the Deductible After the Accident

To really appreciate a good analysis, I find its best to start extreme and compare all three options assuming the worst-case scenario.

In this model, what circumstances would make it worst-case?

• First of all, let’s perform the calculation assuming I was in a car accident and my vehicle was completely totaled at the end of each 6 month period (starting from 0 to 30 months). As time builds on, we’ll see the cumulative effect of the savings versus the depreciating effect of the vehicle (resulting in the net amount of money I will be entitled to receive).
• Let’s also assume that I have to pay the deductible, not the other party.  How likely is that?  Unfortunately, more than you think.  The last accident I was in included someone who claimed to have insurance but turned out to have none.  My insurance company sent her legal notices, but there was never any response.  So I was on the hook for paying for the entire deducible.  Again, we want to assume worst-case.
• Finally, we’ll need to estimate the depreciation of my vehicle. For your information, I drive a 2011 Chrysler 200 (that I picked up for a steal!).  It currently has over 150,000 miles (I told you I commute a lot!) and has an estimated value of roughly $2,000. Since my car is at the tail end of its life-cycle value, I think we could reasonably assume a decrease of $200 of Blue-Book value with every 6-month insurance period.

Results

Observations

1. If I totaled my car tomorrow, clearly switching to the $500 would yield the greatest value whereas dropping collision and comprehensive would result in the least value.

2. If I can manage to stay accident free for at least 16 months, then dropping collision and comprehensive would begin to yield a greater net return relative to having a $1,000 deductible.

3. If I can manage to stay accident free for at least 22 months, then dropping collision and comprehensive would begin to yield a greater net return relative to having a $500 deductible.

4. After 30 months, having a $1,000 deducible would reach a break-even point ($0 value). Going forward, it would make sense to drop collision and comprehensive since there would effectively be no benefit.

5. After 36 months, having a $500 deducible would reach a break-even point ($0 value). Again, going forward, it would make sense to drop collision and comprehensive since there would be no benefit.

Consensus

Though I could accumulate some savings over time, the benefit would not outweigh the risk until several months down the road. Clearly paying for a lower deducible would put me in a better position financially, but this is only if I am unlucky and get into an accident. Hence, the higher deductible option seems to fit right into the middle of the road.

Next Worst-Case Scenario: The Other Party Pays the Deductible

Okay, so maybe the situation I painted above isn’t necessarily “typical”. People get into accidents all the time and both parties have insurance. And when they do, that means they also cover your deductible. So is it really fair to base our decision assuming that we’d have so much to lose?

Of course we can take this point into consideration. So let’s re-do our model with one big change: If I’m in an accident, the other party has insurance and ends up paying my full deductible.

With this in mind, how does it change our calculations?

Results

Observations

1. For the entire life remaining life of my vehicle, at no point would the net payout with the $500 deductible ever provide a greater benefit than the $1,000 deductible option.

2. I would need to stay accident free for at least 30 months for the “dropping collision and comprehensive” option to yield a greater amount of savings than the $500 deductible option.

3. I would need to stay accident free for at least 34 months for the “dropping collision and comprehensive” option to yield a greater amount of savings than the $1,000 deductible option.

Consensus

Clearly when there is the assumption that I would not have to pay the deductible, it would take much longer for the savings of having no coverage to out-weigh the risk. Also when the deductible is no longer a financial threat, the lower cost, higher deductible choice becomes the better option.

Conclusions

So is it really financially better to drop collision and comprehensive coverage from your auto insurance?

This question really boils down to one thing: Do you believe you’re going to get in an accident or not?

Remember: Insurance is never an investment. Inherenitly, it’s a payment for protection from an unwanted risk.

So on that note, be honest with yourself: What’s the likelihood of this risk? How likely are you to get into accident, either by your own fault or by that of someone else.

Unfortunately, this is probably one of those things where we all tend to feel a somewhat false sense of confidence. Hey, I get it! You’re a safe driver. You could never be the one who gets into the accident, right?

But that’s exactly the problem. An accident doesn’t always have to be “your” fault in order for you to become involved. Accidents sometimes just happen. (That’s why they’re called accidents.)

Just like I mentioned already, my last accident was when someone with no insurance hit my car due to some icy weather. Even though I had her information, since she had no insurance, there was really no way to get her to ever pay for my deducible.

Two years before that, I was in another icy road accident where the car next to me started spinning out of control and hit my car. Again, not my fault. But the next thing I knew I had well over $5,000 in damage to my vehicle.

Every day, I commute to work a long, long ways. I deal with rain, snow, and everything in-between. So like it or not, when I have to really consider how likely I’m ever to be in accident again, the answer is probably “yes”.

Therefore, for me, it would make sense to keep collision and comprehensive coverage, and stick with the lower cost, higher deductible option. In other words, no change from the policy I have currently.

But again: Ask yourself the same question. If you don’t commute or drive in normaly stable weather conditions, then perhaps for you it does make sense to drop collision and compreshieve coverage from your auto policy.

Remember: When it comes to insurance, it’s a gamble. But it’s a high stakes game, so in my opinion, play it safe and choose the conservative option.

Readers – What do you think? When you do think its the right time to drop collision and comprehensive coverage from your auto insurance policy? What factors did you consider, or when do think it makes financial sense?

Photo credits: Unsplash, Pexels

The post How Do You Know When to Drop Collision and Comprehensive Coverage? appeared first on My Money Design.

HSA’s (Health Savings Accounts) have been gaining a lot of buzz in the personal finance community.

In case you’ve never heard of them, HSA’s are a type of special investment account in the U.S. you can setup to help bank money that can be used for medical expenses – tax free!  This means that similar to your retirement accounts, you get a tax-break on the front-end … just for saving your money.

For years, we’ve been using an FSA (flexible spending account) to help stash tax-advantaged funds that we can use for medical expenses.

But the problem there has been their “use it or lose it” policy – if you contribute too much to the plan and don’t redeem it within a certain time frame, then you end up losing your savings.  That can get a little tricky.

On top of that, if you’re an early retirement seeker like myself, then HSA’s also lend themselves to some pretty unique tax-advantages on the middle and back-end that make them even more appealing.

After digging into them a little bit more, here’s what I’ve  learned about my ability to make contributions to an HSA.

Perhaps you might also discover if they would be a good fit for you and if you’d be eligible to participate.

Why Get an HSA?

As I started to mentioned earlier, there are a lot of good reasons for why to get an HSA if you can.  Let me expand upon them:

• Contributions are tax deductible; both from you and your employer.  Unlike 401k’s, you can also avoid paying FICA taxes (i.e. Social Security and Medicare) on your contributions.
• Employers can and often do make contributions to your HSA’s.  To contrast this with an FSA, even though employers are allowed to contribute, many of them do not.  If they do, there are restrictions.
• Withdrawals from HSA’s  are tax-free as long as they are used to cover medical expenses.  One interesting point though is that there is no time limit on when you can redeem those medical expenses.  It could be years after the actual event.
• Unlike FSA’s, there is no “use it or lose it” penalty.  The money stays your money forever.  In fact, an unused balance converts to a traditional IRA after age 65.
• Contributions are invested, similar to how they would be with an IRA or 401k.  They do not sit idle in an account.
• Your contributions grow tax-free.  While they are in the HSA’, you do not pay taxes on any of the gains.

Early Retirement Advantages

If early retirement is your goal, then an HSA could be yet another very powerful tool that you can use to fund your financial independence.

Perhaps you noticed these 3 key tax-avoidance advantages:

-> No taxes on the front-end when the contributions are made

-> No taxes while the money grows

-> No taxes on the withdrawals (as long as they are for medical expenses)

The Mad Fientist has a great mega post “HSA – The Ultimate Retirement Account” where he describes in full how you could use this to your advantage.

In a nutshell:

1. Contribute your HSA.  Allow those funds to compound and grow over time.
2. Pay your medical expenses out of pocket.  Hold on to those receipts for later.
3. When you retire early, start redeeming those medical expenses.  This provides yet another income stream that you can have access to BEFORE age 59-1/2.  (To learn about others, click here.)

That’s how you can get completely tax-free money.  Feel free to give the whole article a read.  It’s an interesting strategy to think about.

How to Qualify for an HSA

To see if you qualify for an HSA, you have to check the rules in IRS Publication 969 first.  They are:

1. You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
2. You have no other health coverage except what is permitted under Other health coverage.
3. You aren’t enrolled in Medicare.
4. You can’t be claimed as a dependent on someone else’s 2016 tax return.

Unfortunately, the first item “HDHP” is the one that has disqualified me.  Our medical deductibles are $1,500 per person and $3,000 per family.

As of 2017, the limits are:

• Minimum annual deductibles: $1,300 and $2,600 for self and family
• Maximum annual deductible and other out-of-pocket expenses: $6,550 and $13,100 for self and family

Wait a second!  If the IRS family minimum is $2,600 and my plan is $3,000, then why don’t I qualify?

This is where you need to read all the rules very carefully.  I noticed this small detail in the IRS text followed by an example that clearly disqualifies me:

“If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan doesn’t qualify as an HDHP.”

“Example. You have family health insurance coverage in 2016. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. The plan doesn’t qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,600) for family coverage. “

That pretty much closes the door on my situation.  Oh well … I tried.

Does it make sense to switch to a higher deductible plan to qualify?

In my opinion, no.

Switching to a plan with a higher deductible puts you financially at risk.  While a lot of people switch to higher deductible plans so that they can pay less per paycheck, there is always the chance that you will run into medical problems or need procedures.  That means you’d be on the hook for paying most of it up to your deductible amount.

Money out of your pocket is still money out of your pocket; even with the HSA tax savings.

Though a lower deducible plan might cost a little more, it could end up saving you thousands of dollars you could have potentially spent otherwise with the higher deductible plan.

How to Apply for an HSA

If you do meet the requirements laid out in IRS publication 969 and would like to contribute to an HSA, you have the following options.

• Employer.  Your employer is probably no stranger to the fact that the health care plan they offer is HSA compliant.  Therefore, there’s probably a good chance that they already offer them.  Speak to your HR representative to find out.
• Self.  If you still qualify and your employer doesn’t offer you any assistance, you may still be able to start one on your own.  Start by going to any reputable online investment service provider (such as Vanguard) and look under their products to see if they offer HSA’s.  You’ll likely have to fill out a form.  If you feel more comfortable, just like with investments, you can call to speak to a representative who will help walk you through the process.

2017 HSA Contribution Limits

If you plan on contributing to an HSA this year, the maximum allowable amount for 2017 is as follows:

• Self: $3,400
• Family: $6,750

Remember: This is not a “use it or lose it” type of system like the FSA.  Any money that you do not use simply rolls over to the next year and potentially could be collecting earnings along the way.

Also, similar to a 401(k) or IRA, the HSA shelters you from paying taxes.  So if we estimate a tax rate of 25%, this saves you roughly the following amount of money in taxes for the year:

• Self: $850
• Family: $1,687.50

Can I Also Contribute to an FSA?

No, not for medical expenses.  But your employer may be able to offer a Limited-Purpose FSA.  These are intended to help complement the HSA and may be established to pay for eligible vision and dental expenses.

Readers – How many of you can make contributions to an HSA?  What advantages have you found to using them?  

Featured image courtesy of Flickr

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What do you say to the car insurance company you’ve had for the past 10 years when they won’t budge on their rates?

Don’t let the door hit your butt on the way out!

That’s exactly what I forced to say recently to my insurance provider, AAA, when they refused to negotiate down on the cost of car insurance for our household.  Even though we gave them the chance to hold our business, we ultimately had to come to the decision to shop around only to discover that there were far better rates for basically the same amount of coverage.

Here’s what happened.

Reducing the Cost of Car Insurance:

Frequently in the MMD household, we like to choose one bill from our expenses and pick on it.

• When the mortgage bill seemed too high, we got a refinance and shaved two years off my mortgage!
• When the Comcast bill seemed too expensive, we called and got $1200 knocked off!
• When I had the chance to lower the interest rate on my auto loan, I took full advantage of it.
• When they tried to add fees to my checking account, I switched banks and even got a $150 bonus!

This month it was car insurance that we decided to attack and try to lower our overall budget.

To be fair, our auto coverage has had it coming for some time now.  Every 6 months for the last 2 years the cost of our auto insurance has done nothing but go up and up.  How much was my latest renewal notice?

• $150 per month ($900 for a 6 month period).

That’s way too much!

Now I may not be a car insurance expert, but how much is car insurance when you continue to drive the same two used cars (the oldest being almost 9 years old) year after year and incur no traffic violations or accidents?  Shouldn’t my rates be getting cheaper?

I decided it was time to explore my options.

The Beauty of Shopping Around:

Man, I love the Internet.

Within minutes I had costs for all kinds of reputable car insurance providers.  Armed with actual quotes and hardcopies of new policy offerings, I had the power of persuasion right at my fingertips.

In the past when I wanted to lower my auto insurance expense, I would collect 3 quotes and send them to my agent.  Usually I’d use Progressive, Geico, and at least one other recognizable name brand.  For almost a decade my agent would write me back with at least some break in price.  They may not have been the lowest price, but at least they’d do enough on the cost to show they were willing to work with me and keep my business.

Then last year that came to a stop.  The only reply I’d get from insurance rep was the “that’s our price – take it or leave it” eloquent sort of response.

They did the same thing this time around too.

Well, I can’t say I didn’t warn them.  I know this from my own job:

When a customer threatens to go shopping around for a better price or service, they’re going to find it.  So if you’re smart, you won’t even give them a reason to go looking.

Unfortunately this is a lesson that my car insurance company has yet to learn.  Because I did end up finding a much better deal …

Cheaper Auto Insurance is Out There:

The thing about giving someone an ultimatum is that you have to be prepared to really make a hard change if things don’t go the way you want it to.  You have to let them know this is NOT a bluff.

That’s exactly what I forced to say recently to my insurance provider, AAA, when they refused to negotiate down on the cost of car insurance for our household. Even though we gave them the chance to hold our business, we ultimately had to come to the decision to shop around only to discover that there were far better rates for basically the same amount of coverage.

It kind of stunk.  I’ve been with them for 10 years.  Sometimes I get AAA discounts when I shop.  But none of this anywhere close enough to keep me around and pay way more than I need to.

So who did we end up going with?  Believe it or not, Progressive had the best price.

For the insurance policy I put together, they only wanted $558 for 6 months (if I paid it all up-front).  That’s about $93 per month.  Can you believe that?  That’s almost 38% lower than what AAA was about to charge me for basically the same thing.

This experience is yet again another shining example that it pays to shop around for better coverage prices and explore your options.  In this day and age of instant Internet quotes and auto insurance being pretty much nothing more than a commodity, you’d have to be a fool not to work with your customers and try to get them the best price.  Name brands don’t really carry much weight anymore.  As long as I’m working with a reputable company that is going to honor my claims and be there when I need them, I’m going to find the best deal possible!

Readers – What is the cost of car insurance in your household?  Have you had to switch around service providers when one of them refused to work with you on cost?

Related Posts:

1) It’s Time to Get Real About Our Household Expenses

2) You’re Going to Need A LOT More Emergency Cash – Bad Things Will Happen!

3) A Financial Plan Sample – How Should I Budget My Money?

Images courtesy of FreeDigitalPhotos.net

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My ambitions started out with reading lots of the best money books.  I would go through page after page trying to find the magic equation for getting rich.  By purposely picking books that were written by millionaires themselves, I thought I would be able to learn from their methods and reproduce their success.

To some degree this method worked.  I learned the basics of financial planning on things like having a 401k, an IRA, stocks, etc.  I also learned about the concept of passive income, and how everyday people use it to change their lives.

Books are great and I will never knock them.  But after a point, the material and the messages started to sound the same.  Over and over, the mantra of “spend less, save more” was becoming a bit of a broken record.  And I REALLY wanted to know more about this whole passive income theory and how it could be used to retire early.  Were there REAL people out there who actually had success with it?

The Web is Full of Both Advanced and Basic Financial Planning Tools:

Absolutely there was!  And I found them on blogs.

Reading blogs have taught me so much more than I could have imagined about personal finance.  I’ve been able to find very specific information about everything from retirement planning to asset allocation and stock valuation.  And if that’s not enough, you can even find more serious ones that talk about buying options or making investments in private companies.  No matter what it is you’re trying to find, there always seems to someone else who has had some success in this area before and is willing to share it with the public on their own site.

The people that write these sites live their advice.  They really do retire by age 40.  They really do figure out how to replace their employment income with something else.  They really do figure out how to make what it is you’re trying to do work.

The other great thing about reading financial blogs: They get updated regularly.  Unlike a book, there’s no waiting around for months or years for the next one to come out.  As often as a few times a week you can read something new from your favorite writer; raw and uncensored.

Unlike the titles you might find at Barnes and Noble, the advice you find is not always conventional.  Forget about saving just 10% of your paycheck.  Forget about NOT taking on more debt.  There’s a lot of different tricks people out there use and swear by, and each one of them has a different success story to share.  The only question is: What do you want to learn from all of it?

The Top 100 Finance Blogs Infographic:

If you’d like to see a list of great financial planning blogs, then check out the following infographic by Credit Audit.  I don’t know how, but My Money Design made it to the No. 7 spot out of 100.  That’s pretty great considering there were some pretty big and much more established personal finance blogs on this list.  I’m glad to know that someone thinks pretty highly of my site.

Readers – Where did you learn your basic financial planning habits?  Was your blog included on this list?  How would you have ranked these sites if you had put together this infographic?

Related Posts:

1. How to Invest a Million Dollars and Why You’ll Need to Know How Someday
2. My Picks for Vanguard Mutual Funds for Our Roth IRA
3. Finally a Safe Savings Rate for Your Retirement Formula

Image courtesy of Sura Nualpradid / FreeDigitalPhotos.net

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Why do we put off buying life insurance? Is it because it’s complicated, we’ve heard bad experiences about it, we don’t know which type to buy, or how much we need? Believe it or not, for some people it is simply because they don’t want to go to the doctor or have their blood drawn.

Even though that may sound silly, but it only takes one excuse to keep you from doing what you should. Fortunately the industry offers a product known as no physical life insurance. By not requiring a physical, you can just buy the life insurance online or over the phone without any medical intervention at all.

How No Physical Life Insurance May Benefit Your Situation:

If you haven’t been told you enough already, by simply being an adult with a family (especially with kids), you have a financial responsibility to them. And your life insurance policy at work is more than likely not going to cut it. If you really want to protect your family from financial hardship, then you need to get a life insurance policy that is at least 10 to 12 times your annual household income.

One of the nice things about getting a policy without a medical exam is that it is generally term life insurance as opposed to permanent (please feel free to read my series on which type of life insurance is better). As someone who used to own a variation of permanent life insurance and wasted of money in the process, I can assure you that term is the way to go!

Generally because of the lack of medical investigation, life insurance policies without a physical have a limitation on how much coverage you can purchase. Use an insurance comparison tool to evaluate your options. But there is a small loop hole to this: You can own multiple policies. Usually an insurance provider will ask you first how much insurance you already have, but if they are okay with the other policies you have, then there is no issue. Of course keep in mind that owning multiple policies will generally be more expensive than simply owning one policy with a high amount of coverage.

Image courtesy of David Castillo Dominici / FreeDigitalPhotos.net

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Have you ever heard of someone being awarded a large amount of money (from a lawsuit, lottery, etc) and wondered if they receive it all at once?

Chances are … they usually don’t.

Most of the time, the payment is broken up into smaller payments over a fixed duration of time. So for example, instead of receiving $500,000 all at once from a lawsuit, the plaintiff may receive $2,000 each month for the next 30 years.

Putting it all together, this type of payment is called a structured settlement.

Investopedia defines a structured settlement as:

While we often focus on building wealth for the long-term, it’s important to look at things from both sides of the fence. Therefore, I recognize that there may be some situations where a person may say I want to sell my structured settlement. Here’s a few that come to mind:

Possible Reasons Why You May Want to Sell Your Structured Settlement:

1) Payoff your debt. If you’ve already got a lot of high-interest debt, then chipping away at with regular small payments may not make as much sense as using the opportunity to pay it all off at once.

2) You need the money for upcoming excessive bill payments. If the structured settlement is the result of a lawsuit where there will be mounting medical bills, then having cash on hand may be necessary to prevent those bills from turning into debt.

3) You want to invest or try for a better rate of return. Usually the terms of a structured settlement cannot be altered. Therefore if the rate used to calculate the payment is low, you may think to yourself I want to sell my structured settlement and try for a better return with stocks, mutual funds, etc. Or perhaps you may want to invest in your own business!

4) You’re planning a large upcoming purchase. A house, car, wedding, etc.

5) College. If the kids are becoming of age and you don’t want them to have to deal with student loan debt, a lump sum payment may help to finance their education.

Before You Sell Your Structured Settlement, Do the Following:

Just like any investment, you should understand what it is you may be getting yourself into before you do it. The sale of a structured settlement is no different. And because of the magnitude of how much money is on the table, it is not a decision to be taken lightly.

First things first, understand that you will not get the full value of your settlement. The company making the offer is doing so to profit from it and to provide you the convenience of having access to the money all at once. Therefore you can expect to receive lots of different offers. Not only should you seek multiple quotes to make sure you get the best offer, but also take the time to understand the math behind what you’re presently receiving. You may say to yourself I don’t want to sell my structured settlement if the offer doesn’t compare to what you plan to receive over the long haul.

The other thing you may want to do is consult an attorney or lawyer. A professional who deals with these kinds of transactions can help you to avoid scrupulous offers. In addition, you should know that some places do not allow you to sell your structured settlement. A professional can help you to know if your state is one of them.

Perhaps the biggest benefit to using a professional will be in dealing with the tax consequences. One of the reasons why your settlement was annuitized in the first place is because its tax benefits. Now that it is being sold in exchange for a lump sum, the government will want their cut of the transaction. A good professional will be able to guide you through the process and help you understand the implications of the transaction.

Image courtesy of scottchan / FreeDigitalPhotos.net

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