• Investing First Steps combs the NASDAQ for dividend finds.  While the findings are slim, you’ll note that once you sell calls on the positions the yields look similar to stocks with higher dividends.
• Canadian Finance Blog talks about passive income investing for retirement.  I think this is something really important for most people closing in on retirement to consider.  If you can build “machines” that create a little bit of income for you, your savings for retirement can last dramatically longer.  Think about how much less you need to have to retire if 10% of your expenses are met by passive income.  Can make a huge difference in when you can retire.
• I’ve mentioned before that HSA’s are vital to your financial plan.  I also think they could be a huge part of fixing healthcare.  Free From Broke has a good post about their benefits as well.  All of the points made are good and I think their convenience is something I’ve failed to mention before.  Most of them act like a debit card, how easy is that?
• Miranda Marquit discusses how effective spending can be as important as effective saving as well as discussing 529 savings plans.

Post from: Personal Finance And Investing

Wednesday Links — March 16, 2010

Photo by: nmfbihop

The American health care debate has gone completely off the rails.  The Right, ostensibly in defense of small government, is acting as if we have an option to not address this issue.  Meanwhile the Left is unable to present a coherent vision.  Even worse disinformation is flying from all directions and it’s difficult to have an informed opinion.  It could easily make a person tune out this conversation.

Why You Should Care About the Health Care Debate

One of the biggest reasons that you should care is that unless you’re on Medicare, you’re already footing the bill of socialized medicine.  Medicare is socialized medicine and right now about 27% of the population is on some form of government health care.^[1] If you’re not one one of these programs, every dollar of over-consumed or overpriced affects you personally.  However, the situation becomes much more untenable in the near future.  By 2030 it’s estimated that twice as many people, 80 million, will be on Medicare and in the meantime the population will not have grown nearly be nearly as much, bringing the percentage of people on Medicare to 22%, without any other government programs considered.^[2] Then you consider how many people are being added to Medicaid and other government programs due to the economic downturn and you can see the problem growing.  Unless you’re for abolishing Medicare, and that’s not a very popular view, you probably need a solution to the demographic bomb that’s headed our way.

I’ve already covered that we have high costs and outcomes that don’t justify the expense in America.  Almost any method to cover people’s medical bills is going to have a component of “socialism.”  Quite simply, those who are older or have chronic illnesses are terribly expensive to insure.  We know these people are going to have health problems.  Insurance at that point isn’t really providing insurance but simply giving them money for their health care.  If you want people who are older or have chronic illnesses to be able to get healthcare if they aren’t rich, others are going to have to pay for it.

If you’re healthy right now, you should care about healthcare because you’re subsidizing those who aren’t.  If you’re not healthy you probably already do care about healthcare reform.

A Modest Proposal

I thought I’d put out there what I consider to be a reasonable proposal and see what my readers think.  If I were going to address the situation in this country here would be my plan:

• Catastrophic health insurance subsidized by the government for those who can’t afford it.  Everyone will have this but it will be truly catastrophic insurance.  At least $15,000 for example of yearly expense before it applies.   I don’t really care if it’s privately or publicly implemented and the premiums should cover the expenses.
• Some type of Health saving account that everyone must contribute a percentage of their pre-tax income to until they’ve reached the level of their catastrophic insurance.  Thus if the catastrophic insurance kicks in at $15,000 you have to keep contributing until your HSA is at $15,000.   This is how you pay for everything that isn’t catastrophic.  You can borrow against this account as much as you want, so you can have a very negative balance if you have a lot of broken bones or other procedures that don’t reach the catastrophic level.

The reason I like this plan is addresses several things.  It turns the insurance business back into insurance. They are simply around to pool risk and deal with catastrophes.  Obviously those of us without chronic conditions and the young will subsidize others.  That happens already and is part of a well-functioning society if you ask me.

The HSA makes payers actually care about what a procedure costs.  If they want to go spend $2,500 on an unnecessary MRI, that’s their choice, but it’s coming out of their HSA.  You’re never unable to go to the doctor because you can always borrow against this account, but the more you spend the longer money is going to be coming out of your paycheck.  Thus anyone can get medical attention, but they are aware of what it’s costing.  It also turns the patient back into the customer of the doctor, instead of the insurance industry.

I’m not sure this benefits any special interest enough to get any traction, but I think it achieves some of the goals of reform.  It should reduce overconsumption and lead to universal coverage.  There are more issues like tort reform and other changes that could improve things more, but I think this would be a good start.  I’d love to hear your take.

Post from: Personal Finance And Investing

A Modest Health Care Proposal

1. As Private Insurance Declines, Medicare and Medicaid Pick Up the Slack – WSJ.com
2. Medicare Beneficiary Demographics

Photo by: KB35

This post is step 8 in our Investing Template.

The Health Savings Account is becoming a more popular option recently.  It is a great opportunity to save money on your medical insurance.  Despite that, it is still an under-used option. 

Health Savings Accounts allow you to contribute money to an account whose funds are designated specifically for health uses.  While many people might not immediately see the value in this, it represents an option in which you can almost immediately recoup a large percentage in savings.  If you are in a 33% tax bracket, then every expense you make using this account is essentially at a 50% discount. 

Imagine for example that you have to pay $100 for a prescription.  If you were to pay for this yourself you would have to make $150, on which you would pay $50 in taxes, leaving you the $100.  If you are able to make this purchase without paying taxes, you only have to earn $100.  Thus you have to pay 50% more for the purchase, meaning that you essentially “made” $50 by investing $100. 

Considerations

There are of course some caveats to these plans.  All of this is based on my understanding of the system which you should verify with your tax professional.  First of all, if you are self employed you can have an HSA, but your contributions are  an above the line deduction, as opposed to a pre-tax expense.  This means you will have to pay payroll taxes on them, but not Federal taxes. 

Another key consideration is that you probably don’t want to over-contribute.  More than likely other investments will do better than any savings interest you get on these accounts.  If you are building up a significant balance in your health savings account without a purpose in mind, you are probably contributing too much.  This is even more true with so-called “cafeteria” plans, which are very common.  In these plans, any money left in the account at the end of the year is forfeited. 

Maximize Your Use

While over-contribution is a danger, most of us have many more medical expenses than we think in a typical year.  If you use birth control pills, contact lenses, or some other predictable expense and don’t have an HSA, you’re essentially paying voluntary taxes on those purchases.  Also you can use the fund to save for a long term purchase like LASIK or other medical procedures. 

In summary, you should seriously consider what your likely medical expenses are in the coming year and give serious thought to contributing that much to an HSA.  Assuming you are in the right ballpark about how much to contribute, you will net huge savings with no real risk.

Post from: Personal Finance And Investing

Investing Step #8: Health Savings Accounts

This post is step 4 in our Investing Template.

Why pay taxes?  A lot of people claim they wouldn’t if they didn’t have to. However many of us are voluntarily paying taxes on money we could be pocketing tax-free with tax-advantaged accounts.  These are investment accounts where your taxes are either paid when you take the money out, or sometimes not at all.  Many people are familiar with retirement accounts like 401(k)s or IRAs, but there are other options that are often overlooked entirely.  Many times, if you know you’re going to have an expense in the near future, you can pay for that expense tax-free.  This many not seem like a big deal to you, but let’s do some simple math.

If I have a $100 expense this year and I’m in the 33% tax bracket, I have to earn $150 to pay for this expense if I have to pay taxes on the income.  If, on the other hand, I don’t have to pay taxes, I only have to spend $100.  This means that if I “invest” that money in tax-advantaged accounts that allow me the option to put away a certain amount pre-tax, I’ve immediately made 50% on that money.  A 50% guaranteed return is unheard of anywhere else, yet many of us overlook opportunities to achieve these same returns daily.  We’ll look at 4 broad categories of accounts that allow you to either defer, or completely avoid taxation on your income.

Tax-Deferred Accounts

• Retirement Accounts
• College Tuition Accounts
• Home Investment Accounts
• Health Savings Accounts

While each of these programs have nuances, they are closely related to your investing timeline.  Health Spending Accounts are for near-immediate expenses, home accounts are usually a fairly short timeline, college programs can be quite a while in the future, and retirment accounts are often the furthest off.   This collection of accounts can save you a great deal of money if used properly, so we’ll look at them individually over the coming days.

Post from: Personal Finance And Investing

Investing Step #4: Tax-Advantaged Accounts